Restatements to El Paso Corp.’s oil and natural gas reserves will slice $2.7 billion off the value of production assets, and the resulting restatements to hedge accounting will cut shareholder equity by $1 billion, the company announced Monday. However, as it overcomes the 41% downward revision to its reserves, CEO Doug Foshee said the company’s core businesses, led by its pipeline group, remain solid.
In a conference call to discuss the progress on its financial restatements with analysts Monday, Foshee said the company has nearly completed its oil and gas restatements, along with the hedge accounting, which it announced earlier this month (see Daily GPI, Aug. 11). Using a 58-page presentation via the Internet, Foshee reviewed the progress to date.
“The punch line to all this is that we still know we have challenges ahead, but we are beginning to see the clouds part,” Foshee said. Even with the obstacles in its production segment, Foshee said the core pipeline group “continues to perform well,” and there are “encouraging signs in the turnaround of our production business.”
CFO Dwight Scott previewed the restatements, and said a process is underway to address two basic issues: the reserves revision and related hedge accounting treatments. The reserves restatements are “nearly complete,” but he noted they have taken time because there is no clear methodology on how to restate the revisions, particularly for earlier periods. The company used Dec. 31, 2003 as its starting point and began “working backwards, adjusting each quarter for actual production and pricing, 2003 estimates of operating and capital costs, and re-engineering material property sales.
What it determined, said Scott, is $2.7 billion pre-tax reduction to the value of the oil and gas properties, with a corresponding after-tax reduction in shareholder equity. El Paso is also reviewing its hedge accounting, with the restatement principally impacting the company’s merchant and production segments. There is expected to be $1.6 billion in incremental ceiling test charges, which will be partially offset by $6 million less in debt, depreciation and amortization. The restatement, Scott said, will have “little, if any” impact on cash flow. El Paso expects to file its 2003 Form 10-K by the end of the third quarter, and its 1Q2004 and 2Q2004 Form 10-Qs by Nov. 30.
Despite the restatements, Foshee said asset sales are continuing, with $3.5 billion closed or announced, leading to a “sharp reduction in debt, and we expect that reduction to continue as we close as much as $1.8 billion in asset sales in the third quarter of 2004. Our cash flow has been consistent with our long-range plan, and we continue to benefit from natural gas and oil prices that are well above plan assumptions.”
What hasn’t slowed down is El Paso’s solid pipeline group. In his review, John Somerhalder said the group continues to “meet or exceed” the company’s long-range plans, and said the outlook is strong because of several expansions that will add significant capacity to its natural gas pipeline system. All of the planned pipe expansions are continuing as scheduled with no slowdowns, he said.
Among other things, Somerhalder said progress continues on the new 750 MMcf/d Seafarer Pipeline project, which will transport gas from a proposed liquefied natural gas facility in the Bahamas to southern Florida. The project has secured a customer for all of the firm capacity and is working toward obtaining all regulatory approvals.
In the production group, Lisa Stewart, the former Apache Corp. executive who came on board to oversee the business in January, said she was encouraged by El Paso’s progress to rebuild. Currently, El Paso is producing 803 MMcfe/d, and though lower than estimated months ago, there are encouraging signs, she said. She estimated the final six months of 2004 will see production average between 825-875 MMcf/d, with some growth onshore in the United States and in Brazil. Gulf of Mexico production is flat and falling, but the company is “working hard” to stabilize the offshore, Stewart said.
Foshee also dismissed a question regarding the possible sale of the offshore properties. He said the Gulf of Mexico still held promise for the company, with more drilling planned now that the Group is stabilized.
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