Reacting to the stinging criticism of El Paso Corp.’s continued poor performance within its exploration and production (E&P) unit, the company announced late Friday that Rodney D. Erskine, president of El Paso Production Co., had resigned.
Randy L. Bartley, COO of the subsidiary, was named to step in as interim president until a replacement is found. El Paso said it had begun a search process that would consider both internal and external candidates.
“We want to thank Rod for his many contributions at El Paso,” said CEO Doug Foshee, in a prepared statement. “With his pioneering work in deep drilling and well completion techniques, Rod has had a significant impact on natural gas drilling in the United States. We wish him the very best.”
Erskine’s resignation followed a pounding on his unit by financial analysts and ratings agencies. Last Monday, El Paso reported a 43% drop in earnings for E&P and said its equivalent production was down 32% over a year earlier (see Daily GPI, Nov. 12; Nov. 11). El Paso blamed the declines on the sale of almost 1.6 Tcfe of proved reserves since a year ago, normal base production declines and mechanical failures on some of its wells.
However, the news did not sit well with the financial community, and analysts with Credit Suisse First Boston suggested that El Paso consider a partial sale or spin-off of the E&P unit. Moody’s Investors Service changed its outlook on the E&P unit early in the week, and then on Friday, it dropped the corporation’s rating to “negative” from “developing,” and said the reduction was “much in part the production declines…”
Moody’s analysts said that along with its pipelines, “E&P (accounting for roughly half of the company’s nine months’ earnings before interest and taxes and a fifth of its assets) is a principal business for El Paso and vital to the financial recovery of the corporation overall. Moody’s believes that organic improvement in the credit is unlikely short of strategic action that could materially improve the company’s heavily leveraged financial condition.”
Although its cut in capital spending has helped El Paso to conserve its liquidity for now, “Moody’s believes that cutting back much more may be difficult without compromising the value of its core businesses. The organic decline in production is one fallout from the cutback and indicates the need for more reinvestment to sustain and grow cash flow…” and “a turnaround will entail a considerable amount of time and execution risk.”
Moody’s said it would “take time to gauge El Paso’s success in transitioning E&P’s concentration from shorter-lived production plays to longer-lived coalbed methane and stemming the production declines seen in each of the past seven quarters. Moody’s notes that such negative momentum in production is not easily reversed.”
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