With the sale of its domestic power portfolio nearly complete, El Paso Corp. said Thursday that it is transforming its merchant energy business with a new name and a new focus: marketing the natural gas produced by the company’s exploration and production (E&P) business and by other producers.
El Paso Merchant Energy LP has been renamed El Paso Marketing LP. Along with its primary focus to market natural gas, the unit will be responsible for marketing oil on behalf of El Paso’s E&P businesses. El Paso Merchant Energy had been one of the top 10 North American natural gas marketers in NGI‘s quarterly survey until it stopped publicly reporting its gas sales volumes last year. In its last release of volume information in 3Q2003, El Paso’s merchant unit reported that it had sold 8.4 Bcf/d, which was 35% lower than its 3Q2002 report of 12.43 Bcf/d, but still strong enough to remain among the top five largest North American gas marketers.
“El Paso Marketing will provide a key service for our production business,” said Lisa Stewart, president of El Paso’s E&P unit and non-regulated operations. “In marketing El Paso Production’s oil and gas, El Paso Marketing will pursue strategic markets and redevelop important customer relationships. In addition, El Paso Marketing will continue to provide a high level of service to our existing customers in the oil, gas and power markets.” Stewart, an Apache Corp. veteran, came on board in January to steer E&P operations.
Although there were few details on the extent of its revamped marketing unit, the transformation is consistent with the long-range plan detailed by CEO Doug Foshee in September (see NGI, Sept. 13). Foshee said two months ago that the company would focus on its strategic gas pipeline franchise and the revamped E&P unit.
El Paso’s 2004 production forecast was revised downward in June to 825-875 MMcfe/d from an earlier forecast of 850-950 MMcfe/d. El Paso has a target growth plan for its pipeline franchise of 2-5% a year through 2006.
The company’s natural gas and oil production and exploration operations are organized around four geographic regions: Texas Gulf Coast; Gulf of Mexico and southern Louisiana; Onshore, which includes northern Louisiana, the Rockies, and coalbed methane fields in the Black Warrior, Arkoma, and Raton basins; and International, which is primarily operations in Brazil.
El Paso downgraded its oil and gas reserves about 41% earlier this year, but it still remains one of the largest independent natural gas and oil companies in the United States. Last year, production averaged 1,100 MMcfe/d and through the first eight months of 2004, it averaged 855 MMcfe/d, a 22% decline.
Assuming a $1.40/Mcf valuation, El Paso’s reserves are valued at about $3.6 billion, or 15% of total consolidated enterprise value. As of 2003 year-end and May 2004, CreditSights analysts estimated that El Paso has hedged about one-third of its expected volumes at around $3.80/Mcf in 2005 and $3.70 in 2006, compared with 2005 and 2006 strip prices on the New York Mercantile Exchange of $6.82/Mcf and $6.14.
“This leaves room for a dramatic increase in realized prices as these hedges roll off or if El Paso decides to lock-in these forward prices,” said CreditSights. “However, given El Paso’s credit rating, such hedging could be expensive and require a lot of cash collateral, and El Paso said in September it was not likely to hedge additional volumes.”
Analysts said that it’s also worth noting that the company moved most of its E&P hedges from the Merchant unit to its trading book, “which has no net impact on the company, but will make E&P look much more profitable and Corporation/Other much less profitable. Investors must pay close attention to El Paso’s production volumes versus capital expenditures to see if there will be either additional downside to production volumes or ‘upside’ to segment capital expenditures, neither of which would surprise us given El Paso’s track record.”
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