Bad news -- with the threat of more to come -- dampened the energy sector on Tuesday.

Reliant Resources

(RRI)

took a hit after posting a big full-year loss and offering lukewarm guidance for 2004 as well. Meanwhile,

El Paso

( EP) failed to bounce on news of a big asset sale as investors braced instead for a dark update on the company's proved reserves later in the afternoon.

Reliant blamed its struggling wholesale division for both fourth-quarter and full-year losses. The company posted a quarterly loss of $29 million, down from $176 million a year earlier, and swung to a big full-year loss as well. Hit by a $985 million impairment charge, the company -- which earned $123 million in 2002 -- ended last year $902 million in the red. But management predicted better days ahead.

"Our fourth-quarter results reflect a substantial improvement compared to the same period of 2002, despite the continued difficult market conditions," CEO Joel Staff pointed out. "While we are pleased with the improvement ... we are taking decisive actions to be a highly efficient, customer-focused competitor, to achieve financial flexibility and to capitalize on our competitive advantage."

Reliant pledged to slash its debt load significantly over the next three years. In the meantime, it announced $200 million worth of cost cuts -- on top of the $140 million unveiled last year -- as part of its recovery plan.

"We are committed to position the company to create value for shareholders in all phases of the business cycle," Staff stated.

For now, however, Reliant continues to suffer. The company's wholesale business wiped out all the fourth-quarter and full-year profits generated by its growing retail segment. And a turnaround could be slow. Although Reliant expects to regain profitability this year, the company issued full-year guidance that fell well short of current expectations.

Reliant projected that it will earn just 25 cents a share this year, or less than half the 57-cent consensus estimate. The company's stock slid 4% to $7.73 after Tuesday's update.

Meanwhile, El Paso inched up just 1.3% to $8.68 despite news of a lucrative asset sale. The big pipeline company -- which has been shedding billions of dollars worth of assets in an effort to pay down debt -- expects to collect $346 million for nearly all of its Canadian exploration and production business. At least one analyst believed the company would generate far less from the transaction.

"The transaction price was above our expectations of approximately $250 million," noted J.P. Morgan analyst Anatol Feygin, who has a neutral rating on the stock. "And the sale represents another significant step to executing the asset sale component of El Paso's long-range plan."

The company touted its recent progress as well.

"In roughly two months' time," CEO Doug Foshee stated, "we have contracted for every major asset sale that was assumed in our December plan."

While generally pleased with the latest sale in particular, Feygin did offer one cautionary detail. He pointed out that El Paso's Canadian proved reserves -- unveiled as part of the transaction -- were "modestly below" his expectations.

"Proved reserves at the Canadian properties were based on a

year-ending 2003 evaluation provided by Ryder Scott," he noted. "This may point to conservatism in Ryder Scott's valuation of El Paso's proved reserves" overall.

El Paso is expected to officially slash its proved reserves during an update after the market closes on Tuesday. But some analysts believe the stock -- hit hard when the company first warned of a big writedown -- has already absorbed the bad news.

Indeed, Deutsche Bank analyst John Edwards recommended buying the stock after its recent drop.

"We believe investors have overly discounted the likely outcome of the reserve audit," Edwards said when upgrading El Paso to buy last week. "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."

Edwards himself expects El Paso to cut its proved reserves, primarily in south Texas and the Gulf of Mexico, by as much as 40%. But he's convinced the stock will recover from any resulting hit.

The writedown "would likely receive an initially negative reaction from investors, but we believe over time 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 writedown would be a significant positive for investors."