The energy sector's favorite whipping boys just keep getting spanked.

Royal Dutch/Shell

( RD)

(SC) - Get Report

now faces a formal investigation into its massive restatement of proved reserves, and

El Paso

( EP) has been slapped with its first class-action lawsuit following a cut in reserves that dwarfed Shell's.

The

Securities and Exchange Commission

is now formally examining the 20% reduction in Shell's proved reserves that stunned the market in early January. The company had already fielded informal inquiries from the SEC, as well as class-action lawsuits from shareholders, shortly after the revision.

"The SEC has now advised Shell's legal representatives that its inquiry would proceed as a formal non-public investigation," Shell said in a statement late Thursday. "Shell will continue to cooperate fully with the SEC's investigation."

A spike in oil prices offset the negative news, however. Shell's stock inched up 39 cents to $41.17 Friday morning. Still, the stock has yet to approach the $46.17 high it set just three days before the company dropped its bombshell.

El Paso fared worse on news of a shareholder lawsuit. The stock fell 2.7% to $6.99 after a class-action law firm accused El Paso and its senior managers of "issuing materially false and misleading statements regarding El Paso's financial results and reported reserves."

Analysts had warned of such repercussions after El Paso slashed its proved reserves by some 41% earlier this week.

"When Royal Dutch/Shell stunned the market with its 20% reserve reduction, litigation soon followed," reminded Gordon Howard, a Credit Lyonnais Securities analyst who cut El Paso to sell on Wednesday. "Not to overstate this, but this is a major risk to El Paso that investors should

not

ignore."

Furthermore, Howard warned that a possible SEC probe -- such as the one now facing Shell -- could be another "major negative development" for the company.

Already, El Paso itself has contacted the SEC about its reserves. It also has hired an outside law firm to investigate the cause -- including any wrongdoing -- for inflated reports in the past. But its former production chief, Rod Erskine, has already left the company. And one energy executive, who worked with Erskine at Coastal, worries that the truth may never come out.

"This is a typical deal where they get rid of the guy who was there during the pertinent period," said Frank Powell, a former executive of Coastal, a big company that merged with El Paso in early 2001. "They guarantee them a nice going-away package with a clause that says they can't say anything negative about the company."

Powell isn't suggesting that Erskine did anything wrong. But he hopes that new CEO Doug Foshee will at least waive any clause that might keep Erkisne from speaking in an effort to clean the slate. For now, he adds, investors have been given no access to the person who might have answers.

"Just like Shell didn't have the appropriate person on its conference call" about its writedown," Powell said, "neither did El Paso."

Shell Chairman Sir Philip Watts continues to field harsh criticism -- and even calls for his resignation -- following his absence from the original conference call that followed the company's huge restatement. Similarly, El Paso's new CEO and far newer production chief found themselves struggling to answer questions after the company's own revision.

Howard, for one, is still waiting for answers.

"El Paso failed to address the 'reasons' for the revisions, and stated that 'the outcome of that review may cause us to modify or add the reasons (for the revisions) we provided you today,'" the analyst noted. "We are not sure exactly what that means, but we would suggest investors strongly consider this vague statement -- which was mentioned several times during the conference call -- when making an investment decision in El Paso shares."

UBS analyst Ronald Barone, who cut El Paso to sell the same day, offered words of caution as well. He said he was "taken aback" by the size of both the reserve reduction and the $1 billion ceiling charge it triggered. He also warned about "the potential of

several billions of additional

charges in the quarters ahead" if gas prices fall to normal levels.

In the meantime, he found it "interesting" that El Paso blamed its Coastal assets for most of the revision and all of the ceiling test charge. El Paso inherited both the assets and its former production chief during the 2001 merger.

In its final annual report as a separate company, Coastal boasted of its strong reserves.

"For the sixth consecutive year, we added proved reserves in 2000 that were more than triple our production volumes," the regulatory filing states.

Coastal reported proved gas reserves of 4.2 trillion cubic feet equivalent -- up 21% from the prior year -- at the end of 2000. El Paso's total proved reserves now stand at 2.64 tcfe after the sharp revision.