El Paso Corporation (EP) reported third quarter 2010 operating earnings of 22 cents per share, which beat the Zacks Consensus Estimate by a penny, on account of higher pipeline earnings and robust E&P volumes. However, earnings dipped from the year-ago earnings of 23 cents per share, due to lower realized natural gas prices (after hedges) in the quarter.
On a GAAP basis, earnings improved by 11 cents to 19 cents in the reported quarter compared with 8 cents in the third quarter of 2009.
Revenue
El Paso’s total revenue of $1.213 billion in the third quarter, swept past the Zacks Consensus Estimate of $1.157 billion and $981 million in the year-ago period.
By segment, revenues improved across all of El Paso’s business segments, with revenues of $692 million (up 3.7%) in the Pipeline segment, $519 million (up 51.3%) in the Exploration and Production segment and revenue loss of $16 million (versus a loss of $26 million last year) in the Marketing segment.
Operational Update
El Paso’s production volumes averaged 764 MMcfe/d, implying a 4.4% growth from 732 MMcfe/d in the year-ago quarter. Substantial production growth from El Paso’s Haynesville shale program and increased production in Brazil boosted volumes in the quarter.
Pipeline throughput volumes were down 4% to 17,047 billion British thermal units per day (BBtu/d) in the quarter, from 17,757 BBtu/d in the third quarter of 2009. Lower-than-expected demand in California and the Southwest as well as 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 deliveries on the Colorado Interstate Gas Company system.
Realized natural gas and oil and natural gas liquids (NGL) prices, including financial derivatives, averaged $5.93 per Mcf (down 19.5% year over year) and $62.51 per barrels (down 24%), respectively. Excluding the impact of derivatives, realized prices improved 29.8% for natural gas and 18.9% for oil and NGL.
Total operating expenses at El Paso in the third quarter were $695 million versus $652 million in the year-ago period. The hike in expenses was mainly due to an increase in depreciation, depletion and amortization (DD&A) expenses, which rose 19.5% year over year.
Total operating income of El Paso in the quarter under review was $518 million versus $329 million in the year-ago quarter, reflecting a growth of 27.4%. Robust growth at the Exploration and Production segment and improved results at the Marketing segment led this growth, slightly offset by a dip in Pipeline segment results.
Hedges
El Paso employs various hedging strategies to lower its risks from exposure to commodity prices. The company recently expanded its natural gas hedge position in 2011 and established a position in 2012.
Financial Update
Cash capital expenditures in the quarter reached $1.14 billion versus $718 million in the prior-year quarter.
Cash flow from operation for the nine months ended September 30, 2010 was $1,504 million versus $1,781 million in the same period last year.
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