EP-DYN -- EP eliminates 120 traders.
I'll be interested to see what Chuck Watson does in the future now that he's out of DYN.
May 30, 2002, 12:40AM
El Paso to lay off half its traders
Houston division already cut by 120
By LAURA GOLDBERG
Copyright 2002 Houston Chronicle
El Paso Corp. unveiled a series of steps Wednesday, including cutting its energy trading staff in half, aimed at shifting attention to its core natural gas business and beefing up its balance sheet.
Companies involved in energy trading have come under fierce pressure lately amid a torrent of troubling news, including federal investigations into dubious trading strategies and various accounting matters.
Just a day earlier, Chuck Watson, chairman and chief executive of Houston-based Dynegy resigned, as the company sought to rebuild its credibility. Dynegy's stock, which saw an uptick Tuesday, fell by $1.19 to $8.50 Wednesday.
Credit-rating agencies also are forcing a variety of energy-related companies to reduce debt and boost cash. The worse a company's credit, the more expensive it can be to do business, especially for those involved in trading.
Energy trading, which already made up a small percentage of El Paso's business, "has been the tail wagging the dog," William Wise, the company's chairman, president and chief executive officer, said in an interview.
"We believe both the credit markets and the equity markets have been focusing so much attention on the trading business that the value of the underlying business is being shrouded by the uncertainty associated with trading," he said.
As part of its restructuring plan, the company will issue more stock.
El Paso also lowered earnings-per-share projections for this year and next, citing the planned stock offering, reduction in energy trading, along with other reasons.
Both the stock plan and lower earnings expectations were difficult for shareholders to digest, even though some industry observers say El Paso's moves are likely to provide long-term benefits.
The market pounded shares of El Paso as they closed at $27.01, down $8.26 or 23 percent.
El Paso, which has about 15,000 employees worldwide with about 5,000 of them in Houston, said it would do the following:
· Let go about half of its 600-person energy trading division over the next several weeks. About half of those cuts are expected in Houston. In fact, on Wednesday about 120 Houston traders were let go.
· Limit its capital spending on energy trading to $1 billion, down from as much as $2 billion.
· Undertake a general corporate cost-saving initiative that will result in an as-of-yet-unknown number of job reductions. Between that and the energy-trading staff cuts, the company expects to save $300 million a year.
· Issue $1.5 billion in new equity securities, much of which is expected to be common stock.
· Increase spending on natural gas exploration and production.
· Sell off pipeline assets for about $800 million to a separate company which Houston-based El Paso both manages and holds an ownership interest in.
"We don't think the returns are really there in the trading business for us," Wise said.
As part of its energy trading reduction, the company will move away from long-term trading deals which rely on a certain form of accounting that has drawn criticism from analysts and investors.
As a result, Wise said, El Paso's earnings would be of a higher quality.
Wise also said he believes that El Paso, which already has investment-grade credit ratings, could be well positioned as the year unfolds for rating upgrades.
Both Moody's Investors Service and Standard & Poor's reaffirmed their current ratings on El Paso after the company's plan was released.
"Moody's believes that these steps are positive, because they reduce El Paso's leverage, strengthen its equity base, and make its cash flows more predictable," it said in a report.
Moody's also noted that an El Paso debt-reduction plan begun in December already resulted in the issuance of $862 million in common stock and sales of $1.75 billion in asset sales.
Gregory Phelps, vice president and portfolio manager of the John Hancock Patriot Group of closed-end funds, which own shares of El Paso preferred stock, said he believes there is benefit in the company's plans.
"Long term, those will offer greater revenue and earnings predictability, and that's something that's very highly valued nowadays," he said.
Stock analysts offered varied reactions. Carl Kirst with Merrill Lynch in Houston cut his rating on El Paso's stock, noting that some of El Paso's reduction in earnings projections this year are related to poor performance by certain international assets, including its refinery in Aruba.
But Michael Heim with A.G. Edwards & Sons in St. Louis raised his rating on El Paso, noting that a series of the company's operations are performing well.
"The company's challenge will be to convince investors to view it as an utility/production company instead of an energy merchant company," he wrote in a research note.
Whether El Paso's changes will satisfy shareholder Oscar Wyatt Jr., who wasn't available for comment Wednesday, was unclear.
Wyatt, who got his shares in El Paso when the Houston company he founded, Coastal Corp., was bought by El Paso, blasted El Paso's management last week at the company's annual meeting. He called for El Paso to change a series of accounting, spending, business and financial reporting practices.
Wise said that while there is some overlap between what the company did and Wyatt's concerns, none of El Paso's moves are in response to Wyatt.
In fact, Wise said, El Paso had talked to analysts about shifting its focus away from trading at the beginning of the month.
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