El Paso Corporation (EP) announced third-quarter 2011 operating earnings of 18 cents per share, falling short of the Zacks Consensus Estimate by 8 cents and lower than the year-ago figure by 4 cents.
GAAP loss per share in the quarter was 48 cents versus earnings of 19 cents in the third quarter of 2010.
The difference between GAAP and operating earnings during the reported quarter was due to the impact of a few one-time items. These are: a 14 cent gain from E&P financial derivatives, 20 cents owing to ceiling test charges, 8 cents due to loss on debt extinguishment, 39 cents from loss on Ruby divestments, a 10 cent loss on interest rate swaps, a 2 cent impact from change in fair value of legacy items and a 1 cent impact from change in the annual tax rate.
Revenue
Total revenue of the company at the end of the third quarter was $1.40 billion versus $1.21 billion in the year-ago period, which reflects a growth of 15.7%. The year-over-year growth in revenue was mainly due to strong performance at its Exploration and Production (E&P) segment that saw a 25.8% rise in revenues.
Quarterly revenue was higher than the Zacks Consensus Estimate of $1.24 billion.
Quarterly Highlights
El Paso's cash operating costs for the third quarter of 2011 averaged $1.82 per thousand cubic feet (Mcfe), up from $1.62 per Mcfe for the same period in 2010.
Total operating expenses at the end of the third quarter of 2010 were $1.52 billion versus $0.7 billion in the year-ago period. Total operating expenses in the current quarter include a loss of $0.6 billion due to deconsolidation of the subsidiary. Excluding this, total operating expenses in the reported quarter increased by 32.9% over the prior year.
Interest and debt expenses at the end of third quarter 2011 were $242 million, 5.1% lower than the third quarter of 2010.
Production and Realized Price
El Paso's production in third quarter 2011 averaged 827 million cubic feet per day (MMcfe/d), representing an increase of 63 MMcfe/d from third quarter 2010 production volumes, which averaged 764 MMcfe/d.
Pipeline throughput volumes were up 6.9% to 18,511 billion British thermal units per day (BBtu/d) in the third quarter 2011 from 17,235 BBtu/d in the third quarter 2010.
Realized natural gas and oil prices including financial derivatives averaged $5.60 per Mcf, down 5.6% and $88.95 per barrel, up 29.8%, respectively, both on a year-over-year basis.
Hedges
El Paso employs various hedging strategies to lower its risks from exposure to commodity prices. During the reported quarter the company further added to its hedged positions. As of September 30, 2011, 65% of El Paso’s fourth quarter 2011 oil production is hedged with a floor of $85.99 and a ceiling of $91.88. The company also hedged 70%of its 2011 domestic natural gas production at an average floor price of $6.06 per MMBtu.
Financial Update
Cash capital expenditures in the third quarter of 2011 reached $0.97 billion versus $1.13 billion in third quarter 2010. Of the total capital expenses 52.2% were invested on pipeline operations and 43.3% were invested for exploration and production (E&P) activities.
Cash flow from operations during the first nine moths of 2011 was $1.61billion versus $1.41 billion in the same period of 2010.
Peer Comparison
Williams Companies(WMB) competes directly with El Paso Corporation. The former announced operating earnings for the third quarter 2011 of 40 cents per share, falling short of the Zacks Consensus Estimate by a penny.
Our View
The performance of the company was mixed during the reported quarter. The company has nonetheless undertaken a few growth projects that would improve its position in North America.
El Paso Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
Based in Houston, Texas, El Paso Corporation is engaged in natural gas transmission and in the exploration and production sectors of the energy industry. The company primarily operates in the United States with some exposure in Brazil and Egypt.
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