El Paso


tossed the market a bone on Monday.

Investors have some new numbers to chew on as they wait for the company to file audited financial statements. A few of the figures -- including a $2.7 billion writedown of El Paso's production assets -- were pretty tough to swallow. But investors willingly choked down the bad with the good.

John Olson, chief investment officer at Sanders Morris Harris, acknowledged that the hit to El Paso's balance sheet was "a little worse" than he'd expected. But Olson, who owns the stock, took comfort in the company's strong liquidity position and the lack of any other major surprises.

El Paso is in the middle of a dramatic turnaround effort following its doomed venture into energy trading and, more recently, a sharp downturn in its production business. The company stunned the market in February by slashing its proved reserves by 40%, and since then it has announced further reductions and the need to restate five years' worth of old annual reports. It expects to file newly audited financial statements -- complete with billions of dollars worth of charges and writedowns -- by the end of the current quarter.

In the meantime, the company tried to reassure investors who are hungry for good news.

"We continue to make solid progress on our long-range plan," CEO Doug Foshee said. "Operationally, our businesses are performing at or ahead of our expectations, and we are encouraged by the signs of stability in our production business. Given our progress, I'm optimistic about the outlook for El Paso."

Investors feasted on Foshee's hope, pushing El Paso's stock up 4.7% to $8.18 late Monday morning.

At least one analyst predicted last week that Monday's update would trigger a rise in El Paso's share price. David Maccarrone of Goldman Sachs suggested that investors buy calls ahead of a series of catalysts, beginning with the current financial update, that could drive the company's stock toward $9 over the next few months.

Still, at least one of Maccorrone's assumptions now looks somewhat optimistic. Last week he predicted that El Paso would report an improvement in disappointing production levels posted earlier this quarter. Instead, full-quarter production levels came in even lower than the figures posted before.

El Paso saw production spiral from 890 million cubic feet equivalent per day in the first quarter to 816 MMcfe/d through most of the second period. It went on to report an overall production level of 805 MMcfe/d for the entire second quarter.

Even so, El Paso said on Monday that it remains on target to hit a production target -- viewed as aggressive by some -- of 850 million to 950 million MMcfe/d for the full year.

It also promised to slash its massive debt load to $15 billion by the end of 2005. Meanwhile, it has already met its asset sale targets for both this year and next after inking some $3.5 billion worth of transactions.

But the company has weathered some setbacks as well. The writedown of its oil and gas properties will reduce shareholders' equity by $2.7 billion. Its past use of hedge accounting, which is no longer deemed appropriate, will cut shareholders equity by another $1 billion. And it faces $1.6 billion in "incremental ceiling test charges" beyond those already announced.

As a result, however, the numbers should look prettier going forward. Maccaarrone predicted that the restatements would lead to "significantly lower" production expenses in the future. He also said that El Paso's reduction in hedges will allow the company to more easily be compared with its peers.

Prior to Monday's announcements, Maccarrone noted, El Paso severely underperformed competing energy stocks. But he expects that situation to change in the future. He believes that new signs of stability at the company -- coupled with strong energy prices -- will keep pushing the stock higher.

He points to one possible catalyst in particular.

"The delay in filing SEC financial statements appears to have kept many investors from even beginning to consider El Paso securities," wrote Maccarrone, who has an in-line rating on the stock. So "we view the filing of audited 1999-2003 financials as a significant positive catalyst for EP shares."

By now, El Paso has already recovered much of the ground it lost following news of its massive reduction in reserves. Still, the stock hasn't seen double digits in more than a year.