REASONS TO OWN EL PASO:
l. ASSETS ARE IN DEMAND AND MAKING MONEY
EP owns the country's largest NG pipeline system and this constitutes approximately 75% of its assets. Unlike power plants that are at present a glut on the market, pipelines make good money (10-11%); and they will always make money. They do not have to worry about about spark spreads or when, or if, their market will recover. These can always be monetized at close to book value whatever happens. (One or two pipelines may have sold last year at distress prices. But that was last year.)
2. EP's OIL & GAS PRODUCTION DIVISION WILL BE TWO TO THREE TIMES MORE PROFITABLE THIS YEAR _ AND THE FORESEEABLE FUTURE - THAN IT WAS IN 2001 & 2002
These assets represents most of the rest of EP's assets. The proved reserve reduction of 35%(not 41) is a bookkeeping entry and does not affect either current production, or cash flow, or profits. Virtually all of these proved reserves are in the continental U.S. and are thus much, much more valuable than, say, the Brazilian reserves which were removed from the proved category because they did not yet have a customer.
Even without any further capex or effort, EP would average 680 0750 mmcfe per day for the balance of 2004 based even on depletion rates as high as 25 -40% (Confirmed by Ryder Scott). Except that EP will not sit on its heels, but will spend $850 million to bring that daily production up to 850 - 950mmcfe. This extra investment will, of course, more than pay for itself.
3. MARINER
As everyone knows, an announcement could be made any day. Even for a company as big and debt-ridden as EP, 50 % of 1.2 trillion cubic feet of NG will make a huge diference, paying off its entire debt and then some. A lottery ticket maybe, but at some price worth holding EP stock for this reason alone.
4. MERCHANT ENERGY WILL GO FROM A BIG NEGATIVE TO A POSITIVE BY THE START OF 2005
EP projects it will lose $450 Million in this division in 2004. However, 70 % of its contract expire this year and in 2005, it will have a positive cash flow of approximately $450 million and will recover working capital held as security of another $500 - 600 million.. This is a 1.5 $Billion swing and the money can be used to pay down debt.
5. SALES OF NON-KEY ASSETS IS AHEAD OF SCHEDULE AND REALIZING HIGHER PRICES THAN PROJECTED
In October 2003 EP announced that it intended to sell $3.3 - 3.9 billion in assets by the beginning of 2005. At the Feb 2004 CC, they announce that they were ahead of schedule and realizing higher than expected prices. In their report issued after 2/20/04, Argus Research projects that EP could be down to $13.5 Billion debt by the end of 2004.
POSITIVE RESEARCH REPORTS
On my own, I might not be so confident. But three respected research firms or individuals recently have opined their belief in positive prospects for EP. It's hard to reconcile your dire predictions with these 3 separate independent analyses.
1. Deutche Securities just before the reserves restatement raised EP to a "Buy."
2. Argus Research rates EP a "strong hold." They issued this ater the reserves restataement and believe that EP will earn in 2004 $.90 per share exclusive of spcial non-recurring charges.
c. Archie MacAllister in today' Barron's (Abelson's column) which I've already detailed.
DERIVATIVE LAWSUITS NO BIG DEAL IF EVERYTHING ELSE IS POSITIVE
EP tanked and went to $4/share without a restatement of reserves. Buyers cannot claim damages for that fall. What they can claim is the fall from $8.60 before the announcement ato ~$7.30 today. But if when the case comes to trial in 2 -3 years - and if EP's shares are $13+ - and if much of the reserves taken from proved are put back in that category - then the damages if proven are going to be manageable.
JMVHO.
Bruce |
