El Paso Critics Mull What Might Have Been

Hero or Villain?

To Killen -- and hundreds of other ordinary El Paso shareholders -- Wyatt is a bona fide hero.

The outspoken oilman, now approaching 80, funneled millions of dollars of his own money into a proxy fight that gave small investors an unusually loud voice. But Wyatt had already earned the respect of some shareholders -- namely his former employees -- even before then. They had watched Wyatt build Coastal into a multibillion-dollar energy empire before selling it off to El Paso in early 2001. Some felt a slip in oversight almost immediately afterwards, however.

"Coastal was very tightly controlled by management," Killen stated. "If you needed a new pencil, you would have to show that you had used the last one down to the nub, if you know what I mean. If little things -- like getting new pencils -- were allowed now, what about the big things? That's what scared me."

Killen retired and cashed in nearly all her stock after the merger.

"It was not Coastal any more," she said simply. "It was not Oscar Wyatt's company. It was time to diversify."

But others are far less generous. They actually criticize Wyatt for some of the company's current troubles. One former employee insists that Wyatt had to know that Coastal's reserves -- largely blamed for the new revisions -- were being overstated.

"That was his baby," the former staffer said of Coastal's E&P division. "If he didn't know, then he isn't the Oscar Wyatt that we have all come to love and loathe."

Wyatt declined to be interviewed for this story because he is currently embroiled in litigation against El Paso. He has been named the lead plaintiff in a series of shareholder lawsuits that accuse the company of, among other things, overstating reserves.

New Math

To be fair, experts have always relied on judgment calls -- as well as science -- when calculating energy reserves.

They have just grown more cautious since new rules, with stiff penalties, took effect last year. The Sarbanes-Oxley Act now requires senior executives to certify that corporate financial statements, which include reserves for energy companies, are accurate. And it can trigger fines of up to $5 million and 20 years in prison for serious violations.

"This has a marvelous way of making people second-guess everything they do and err on the side of conservatism," says John Olson, a veteran energy analyst at Sanders Morris Harris who owns El Paso shares himself.

Some wonder whether El Paso's past management will now be held accountable. El Paso finally slashed its reserves after hiring Ryder Scott -- one of the most conservative auditors in the business -- following Foshee's arrival last year. Olson says the company, which now faces a writedown of up to $3 billion as a result of the revision, is doing the right thing by scrubbing its books clean.

But others wonder. At least one former El Paso employee, among hundreds recently laid off, defends the past reserves figures and the former head of the division. He suspects that current management may actually be understating reserves now so that it can enjoy upside revisions in the future.

"I think the reserve cuts were excessive," he says bluntly.

Still, new management teams often seek out past excesses so they can start with a clean slate. And many people -- including some of last year's dissidents -- are still willing to give El Paso's current leadership a chance.

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