El Paso Joins Dividend-Cut Stampede - TheStreet

El Paso Joins Dividend-Cut Stampede

The big energy company slashes its payout, provoking a plunge in its beaten-down shares.
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El Paso

(EP)

keeps looking more like the energy traders it once towered above.

The former industry powerhouse revealed plans Wednesday to slash its dividend and sell off big pieces of itself in an effort to stay afloat. El Paso's strategy mirrors similar plans adopted last year by weaker players -- including

Dynegy

(DYN)

and

Williams

(WMB) - Get Report

-- after they, too, lost their investment-grade credit ratings and began scrambling for cash to service heavy debt loads.

El Paso unrolled its plan while warning of fourth-quarter and full-year losses for 2002. The company also issued 2003 earnings guidance of only $1 -- 24% lower than analysts had expected.

The stock took an immediate hit, plunging 15% to $6.81 on the news.

John Olson, an analyst at Sanders Morris Harris, expressed little surprise at either El Paso's announcement or the market's reaction to it. He said the company's plans, absent specific details, had been "pretty well telegraphed" to the market. Olson was mildly surprised by only two things: El Paso expects to sell more assets, and cut fewer expenses, than he'd anticipated.

But overall, Olson applauded the plan and predicted a turnaround for the stock.

"I suspect that after the reaction to the dividend cut is manifested in the next few days, the shorts will probably start covering," said Morris, who owns the stock himself. "There will be fewer reasons to be negative on the company."

Driving

During a presentation to investors on Wednesday, El Paso CEO William Wise insisted the company is making tough decisions to overcome past mistakes and rebuild for the future. Going forward, El Paso is pinning its future on "core" businesses -- such as pipelines and production -- following a disastrous foray into an energy trading venture the company is now dismantling.

"In hindsight, we would have done some things differently -- and possibly not at all," Wise said Wednesday. "We're aggressively dealing with the past ... and moving forward to preserve the core value of assets we have in this company."

Industry critic Karl Miller scoffed at El Paso's claims.

"El Paso has no strategic focus nor direction," said Miller, whose firm specializes in energy-related acquisitions. "They have wasted away tremendous resources during the last three years. ... A wholesale change in management is clearly required."

Unlike some of its peers, El Paso has kept its senior management team largely intact throughout a stunning industry collapse set off by the 2000 bankruptcy of Enron. But even Olson, who has remained largely supportive of El Paso, sees a chance for major leadership changes at the company.

"I think that there is a proxy battle looming," Olson said. "We don't know what the opposition looks like -- who the proposed slate of management and board members would be -- so it's hard to tell now which is better or worse."

Regardless of whether they remain, Olson said, El Paso's current leaders are taking the right steps now to restore the company.

The market took a harsher view. By the time El Paso had detailed its plans -- during a conference call that left little time for questions -- the company's stock had plunged even further, falling 25% to $6.02.

The Five Points

During the call, El Paso laid out a "five-point plan" for recovery. Beginning this year, the company will spend the vast majority of its capital on its pipeline and production businesses. It will attempt to sell another $2.9 billion worth of assets, including its successful liquid natural gas business.

It will cut capital expenditures by 35% and its annual dividend by 82% -- to just 16 cents annually -- in an effort to strengthen its balance sheet and boost a liquidity position that has dwindled considerably in recent months. And it hopes to cut additional costs and resolve a mountain of legal and regulatory uncertainties that weigh heavily on the company.

"This is a very volatile industry environment ... and we think we've done all the things that are within our control," Wise told analysts Wednesday. "The board and management of El Paso is concentrating on the future of this company, and we're confident

it's headed in the right direction."

But recent stock sales -- by Wise in particular -- appear to contradict that confidence. In a nonopen market transaction last November, Wise collected $4.89 million by selling 524,056 shares of El Paso stock at $9.33 a share. Several other officers -- including El Paso's president, treasurer and controller -- also executed sales that same month.