El Paso Corporation (EP) reported an adjusted EPS of 25 cents for the second quarter of 2009, slightly above the Zacks Consensus Estimate of 21 cents, but below 39 cents posted in the same quarter a year ago. Encouraging performance in the Pipeline segment, which clocked an 11% earnings growth, was more than offset by lower realized commodity prices.
GAAP net income, which includes the impact of production-related derivatives, ceiling test charges and other items, declined to $79 million or 11 cents per share from $191 million or 25 cents per share. Revenues dropped 16% to $973 million, and operating income fell 18% to $408 million.
Operating income in the Pipeline segment grew 11% to $327 million, driven primarily by incremental revenues from several expansion projects that went into service during 2008. Higher reservation revenues on the El Paso Natural Gas system, fresh contracts on Rocky Mountain region systems and additional capacity sales in the Tennessee Gas Pipeline system also added to the improved performance.
Operating income of the Exploration and Production segment declined 80% to $61 million, mainly due to the current challenging commodity price environment. Realized natural gas price averaged $7.07 per Mcf (down 26%) and oil, condensate and NGL price averaged $75.21 per Bbl (down 12%). However, per unit cash operating costs improved to $1.68 from $2.01, largely due to lower lease operating expenses and production taxes.
The Marketing segment posted an operating income of $10 million compared to an operating loss of $153 a year ago. The Power segment reported an operating loss of $21 million compared to an operating income of $12 million in the year-ago quarter.
We believe that El Paso’s management competencies and access to financing will enable the company to successfully execute its industry-leading pipeline backlog going forward while maintaining sufficient liquidity. Of late, El Paso has locked-in a substantial portion of its natural gas production volume for 2010 and 2011 at levels above $6.00 per Mcf. This gives the company more operating clarity as well as surety of cash flows in the event that commodity prices remain volatile for an extended period.
We maintain our Buy recommendation for the company.
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