El Paso Seeks to Silence Skeptics - TheStreet

El Paso


continues to insist that its future isn't as bleak as the market has come to believe.

On Monday, the once-mighty energy giant sought to "clarify" a 2003 business plan that last week triggered a freefall in its stock and a rash of analyst downgrades. Specifically, El Paso further examined its proposed asset sales, its current financial condition and its ability to meet obligations in 2003 and beyond. The company also addressed the expected impact of credit downgrades issued by Standard & Poor's after the market closed Friday.

After chewing El Paso up following last week's announcement of the revamping plans, investors showed a new willingness to be reassured on Monday. The company's stock bounced 4.9% to $5.16 in heavy trading.

But analysts remain skeptical. Last week William Maze of Banc of America Securities cut El Paso to sell and calculated the value of the stock at only $4. He warned that El Paso must rely on asset sales to stay afloat in 2003 -- and that cash could run out in 2004.

"This is not a sustainable business model, in our opinion," Maze said. "As a result, El Paso's ability to remain a going concern has come into question."

Maze's downgrade came two days ahead of S&P's action on Friday, which sent El Paso's credit deeper into junk territory. S&P cut El Paso's long-term debt from BB to B-plus, just above the category where companies often default.

"Of paramount performance to the company's ability to persevere current conditions is renegotiating its credit facilities and regaining access to capital markets at the holding company level," S&P wrote Friday. "Absent such access, the company will be severely challenged to repay nearly $2.5 billion of borrowings in 2003 and $3.5 billion in 2004."

S&P followed up on Monday by warning that it may also cut the credit rating of El Paso Energy Partners, a company that operates stable cash-generating assets but remains closely tied to troubled El Paso.

"Standard & Poor's continues to evaluate the relationship between EPN and its general partner, and until that review is completed, the CreditWatch listing for EPN will remain in effect," the ratings agency said Monday.

S&P currently rates the partnership's credit three notches above the parent's at BB-plus.

For its part, El Paso continues to view its business plan as feasible. The company stressed on Monday that it has already sold or contracted to sell $552 million in assets this year -- one-fifth of the $2.9 billion in total assets it hopes to sell in 2003.

In the meantime, El Paso blamed its rising debt and dwindling cash primarily on a trading business that it's trying to get rid of. Following credit downgrades in the second half of 2002, El Paso saw its capital outlays for the trading division explode by $1.7 billion. All told, the company expects credit downgrades -- including the latest one by S&P -- to cost its trading division a total of $2.2 billion in additional capital.

El Paso expects to recover around $1 billion of that collateral as it liquidates its trading book. But some analysts, including Maze, have assigned no value at all to the company's trading division.

Only one analyst -- Carol Coale of Prudential Securities -- has remained vocally supportive of the stock. Coale upgraded El Paso from hold to buy less than a month ago. And even after last week's disastrous update from the company, she continues to expect El Paso to perform.

"Wall Street showed no mercy," Coale said of last week's market reaction. "While El Paso's situation is clearly high risk, we believe the stock is oversold and that

the company will be successful in executing its asset divesture plan."

Coale went on to conclude that "the worst is behind" the company.

But El Paso still faces serious financing and regulatory hurdles ahead. And at least one industry critic predicted that only sweeping change -- starting in the executive suite -- can save the company now.

"The capital markets must break up the 'bunker mentality' and force real change in the power sector," said Karl Miller, a former industry executive who now leads an energy-related acquisitions firm. "Senior management ... must be changed."

Even after Monday's surge, El Paso's stock continues to trade near the all-time low of $4.39 it set four months ago.