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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Bruce L who wrote (30403)	3/1/2004 10:40:03 AM
From: jim_p	Read Replies (1) \| Respond to of 206092

Bruce, I agree with #1, but EP's problem is too much debt and the cost of junk debt is going up as that market is now shrinking for companies like CPN and EP. I disagree on #2, the quality of EP's oil and gas properties is low and the half life is very short. EP's needs to spend the $850MM to keep the treadmill going and if they stop spending the production/cash flow will drop off quickly. The question is can/will EP spend part of its free cash flow to just try to maintain production??? They need this cash flow to maintain their pipelines and to retire debt. If the Mariner comes in as expected, it would be several years before the first NG is sold and it would cost EP a lot of capital they can't afford to spend to develop it. In addition the Mariner would not have that large of an impact on a company the size of EP. The Mariner is already priced into the stock with all the hype from the boys in Canada. I have no feel for a turn around of the Merchant energy business in 05 or beyond, but EP needs cash to maintain its pipelines, E&P operations and to retire debt between now and then. As you can see by this morning’s action in the stock, the stock opened higher on the positive Barron’s report and the smart money is now using the positive news to exit as EP is now falling. RRI is just the opposite, the stock opened down with profit taking from the run up we just had and buyers rushed in the take the stock higher. EP's cash flow declined by 15% from 2001 to 2002 at a time when commodity prices were rising. What will EP's cash flow be in 2003??? If you simply annualize the first 9 months of EP's cash flow in 2003 it comes in at $1.5B, or down another 20% from 2002. If I were an investor and saw the downward trend in cash flow from operations when commodity prices were rising I'd be pretty darn concerned knowing that EP desperately needs every dime for Cap-X to just maintain operations. Assuming EP's cash flow comes in about were it's expected, the cash flow per share in 03 will be about the same for RRI and EP and RRI has a fraction of EP's leverage. If NG prices are at 5.00 at 3/31/04, EP's book value will drop to about $10.00 per share less any other unexpected write downs at year end. My guess is there will be some. EP's leverage is 2 1/2 times that of RRI and that leverage will increase with the write downs already contemplated. RRI's cash flow has increased in each of the last four years, and EP's has dropped in each of the last three years. Let's just look at EP's last nine months since we don't have the results for the full year. Cash flow from operations was $1.18B. Net cap-x, which includes $1.37B in cash generated from assets sales, was $1.87B, or $.688B less than cash flow from operations at a time when EP has already cut back on exploration and is trying to conserve cash for its very survival. RRI had net cap-x of $(2.88)B, or they generated $2.88B of cash after Cap-x needed to maintain operations. If you add RRI's net cap-x to their cash flow from operations, they generated $3.69B in free cash flow that was used to retire 31% of their entire debt ($2.63)B in one year. 31% of EP's debt would be $7.4B, which is more than all the debt RRI has. In the first 9 months of operations EP's debt actually increased to help fund part of the $.688B that was used up in operations/cap-x. EP is going in the wrong direction and RRI is making great strides to solve its problems. I could go on, but the bottom line is that there is no comparison between RRI’s financial health/future and that of EP. If all the stars align up for EP, the most you have is a $10.00 stock, where as in RRI's case you have the potential for a stock selling in excess of $20 as the IPP cycle recovers and goes into the next up cycle. Good luck with EP, I feel your odds are a little better at the track but I wish you the best. JMVHO, Jim