After surviving near-death experiences following the collapse in the energy merchant sector in 2002, The Williams Cos. and El Paso Corp. are both on the comeback trail, Standard & Poor’s (S&P) said in a recent report.

S&P credit analyst Ben Tsocanos noted the two companies exhibit similar characteristics, including comparable ratings and outlooks. Williams is rated “BB-,” El Paso is rated “B+,” and they both carry “positive” outlooks. Ratings-wise, the companies are separated by one notch. In 2001, both carried a “BBB+” rating. By 2002, Williams had dropped to “B+” and El Paso’s was “BB.” In 2004, Williams remained at “B+” but El Paso fell to “B-“. A year later, El Paso’s ratings began to stabilize, rising to a rating of “B.” This year, S&P upgraded both companies by one credit rating notch.

“Aggressive asset rationalization and adequate bank lines provided just enough liquidity for the companies to right-size their operations, pay down debt and set sail on a new course since veering into trouble at the beginning of this decade,” Tsocanos wrote. “Williams is a little further along on the ratings restoration front,” but regardless, he said, both are still a long way from returning to investment-grade corporations.

“One of the key drivers for the companies’ positive outlook is that they appear to be on the mend,” wrote Tsocanos. “Both companies’ financial metrics deteriorated in 2002 due to a combination of issues, many of which stemmed from their energy marketing and trading (EM&T) business units and the associated uncertainty and skepticism these units caused in the financial markets. As a result of the market backlash and the reduced trading capability, the companies’ EM&T units were drastically cut back.”

To survive, both companies sold assets worth billions to meet liquidity needs, reduce debt and improve their financial condition. Even with the turnaround, however, Tsocanos cautioned that from an overall business risk profile, El Paso and Williams remain weak because of legacy positions and the “risk appetite” of their remaining subsidiaries.

Before El Paso’s recent restructuring, Tsocanos noted that both companies possessed four major business units: regulated natural gas pipelines, oil and gas exploration and production (E&P), EM&T, and midstream gathering and processing. El Paso sold off its GulfTerra midstream business to Enterprise Products Partners (see NGI, Aug. 2, 2004) and also reduced its power market exposure.

“El Paso has the potential for business risk profile improvement once legacy trading positions have been unwound, largely by the end of 2006,” noted Tsocanos. “Williams, which has a better-performing E&P business and a strong, though somewhat smaller, pipeline network, has a business risk profile that is weighed down by continued commitment to power trading and marketing.”

In the near-term, Tsocanos said Williams should benefit from high natural gas prices and adequate liquidity. The “currently high prices for natural gas should allow Williams to continue to generate considerable cash flow,” but “Williams must maintain substantial liquidity to meet its large collateral needs. For example, Williams posted about $1.4 billion in collateral as of Dec. 31, 2005, which is down from $1.8 billion on Sept. 30, 2005. More than one-half of the collateral needs are to support its E&P business.

For El Paso, its key short-term credit factors are its ability to satisfy looming debt maturities and the potential effect of higher gas prices on collateral posting requirements. “Key determinants to El Paso’s ability to generate cash flow are natural gas prices and whether the company can reverse precipitous production declines over the past several years from its oil and gas E&P operations.”

©Copyright 2006Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.