El Paso Corporation (EP) announced its second-quarter 2010 operating earnings of 22 cents per share, which beat the Zacks Consensus Estimate by a penny. The results of the company were lower than year-ago earnings of 25 cents per share.
GAAP earnings in the quarter were 21 cents versus 11 cents in the second quarter of 2009.
The difference between the GAAP earnings of 21 cents and operating earnings of 22 cents during the reported quarter was due to the impact of a few one-time items: a gain of 8 cents on sale of Mexican pipeline assets, a 2 cent impact due to changes in legacy derivative contracts, a 6 cent impact for E&P financial derivatives and 1 cent owing to a tax adjustment.
Revenue
Total revenue of the company at the end of the second quarter was $1,018 million versus $973 million in the year-ago period. The actual results of the company failed to meet the Zacks Consensus Estimate of $1,123 million.
Production and Realized Price
El Paso’s production in second-quarter 2010 averaged 788 MMcfe/d, representing an increase of 11 MMcfe/d from second-quarter 2009 production volumes, which averaged 777 MMcfe/d. The consolidated production volumes during the quarter improved 3% year over year.
Pipeline throughput volumes were down 4.3% to 17,150 billion British thermal units per day (BBtu/d) in the quarter, from 17,929 BBtu/d in the second quarter of 2009. Lower-than-expected demand due to lackluster economic conditions and increased competition, primarily on the El Paso Natural Gas system, led to the year-over-year decline. Also, throughput volumes were negatively impacted by lowered production from Rockies.
Realized natural gas and oil prices, including financial derivatives, averaged $5.86 per Mcf, down 17.1% and $63.69 per barrels, down 15.3%, respectively, both on a year-over-year basis. Excluding the impact of derivatives, realized prices improved 26.2% for natural gas and 40.7% for oil.
Operational Update
Total operating expenses of the company at the end of the second quarter of 2010 were $634 million versus $582 million in the year-ago period. The hike in expense was mainly due to an increase in depreciation, depletion and amortization (DD&A) expenses.
El Paso’s cash operating costs for the second quarter of 2010 averaged $1.77 per Mcfe, up from $1.68 per Mcfe for the same period in 2009, primarily due to higher lease operating expenses and higher production taxes.
Interest expenses for the company in the second quarter of 2010 were $284 million versus $253 million in the year-ago period.
The total operating income of El Paso in the quarter under review was $384 million versus $391 million in the year-ago quarter, reflecting a decline of 1.8%. All segments performed well except the Marketing segment, which more than offset the benefits from the other segments.
Segmental Results
Operating income of the Pipeline Group was $310 million for the quarter ended June 30, 2010 versus $285 million for the same period in 2009. Second-quarter 2010 results benefited from higher reservation revenues, and the impact of several expansion projects, which includes the Elba Express Pipeline, the SLNG Elba Island LNG terminal expansion and the Totem storage project.
Operating income from the Exploration and Production segment was $102 million in the second quarter of 2010 versus $76 million for the same period in 2009. The increase was primarily due to higher realized commodity prices, excluding the impact of financial derivatives, and higher production volumes, partially offset by higher DD&A expenses.
The Marketing segment reported an operating loss of $50 million for the quarter ended June 30, 2010, compared with a $10 million gain for the same period in 2009.
Corporate and other in the quarter was $22 million versus $20 million in the year-ago quarter.
El Paso employs various hedging strategies to lower its risks from exposure to commodity prices. As of June 30, 2010, the company has hedged 75% of its 2010 domestic natural gas production. The company has also hedged a portion of its 2011 production against commodity price volatility.
Dividend
On July 21, 2010, the board of directors of El Paso announced a dividend of 1 cent per share. The dividend is payable on October 1, 2010, to shareholders of record on September 3, 2010.
Financial Update
Cash capital expenditures in the quarter reached $761 million versus $604 million in the prior-year quarter.
Cash flow from operation for the first half of 2010 was $986 million versus $1,173 million in the first half of 2009.
Guidance
El Paso expects operating earnings for 2010 to be in the range of 90 cents to $1.00 per share.
The company expects its full-year 2010 DD&A expense to be within its guided range of $1.65─$1.85 per Mcfe.
Our View
El Paso is on track to complete the Ruby pipeline project within both time and budget.
We retain a short-term Zacks #3 Rank (Hold) and a long-term Neutral recommendation on the stock.
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