As the saying goes: "Confidence: What you start off with before you completely understand the situation."
Troubled natural gas operator El Paso (NYSE:EP) claims it's "back to basics" for the company. Or is it?
Look at the strategy. It's heavily focused on natural gas in the U.S. That's good. Then, there is its sole international focus -- oil in Brazil. Why not make it "simple" instead of "basic"?
El Paso is part of the select group of companies that greatly overreported proven reserves. Nexen (NYSE:NXY) has reduced reserves by 8%. Royal Dutch/Shell -- represented by two trading stocks, Royal Dutch (NYSE:RD) and Shell Transport (NYSE:SC) -- cut its reserves by more than 20%. Forest Oil's (NYSE:FST) reduction was 25%. And, just to prove everything is larger in Texas, El Paso's cut was 41%.
Here's the key to El Paso's plight. Sales over the last 12 months were $8 billion. Total debt is $24 billion. How big is that Texas-size debt? Oil giant BP (NYSE:BP), with $236 billion in sales, only has a $20 billion debt. To say the least, El Paso is playing with matches in the debt-fireworks factory.
The fireworks analogy is no exaggeration. Consider the company pays a 2.1% dividend. Why return $96 million to shareholders when net income was a negative $2 billion? The definition of "back to basics" must be relative -- especially when you are selling assets to reduce debt.
During the conference call, the company talked about being free cash flow positive. That results from today's ultra-high natural gas prices. Does anyone expect long-term natural gas prices to stay at today's high levels -- especially with liquefied natural gas (LNG) coming? And where were the oil price and debt interest rate forecasts?
Even more disconcerting was the company's revised current-year targets. Revenues: down. Operating expenses: up. That hardly builds confidence.
El Paso had been painting this picture for 2006: Earnings of $1 a share and net debt of $15 billion. When asked to confirm this guidance, the company said it was not revising that far out -- but it was not taking that guidance back, either.
A 2006 price-to-earnings ratio of 7.6 times is great, if it happens. Given today's revision -- and debt that dwarfs revenue -- there is little credibility for that picture. It just shows that everything that is larger in Texas is not necessarily good for investors.
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Fool contributor W.D. Crotty does not own any of the stocks mentioned.
