El Paso Slips on Reserve Setback
El Paso
(EP)
just slipped on its steep road to recovery.
The exploration-and-production unit that has been weighing on the company for months continues to weather setbacks. In a regulatory filing on Monday, El Paso warned that it faces a "material negative revision" to its proved reserves -- a key measure of the E&P unit's health -- in a matter of weeks.
Analysts were already bracing for a big writedown following the division's weak performance last year. And El Paso itself had cautioned investors -- at least four separate times -- that a revision could be coming. But the market nevertheless blanched Monday at the prospect of a large writedown.
Shares of El Paso, which nearly broke past the $10 mark just last month, tumbled 4.6% to $8.11 halfway through Monday's session.
J.P. Morgan analyst Anatol Feygin clearly saw the writedown coming. In a January research note entitled "Reservations about EP's Reserves," Feygin warned that El Paso's stock -- then trading at $9.67 -- was "due for a breather." And he pointed to a sharp reduction in the company's reserves as a trigger for the selloff.
Feygin, who has a hold rating on the stock, predicted that El Paso could slash its proved reserves by as much as 30% following an independent review that's currently under way. The company itself has yet to specify just how big the writedown will be.
"Although the preparation of our internal estimates and Ryder Scott Co.'s independent reserve estimate for all our properties have not been completed at this time, we currently expect a material negative revision to our proved reserve estimates," El Paso disclosed in a special 8-K filing on Monday. "We expect to provide a further update of our proved reserve estimates and reported values of our reserves as soon as more complete information becomes available, which we would expect to have no later than by mid-February 2004."
Feygin has already noted that El Paso's new reserves auditor ranks as "one of the most respected, albeit conservative" names in the industry. And he plans to rely on the auditor's findings to recalculate the true value of El Paso's shares.
"Whether El Paso is a bargain or overvalued depends on several factors," he acknowledged. "But an important component is E&P's valuation, and the reserve revisions should provide a clearer sense of underlying asset values."
Morgan Stanley analyst Scott Soler has already declared El Paso's stock overpriced. He, too, warned of a "significant" reserve writedown late last month. But he highlighted other areas of concern as well. He fretted over El Paso's weak earnings power and labeled the company's cash flow projections "too optimistic." He also warned of long-term challenges down the road.
"El Paso still has significant debt payments due over the next several years, with a cap-ex budget that remains too high, in our view," Soler wrote. "While liquidity appears stable, it is not impervious to exogenous shocks."
El Paso is counting on new E&P management to help turn the company around. It recently hired Lisa Stewart -- credited for
Apache's
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explosive growth -- to steer that recovery effort.