Updated from Feb. 17

El Paso

(EP)

investors just struck a dry hole.

Like doomed wildcatters, they had hoped for the best and found themselves discovering the worst instead. Bad news -- including a huge cut in proved reserves -- gushed from the company after the market closed on Tuesday, pressuring its shares in early Wednesday action.

"We're not happy to be reporting this large revision," El Paso CFO Dwight Scott admitted in a conference call with analysts. "It's a big disappointment, to say the least."

Following an independent review by conservative outside auditors, El Paso slashed its proved reserves by 1.8 trillion cubic feet -- or 41% -- to 2.6 Tcf of oil equivalent. It also hired lawyers to look into the matter and warned of a $1 billion pretax charge, triggered by the revision, and warned of more bad news to come.

"It is likely we will have further charges as we move through 2004," Scott explained.

The stock slid 10% to $7.99 early Wednesday.

Supermajor

Royal Dutch/Shell

(RD)

suffered a similar blow last month after slashing its own reserves. Like Shell, El Paso tried -- but failed -- to convince investors to look on the bright side.

The company pointed out that it had left its 2004 production targets intact despite the huge revision. It also highlighted progress outside its troubled -- but crucial -- exploration-and-production division.

"What's important is what has not changed," Scott insisted. "In virtually every other area of our long-range plan, we are at -- or ahead of -- schedule."

Still, analysts were clearly expecting better. Indeed, John Edwards of Deutsche Bank actually upgraded El Paso's stock last week because he expected the company to deliver no -- or even positive -- surprises about its proved reserves.

"We believe investors have overly discounted the likely outcome of the reserve audit," Edwards said when raising El Paso to buy. "At this juncture, it appears to us that the write-down risks are more than adequately discounted in the stock, presenting to us what appears to be a trading opportunity to the upside."

To be fair, Edwards did predict that El Paso would cut its proved reserves, primarily in south Texas and the Gulf of Mexico, by as much as 40%. But he also assumed the stock would quickly recover from any resulting hit.

The writedown "would likely receive an initially negative reaction from investors, but we believe over time it still supports a stock price at least equal to the current price and likely still provides room for upside," he wrote. "Additionally, we believe that a

smaller write-down would be a significant positive for investors."

The company -- including new E&P Director Lisa Stewart -- asked investors to exercise patience on Tuesday.

"With the reserve report behind us, we

still have a lot of work to do," Stewart acknowledged. "This is a work in progress."