El Paso Corp. last week delayed indefinitely reporting its fourth quarter 2003 earnings pending the completion of both an internal and an independent review on the impact of a 41% negative oil and gas reserves revision. The Houston-based company had been scheduled to issue its quarterly statement Thursday.
In February, El Paso announced a negative revision of its proved oil and gas reserves of 1.8 Tcfe (see NGI, Feb. 23). “The total amount of the revision will not change,” the company said in a statement. However, since the announcement, El Paso has been reviewing whether portions of the revision should be applied to prior years, which would cause a restatement of prior years’ financial statements and related supplemental oil and gas reserve disclosures.
“Based on El Paso’s internal technical reviews as well as the independent review of the audit committee of the board of directors, the company believes that it is likely that a restatement of the financial statements for El Paso Corp., El Paso CGP Co., and El Paso Production Holding Co. will be required,” the company stated. “Consequently, investors should not rely on previously filed reports for these registrants until further notice from the company.”
Besides delaying its Form 10-K filings with the Securities and Exchange Commission, El Paso also has requested waivers from its lenders participating in its revolving credit facility and other bank facilities that address a restatement or delay in its filings. El Paso said it expects to receive those waivers.
“In El Paso’s previous disclosures on the impact of these reserve revisions, the company stated that the pre-tax ceiling test impact on El Paso Corp. at Dec. 31, 2003 would be approximately $1 billion if the impact of the revisions were all reflected in the fourth quarter of 2003,” it said in a statement. “This charge was based on the ceiling test calculation utilizing the year-end 2003 price for natural gas of approximately $6/MMBtu, the impact of the company’s current hedge position, and the company’s current investment in its production business. At that time, the company stated that if natural gas prices had been $1/MMBtu lower at year-end 2003, it would have resulted in an additional pre-tax charge of approximately $1.5 billion.”
Before the announcement Wednesday, Goldman Sachs reduced its 2003 earnings per share estimate for El Paso to 5-15 cents to reflect higher expenses from the reserve revisions. “We believe 4Q reported results will include additional charges beyond the announced $1 billion Exploration and Production (E&P) impairment as El Paso continues to restructure. We believe the shares could weaken on such negative headlines. However, we believe a quick recovery would be likely as we expect management to reiterate that its restructuring plan remains on track.”
Analysts noted that investors could view El Paso as an “opportunity considering the turnaround potential with a new management team. However, we prefer to remain on the sidelines given limited visibility to the timing and level of production recovery resulting from an E&P strategy that is expected to be redefined during 2Q following the new head of E&P’s strategic review.”
Gordon Howald, a Credit Lyonnais analyst, noted that when El Paso first revised its reserve estimate, “there was a tremendous amount of class action litigation. If those had traction before, they’re going to have a lot more traction now.” He has a “sell” rating on the company. “I think many investors have based their buying on the company’s long-range plan from December,” Howald wrote. “My recommendation to investors is while a lot of it could remain the same, a lot of it’s not the same,” referring to the exploration and production business as well as future debt costs. And Credit Suisse First Boston analysts said that they expect to see “signals” from the ratings agencies based on last week’s announcement.
In an internal memo sent to El Paso employees last week, CEO Doug Foshee wrote, “Please do not let this recent negative news about our reserves overshadow the progress being made against the goals we set in our Long Range Plan. We have made great progress on debt reduction. The pipelines continue to perform well. We are ahead of schedule on asset sales, having announced or completed now $2.9 billion of our $3.3 billion-$3.9 billion goal. That goal was targeted for year-end 2005 and we are still in the first half of 2004. The reorganization, a difficult process for everyone, is on track for completion by the end of this month. We continue to make good progress in our Merchant areas. With regard to E&P, I have complete confidence in our team’s ability to return this business to profitability and value creation. As we all know, this will take time, but we will surprise those who are betting against us.
“Like all of you, I am very disappointed in the outcome of the review of our reserves, particularly because so much else in the company is going so well. But it is what it is, and my job, OUR job, is to report the news and this is the news. We will deal with this and move on, and I want to thank all of you for your efforts.”
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