El Paso Corporation (EP) announced its second-quarter 2010 operating earnings of 34 cents per share, beating the Zacks Consensus Estimate by a dime. The results of the company surpassed the year-ago figure by 13 cents.
GAAP earnings per share in the quarter were 25 cents versus 22 cents in the second quarter of 2010. The difference between the GAAP and operating earnings during the reported quarter was due to the impact of a few one-time items.
These are a 6 cent impact for E&P financial derivatives, 6 cents owing to ceiling test charges to a tax adjustment, 2 cents due to loss on debt extinguishment and a 1 cent impact for change in fair value of legacy items.
Revenue
Total revenue of the company at the end of the second quarter was $1.23 billion versus $1.01 billion in the year-ago period, which reflects a growth of 21.4%. The year-over-year growth in revenue was mainly due to strong performance from its Exploration and Production (E&P) segment that saw a 44.9% rise in revenues year over year. This segment benefited from higher volumes and improved oil and condensate prices.
Quarterly revenue was higher than the Zacks Consensus Estimate of $1.19 billion.
Quarterly Highlights
El Paso's cash operating costs for the second quarter of 2011 averaged $1.75 per thousand cubic feet (Mcfe), down from $1.77 per Mcfe for the same period in 2010.
Total operating expenses of the company at the end of the second quarter of 2010 were $707 million versus $634 million in the year-ago period, reflecting an increase of 11.5%.The increase in expenses was attributable to higher operating and maintenance expenses. However, total operating expenses as a percentage of revenue decreased by 508 basis points over the prior year.
Higher revenues combined with a relative decline in input costs as a percentage of sales boosted the operating income of the company. Operating income during the second quarter 2011 was $529 million, up 37.8% from $384 million in the year-ago quarter.
Interest and debt expenses at the end of second quarter 2011 were $239 million, 15.8% lower than the second quarter of 2010.
Production and Realized Price
El Paso's production in second quarter 2011 averaged 823 million cubic feet per day (MMcfe/d), representing an increase of 35 MMcfe/d from second quarter 2010 production volumes, which averaged 788 MMcfe/d.
Pipeline throughput volumes were up 3.9% to 17,042 billion British thermal units per day (BBtu/d) in second quarter 2011 from 16,404 BBtu/d in the second quarter 2010.
Realized natural gas and oil prices, including financial derivatives, in second quarter 2011 averaged $5.44 per Mcf, down 7.1% and $91.30 per barrel, up 28.5%, 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 June 30, 2011, 85% of El Paso's remaining 2011 oil production is hedged with a floor of $85.99 and a ceiling of $91.88. The company also hedged 80% of its remaining 2011 domestic natural gas production at an average floor price of $5.89 per MMBtu.
Financial Update
Cash capital expenditures in the second quarter of 2011 reached $0.92 billion versus $0.76 billion in second quarter 2010. Of the total capital expenses 57% were invested on pipeline operations and 38.4% were invested for exploration and production (E&P) activities.
Cash flow from operations during the first half of 2011 was $996 million versus $894 million in the first half of 2010.
Peer Comparison
Williams Companies (WMB) competes directly with El Paso Corporation. The former announced operating earnings for the second quarter 2011 of 39 cents per share, beating the Zacks Consensus Estimate by a penny and the year-ago quarter’s results by 11 cents.
The operating revenue of the company in the second quarter 2011 was $2.67 billion, which surpassed both year-ago results of $2.29 billion and the Zacks Consensus Estimate of $2.59 billion.
Our View
El Paso displayed a strong second quarter, surpassing our expectation. During the year so far the company has put three projects into service and is likely to bring in a couple more by the end of the year. We expect these projects will boost results in the coming years.
El Paso Corporation currently retains a Zacks #2 Rank (short-term Buy rating).
Based in Houston, Texas, El Paso Corporation involves in natural gas transmission and in the exploration and production sectors of the energy industry. The company primarily operates in United States and has some exposure in Brazil and Egypt.
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