EP EL Paso Corp. (Holding Co.)

El Paso Corporation (EP) announced first-quarter 2012 operating earnings of 20 cents per share, which fell short of the Zacks Consensus Estimate by 7 cents. The results of the company were lower than the year-ago figure by 10 cents.

GAAP earnings per share in the quarter were 11 cents versus 8 cents in the first quarter of 2011.

The difference between GAAP and operating earnings during the reported quarter was due to the impact of a few one-time items. These include an 8 cent ceiling test charge in Egypt, a 1 cent charge for merger related costs, a 1 cent change in fair value of legacy indemnification and other legacy items and a 1 cent gain for favorable tax effect.

Revenue

Total revenue at the end of the first quarter was $1.26 billion versus $0.98 billion in the year-ago period, which reflects growth of 27.4%. The year-over-year growth in revenue was mainly due to strong performance from its Exploration and Production (E&P) segment, which grew 93.6% from the previous year quarter.

However, the quarterly revenue was lower than the Zacks Consensus Estimate of $1.32 billion.

Quarterly Highlights

El Paso’s cash operating costs for the first quarter of 2012 averaged $1.74 per thousand cubic feet (Mcfe), down from $1.85 per Mcfe for the same period in 2011, primarily due to higher production volumes and lower G&A costs.

Total operating expenses at the end of the first quarter of 2012 were $866 million versus $682 million in the year-ago period, reflecting an increase of 26.9%.The increase in expenses was attributable to higher operating and maintenance expenses and increase in the cost of products and services supplied.

Operating income during the first quarter 2012 was $394 million, up 28.3% from $307 million in the year-ago quarter.

Interest and debt expenses at the end of first quarter 2012 were $226 million, 5.8% lower than the first quarter of 2011.

Production and Realized Price

El Paso’s production in first quarter 2012 averaged 908 million cubic feet per day (MMcfe/d), representing an increase of 87 MMcfe/d from first quarter 2011 production volumes, which averaged 821 MMcfe/d. The 11% year-over-year rise in production volumes was primarily due to the increase in oil and condensate volumes.

Pipeline throughput volumes were up 10.1% to 19,864 billion British thermal units per day (BBtu/d) in first quarter 2012 from 18,038 BBtu/d in first quarter 2011. The upsurge was due to higher volumes in the Tennessee Gas Pipeline (TGP) system.

Realized natural gas and oil prices, including financial derivatives, in first quarter 2012 averaged $4.27 per Mcf, down 21.5% and $100.16 per barrel, up 16.9%, respectively, both on a year-over-year basis.

Financial Update

Capital expenditures in the first quarter of 2012 were $0.5 billion, which was considerably lower than the first quarter 2011 level of $1.1 billion. During the quarter investment on exploration and production (E&P) grew by 28.5% year over year, while the investment in the pipeline segment was $80 million versus $744 million invested in the prior-year quarter.

Cash flow from operations during the first quarter 2012 was $516 million versus $531 million in the first quarter of 2011.

Peer Comparison

Williams Companies (WMB) competes directly with El Paso Corporation. The former announced operating earnings for the first quarter 2012 of 39 cents per share, beating the Zacks Consensus Estimate by 3 cents and the year-ago results by 11 cents.

The operating revenue in the first quarter 2012 was $2.01 billion which surpassed both year-ago results of $1.87 billion and the Zacks Consensus Estimate of $1.84 billion.

Our View

El Paso failed to match up to our expectation this quarter. We believe, like other operators in the industry, El Paso is also impacted by lower realized prices of natural gas and natural gas liquids. The decline in realized prices to a large extent negates the impact of increase in production.

El Paso Corporation currently retains a Zacks #4 Rank, which translates into a 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.

 
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