We reiterate our Neutral recommendation on El Paso Corporation (EP) given the company’s high-grade Exploration & Production assets and large inventory of pipeline projects, which offer significant value in the long run. However, the delays and cost overruns at the Ruby pipeline project have hindered the company’s near-term outlook.
Houston, Texas-based El Paso Corp. is a major player in both the natural gas transmission (Pipelines business) and exploration & production (E&P) space in the U.S. The company competes primarily with Exxon Mobil Corporation (XOM) and Williams Companies Inc. (WMB).
El Paso is the largest pipeline operator in the United States, owning interest in some of the largest and most active pipelines of the country. These assets are located in close proximity to major markets as well as regions where exploration and production of hydrocarbons are very active. This benefits the company on both the demand and supply sides.
The long-term growth of El Paso’s pipeline business depends on its success in executing its backlog of expansion projects and developing new projects in its markets and supply areas. The Pipeline Group expects to start five major projects in 2011, including the Ruby pipeline project, FGT Phase VIII, Gulf LNG, Phase II of SNG’s South System III expansion and the TGP 300 Line.
In the exploration and production business, El Paso continues to execute on its strategy with increased production volumes, lower per unit cash operating costs and an expanded 2011 and 2012 hedging program designed to support its balance sheet and cash flows. The company continues to advance its core drilling programs with an increasing capital investment on oil-directed drilling in the Eagle Ford, Altamont and Wolfcamp areas.
El Paso benefits from hedging a substantial portion of its future production, showing operating clarity and cash flow visibility even when energy prices remain volatile. We believe the competence of its management and access to financing will enable successful execution of El Paso’s industry leading pipeline backlog going forward.
On the negative side, El Paso Corp. depends greatly on the timely completion of its pipeline and E&P projects. The inability to complete projects on time and per budget may significantly affect the company’s profitability, cash flows or financial position. While El Paso has a history of successful execution, the announcement of a potential delay and a cost overrun at its Ruby Pipeline project could hurt the near-term outlook, in our view.
Moreover, the operational success of El Paso’s exploration and production arm depends largely on the volatility of oil and gas prices, which can affect the company’s relative valuation, profitability and the carrying value of oil and gas reserves.
However, we believe the cumulative rise in capital expenditure at the Ruby project is manageable for the company given its strong liquidity position. El Paso Corp. currently retains a Zacks #3 Rank (short term Hold rating), which supports our Neutral rating for the stock.
EL PASO CORP (EP): Free Stock Analysis Report
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