El Paso Corporation (EP) is an energy company which builds and manages oil and gas pipelines plus the company has a division for oil and gas exploration and production. In an August announcement, El Paso management made known it intention to spin off the exploration and production division into a separate company by the end of 2011, to be called El Paso Energy (EPE).
The El Paso Corporation business can be divided into three areas: Pipeline and midstream facility construction, management of those assets, and the oil and gas exploration and production division. The company booked some large losses during the recent commodity meltdown. It returned to profitability in 2010 after two years of significant reported losses.
In 2010, EP earned 99 cents per share compared to losses totaling more than $2 per share for the previous two years. The consensus earnings estimate for 2011 is $1.13 per share. The losses incurred in 2008 and 2009 were due to large, one-time, non-cash charges related to the amount of reserves the company claimed. Cash-flow wise, El Paso Corp remained profitable through the energy industry problems of 2008 and 2009.
Oil and gas exploration and production accounted for just under 40 percent of the company's EBITDA. Once El Paso Energy is spun off, the new company's results will rise and fall with the prices of crude oil and natural gas. El Paso Corp will then be a midstream and pipeline company with more predictable revenue streams.
El Paso Corporation has an active program of new pipeline construction, with spending plans of $8 billion in 2011. Once construction is complete, the company employs a strategy of dropping down assets into the El Paso Pipeline Partners (EPB) master limited partnership. This strategy allows the company to turn revenue-generating pipelines into cash, plus an ongoing stream of income from the retained and general partnership units.
The analysts have not released opinions yet on the proposed spinoff, but the most recent reports out of Wall Street had the analysts from Howard Weil, UBS, and Barclays Capital reiterating their market outperform, buy, and overweight ratings, respectively. The company next reports on Nov. 2.
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