November was a good month for El Paso (NYSE:EP), the Texas-based natural gas pipeline and merchant energy company. Actually, it was a good month for other energy companies such as Williams (NYSE:WMB), Dynegy (NYSE:DYN), Calpine (NYSE:CPN), and AES (NYSE:AES). El Paso's stock price rose 30% before the holiday weekend, only to fall 9.5% during the two days after, closing the month up 18.1%.
The company plodded along for most of the month. There was a push by some shareholder advocacy groups to convince shareholders to vote out PricewaterhouseCoopers, the company's auditor for 21 years. Unfortunately, El Paso had some problems with its 2001 and 2002 financial statements and apparently had overstated the amount of proved gas reserves by 41%. But shareholders voted to keep PwC, and management backed the choice, saying PwC "was familiar with the company's finances." I hope that it is familiar enough to make sure they are credible in the future.
Things got cooking before the Thanksgiving holiday. El Paso reworked some credit agreements that were set to expire next year. This was especially nice, as the restatements for 2001 and 2002 almost caused the company to miss its covenant restrictions. No wonder short interest is high. The stock rose 18% following the announcement. Perhaps the shorts felt a little squeeze, like my waistline after my fourth helping of stuffing.
JPMorgan (NYSE:JPM) relieved some of the pressure by issuing a downgrade on Monday. The analyst cited valuation concerns and the expectation that management is likely to reduce production guidance for 2005 and 2006. Although I have no idea about production guidance revisions, I too am uneasy about the company's valuation.
Remember that assets are basically as valuable as the cash flows they produce over their lifetime. How can investors make a judgment about the future cash flows when the financial statements are being restated? And when financial statements are late, how can investors be confident about judgments they make? Thankfully, El Paso believes in full disclosure, as evidenced by the 313-page 10-K report for 2003. That's right, 313 pages. I should probably be done reading it by the time the 2004 10-K comes out.
El Paso's assets are real and valuable. How valuable are they? I really don't know. But I do not believe that El Paso is about to turn the corner and start growing. The company is still focused on strengthening its liquidity, which would seem to leave little time to focus on growth.
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Fool contributor David Meier owns shares in AES, but does not own shares in any of the other companies mentioned.
