El Paso Corporation
Not anymore. El Paso announced yesterday that its previously alluded to "material" reduction in proven reserves would be 41%, substantially worse than most expected. Its stock was pummeled as a result, down nearly 20%. This comes at a time when the company has shown glimmers of hope that its business would be strong enough to meet targets to pay down its more than $22 billion debt. Now, the "proven reserve" levels are substantially lower, and the company will take a $1 billion (non-cash) charge against its fourth-quarter earnings.
There's very little about this that can be pinned on current management. It didn't ring up the debt, nor did it make the reserve projections in the first place. They've sold off assets, including its Coastal Unilube division in December, its Aruba refinery earlier this month -- to Hidden Gems 2003 selectionValero Energy
What was particularly brutal about the revision was that certain assets that were considered to be conservatively reported were included in the markdown. Investors had expected its coal bed methane assets -- which also took a big hit in the reserve reduction -- to drive El Paso's recovery. Also problematic was the immediate lowering of El Paso's credit rating at Moody's
El Paso's stock has surged from barely over $3 per share in early 2003 to nearly $10 this past week. It's still substantially below its $70 stock price in early 2001. The company exhibits three of the riskiest characteristics in investing: It's in a recovery, following spectacularly bad decisions that nearly tanked the company; it's weighed down by enormous amounts of debt, which it's obligated to service; and it requires additional financing for ongoing projects it needs to work its way out.
Even in an environment where pricing in one of its main products (natural gas) has trended much higher, this is a dangerous combination. El Paso may work itself out of the jam -- and if gas prices rise and its existing projects produce, the chances are all the higher -- but the risks are as high, if not higher, today than they were before the reserve reduction. There are counter-examples -- Waste Management
Warren Buffett said it very well: "Turnarounds rarely do."
Bill Mann owns no companies mentioned in this article.