El Paso Corporation (EP) announced its fourth-quarter 2010 operating earnings of 20 cents per share, lower than the Zacks Consensus Estimate by 4 cents. The results of the company were also lower than year-ago earnings of 34 cents per share.
GAAP earnings per share in the quarter were 9 cents versus 36 cents in the fourth quarter of 2009.
The difference between the GAAP and operating earnings during the reported quarter was due to the impact of a few one-time items. These are a gain of 10 cents on Midstream joint venture, a 2 cent impact due to changes in legacy derivative contracts, a 12 cent impact for E&P financial derivatives, 1 cent owing to ceiling test charges to a tax adjustment and 10 cents due to loss on debt extinguishment.
El Paso’s 2010 operating earnings were 98 cents per share compared with $1.29 per share reported in 2009. Fiscal 2010 earnings also missed the Zacks Consensus Estimate of $1.00 as provided by 11 covering analysts.
Earnings per share, as per GAAP, in 2010 were $1.00 versus a loss of 83 cents in 2009.
The difference between the GAAP and operating earnings during the year was due to the impact of a few one-time items. These include a gain of 9 cents on Midstream joint venture, a gain of 8 cents on Mexican pipeline assets, a 7 cent impact for E&P financial derivatives and a benefit of 1 cent from liquidation of foreign entities.
These benefits were negatively impacted by 3 cents due to ceiling test charges, a loss of 18 cents from debt extinguishment and 2 cents due to health care legislation.
Revenue
Total revenue of the company at the end of the fourth quarter was $984 million versus $1.19 billion in the year-ago period, which reflects a decline of 17.5%.
Quarterly revenue was lower than the Zacks Consensus Estimate of $1.21 billion.
The company generated total revenue of $4.61 billion in 2010, marginally down from $4.63 billion reported in 2009.
Total 2010 revenue was also lower than the Zacks Consensus Estimate of $4.74 billion.
Quarterly Highlights
El Paso’s cash operating costs for the fourth quarter of 2010 averaged $1.84 per thousand cubic feet (Mcfe), up from $1.81 per Mcfe for the same period in 2009, primarily due to higher production taxes.
Total operating expenses of the company at the end of the fourth quarter of 2010 were $603 million versus $695 million in the year-ago period. However, the decrease in cost did not benefit the operating results of the company affected as it was by a much lower top line.
Operating income during the fourth quarter 2010 dropped by $117 million to $381 million from the year-ago quarter.
Annual Highlights
During the year the company experienced a substantial year-over-year decline in total operating expenses. The expenses were cut by 45% from the year-ago level mainly due to ceiling test changes.
The decrease in operating expenses percolated down to benefit operating income. Operating income in 2010 was an impressive $2.04 billion versus a loss of $51 million in 2009.
Interest expenses at the end of 2010 were $1.03 billion, 2.3% higher than 2009 levels. We expect interest expenses to continue to increase in 2011, due to issuances of new debts last year.
Production and Realized Price
El Paso’s production in 2010 averaged 782 million cubic feet per day (MMcfe/d), representing an increase of 19 MMcfe/d from 2009 production volumes, which averaged 763 MMcfe/d.
Pipeline throughput volumes were down 4.7% to 17,469 billion British thermal units per day (BBtu/d) in 2010, from 18,338 BBtu/d 2009. The decrease was due to the sale of the Mexican pipeline in 2010.
Realized natural gas and oil prices, including financial derivatives, in 2010 averaged $5.67 per Mcf, down 25.6% and $64.50 per barrel, down 17.7%, respectively, both on a year-over-year basis.
El Paso employs various hedging strategies to lower its risks from exposure to commodity prices. As of December 31, 2010, the company has hedged 5.66 million barrels at an average floor price of $85.99 while, for 2012, the company has hedged 4.9 million barrels at an average floor price of $91.31.
Financial Update
Cash capital expenditures in 2010 reached $3.9 billion versus $2.8 billion in 2009. The company invested 48% more on pipeline operations and an incremental 29.9% for exploration and production (E&P) over the preceding year.
Cash flow from operations for 2010 was $1.84 billion versus $2.1 billion in 2009.
Dividend
On February 8, 2011, the board of directors of El Paso announced a dividend of 1 cent per share. The dividend is payable on April 4, 2011, to shareholders of record on March 4, 2011.
Guidance
In January this year the company provided guidance for 2011. The company expects adjusted EBITDA for 2011 to be in the range of $3.3 billion to $3.5 billion.
The consolidated capital expenditures for 2011 are expected to be $3.2 billion, with $1.7 billion earmarked for pipeline operations, $1.3 billion for E&P and $0.2 billion for Midstream and Corporate.
The cash flow from operations is expected to be in the range of $2.1–$2.3 billion in 2011.
The company expected earnings per share to range from 90 cents to $1.05.
Peer Comparison
Williams Companies (WMB) competes directly with El Paso Corporation. The former announced operating earnings for the fourth quarter 2010 of 44 cents per share, beating the Zacks Consensus Estimate of 26 cents and year-ago earnings of 27 cents per share.
Fiscal 2010 ongoing earnings came in at $1.28 per share, beating the Zacks Consensus Estimate of $1.15 and the year-ago figure of 94 cents per share.
Our View
We appreciate the attempts made by the company during the year to enhance its pipeline business. In August 2010, El Paso entered into a 50/50 joint venture with AGL Resources Inc. (AGL) to develop the distribution of liquefied natural gas (LNG) across the southeastern United States.
In December 2010, the company entered into another joint venture with Kohlberg Kravis Roberts & Co. (KKR) to develop natural gas processing plants and pipelines.
El Paso Corporation currently retains a Zacks #3 Rank (short-term Hold rating).
Based in Houston, Texas, El Paso Corporation involves in the natural gas transmission and in the exploration and production sectors of the energy industry. The company primarily operates in United States and has some exposure in Brazil and Egypt.
AGL RESOURCES (AGL): Free Stock Analysis Report
EL PASO CORP (EP): Free Stock Analysis Report
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WILLIAMS COS (WMB): Free Stock Analysis Report
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