El Paso Corp. turned its recent losses on their head in 1Q2010, reporting Thursday that it had net profits of $388 million (54 cents/share) versus a loss of $969 million (minus $1.41) in the year-ago period.
With financing for the Ruby Pipeline project now in place, 2010 funding requirements are substantially complete, CEO Doug Foshee told financial analysts during a conference call.
“El Paso will be free cash positive certainly by 2012,” Foshee said. “We moved a big step closer to that goal starting on Ruby.”
The pipeline project, which would move up to 1.5 Bcf/d from the Rockies to West Coast markets, is to be funded by El Paso and private equity partner Global Infrastructure Partners, which joined the project last year (see Daily GPI, July 28, 2009).
The Federal Energy Regulatory Commission (FERC) in early April issued a certificate for the 675-mile, 42-inch diameter pipeline project (see Daily GPI, April 6); still to come are approval by the Bureau of Land Management and final approval by FERC. The pipeline would move gas supplies from the Opal Hub in southwest Wyoming to the Malin Hub near the Oregon-California border.
Once the final approvals are in place, El Paso pipeline chief Jim Yardley told analysts that construction would begin in late June or early July, with start-up and gas deliveries beginning on schedule in 2011.
“The closing of the Ruby financing project represents the delivery of the most significant component of our 2010 financing plan,” said Foshee. “With the sale of our Mexican pipeline assets and the recent drop down to El Paso Pipeline Partners LP, we have effectively addressed our funding requirements for 2010.”
El Paso completed the $300 million sale of its Mexican gas assets to Sempra Energy on Monday (see Daily GPI, May 4). The partnership drop down was fully launched earlier this year when it acquired from the corporation a majority interest in Southern LNG Co. LLC and Elba Express Co. LLC (see Daily GPI, March 26).
The seven-year, $1.5 billion debt facility for Ruby is supported by a group of domestic and international banks, El Paso said. Ruby’s borrowing rate is the London Inter-Bank Offer Rate, or LIBOR, plus 300 basis points for the first two years; LIBOR plus 325 basis points for the third and fourth years; and LIBOR plus 375 basis points for the fifth, sixth and seventh years, assuming that $700 million of debt is refinanced by the end of the fourth year.
This year already was pegged to be one of El Paso’s largest for new and expanded pipeline projects. Since the beginning of the year El Paso put two projects into service: a major expansion of the Elba Island liquefied natural gas import terminal in Georgia, and the new Elba Express Pipeline to serve southeastern and eastern U.S. markets (see Daily GPI, March 3).
El Paso’s Tennessee Gas Pipeline also has received a favorable environmental review by FERC (see Daily GPI, Feb. 26), and its Appalachian Basin expansion, which is to begin soon, will provide more takeaway for Marcellus Shale gas, Yardley noted.
The Pipeline Group earned $421 million in the latest quarter, up from $396 million in the year-ago period. The group’s results benefited from higher reservation revenues because of four expansion projects that went into service throughout 2009. Results also were impacted favorably by new rates on the Southern Natural Gas system and an increase in allowance for funds used during construction on the expansion projects.
Offsetting the positives for the period was a $10 million impairment of a storage project and reduced income from fuel not used in operations, primarily because of lower natural gas prices.
Pipeline throughput in 1Q2010 also fell from the year-ago quarter as a result of weaker demand because of slower economic conditions and increased competition, primarily on the El Paso Natural Gas system, said Yardley. “However, throughput does not materially impact near-term financial results because a significant portion of pipeline revenues are derived from demand charges under long-term contracts,” he said.
The company’s Exploration and Production (E&P) Group reported that gas-heavy volumes rose 5% to 781 MMcfe/d in 1Q2010 from the final three months of 2009. Gas volumes sequentially rose to 671 MMcf/d from 638 MMcf/d. In 1Q2009 E&P gas volumes were 686 MMcf/d.
The E&P segment reported $390 million in earnings for the quarter, compared with a loss of $1.7 billion in 1Q2009. The losses a year ago were related to ceiling test charges and derivatives.
The biggest volume gains in the quarter were in the Haynesville Shale, which delivered “better results than in our models,” said Brent Smolik, who helms the E&P unit. El Paso also reported successful results from a gas condensate test well in the Eagle Ford Shale.
The E&P unit also benefited from lower service costs in the period. Total per-unit cash operating costs decreased to an average of $1.88/Mcfe in 1Q2010, down from $2.00/Mcfe in 1Q2009. Because of the lower costs, El Paso reduced its guidance for 2010 per-unit cash operating costs to $1.80-2.10/Mcfe.
In the Eagle Ford Shale, El Paso is seeing “nice” initial production rates. “The headlines of 7.2 MMcfe/d are less impressive than the Haynesville, but the liquids and gas condensate increase the potential…When prices do turn, this is going to be a really good area,” Smolik said.
“The only negative news,” he said, “is that stimulation costs are up about 10% since the beginning of the year, and that’s putting upward cost pressure in the [Haynesville] field. We had gotten well costs to $7.5 million, but now they are up to $8-9 million per well.
“While some are discussing their activity levels in the field, there’s a logical limit to high service costs and low natural gas prices, and we’re getting close…
“As with the rest of the industry, we are very concerned in the upticks in some service costs, particularly in the low gas price environment. And we’ll be prepared to cut back if costs are not in line with the gas environment.”
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