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Gold/Mining/Energy : El Paso Energy EPG

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From: Dennis Roth	5/9/2008 8:48:39 AM
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El Paso Corp. (EP): Shares responding to natural gas leverage, add'l upside remains - Goldman Sachs - May 09, 2008 What's changed El Paso Corp. reported 1Q08 EPS of $0.33 that was in line with our estimate and above the consensus estimate of $0.30. Pipelines segment EBITDA of ~$480 million was modestly above our estimate and offset lower divestiture-impacted E&P segment volumes. We are raising our 2008-2010 EPS estimates 15% entirely due to a higher natural gas / crude oil price deck. Implications We maintain our Buy rating on El Paso although recognize that the market has begun to appreciate the leverage the company has to higher natural gas prices – shares traded up 4.7% today and 19% over the last 9 weeks compared to S&P 500 returns of 0.5% and 8%. However, we believe additional upside exists as valuation underestimates the true depth of the cash flow surge we expect given our bullish energy price forecast. Furthermore, the near-term cash surge will reduce capital requirements that El Paso requires to fund its extensive Pipelines’ segment capital expansion portfolio, estimated at $4.8 billion over the next 3-6 years. It is this bridge connecting the E&P-driven cash surge with more long-term Pipelines-driven EBITDA growth that underpins our positive view on company fundamentals. Valuation We are raising our 6-month target price by 5% to $21 (10% total return) based on a company-wide 2008 EBITDA multiple of 6.9X, supported by a 9.5X EBITDA multiple for its Pipelines segment, 17.0X IDR cash flow multiple for its GP interest in El Paso LP (EPB), our 6-month target price for EPB LP units, and the discounted net asset value (NAV) for its Exploration & Production business, or $3.40 per Mcfe of proved reserves. Key risks Changing commodity prices or construction costs may slow project development or impact returns.

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