It doesn't seem all that long ago that pipeline and exploration and production operator El Paso (NYSE:EP) seemed destined for the scrap heap. Since then, the company has shaped itself up through asset sales, debt reduction, and exiting what management sees as non-core businesses.

Though El Paso hasn't succeeded in its turnaround to the extent that the stock trades where it did in 2000, it has come far enough that investors are no longer content with simple survival. To that end, El Paso's second quarter was "good enough" but not good enough to satisfying the expectations that have built up as the stock has recovered from around $11 to more than $15 before Monday's drop.

Operating revenue rose about 4% this time out, with 8% growth in the pipeline business and 2% growth in the E&P operations. Performance was likewise mixed in terms of income: The pipeline business improved 8%, while the E&P business was down 7%.

Though I don't have large institutions calling me up and explaining to me ahead of time why they're selling El Paso stock, my hunch is that the E&P operations are the main problem. Production was down 8% this quarter, in part because of ongoing shutdowns in the Gulf and Louisiana. That in turn means the company will need to hustle a bit (and hope for good weather) to deliver OK full-year production results. Making matters worse, costs continue to rise: El Paso was never exactly a low-cost operator, but ongoing cost inflation is still not welcome. And let's also not forget that results here are especially sensitive to natural gas prices.

If it weren't for the looming debt load, this would be an interesting sort of company. On one hand, El Paso has the largest regulated natural gas pipeline in the country and the relatively stable cash flow that brings. On the other hand, you have the higher-risk/higher-reward potential of the E&P business. As a result, valuing these companies requires you to use a hybrid of the value of transportation companies like Southern Union (NYSE:SUG) and Williams (NYSE:WMB) with that of oil/gas producers like Cimarex (NYSE:XEC) and Newfield Exploration (NYSE:NFX) -- at least, if relative valuation is your thing.

At the bottom line, this is another stock where I'd prefer to wait for a better valuation before buying -- I'm a believer in the long-term potential of both sides of the business, but I want a little more cushion relative to fair value before I pony up my own cash.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).