El Paso Gasses Estimates, But Help is on the Way (EP, CHK, GS)

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El Paso Corporation (NYSE:EP) has reported earnings of $0.29 EPS on net income of $219 million and revenue of $1.269 billion for the first quarter of 2008. Analysts were expecting $0.30 EPS and revenue of $1.35 billion.

The company’s president and CEO Doug Foshee provided an upbeat projection for the rest of the year, saying that EP expects "sharply higher earnings than our $1.00 to $1.10 earnings guidance for 2008 as our hedging strategy has enabled us to participate in improved natural gas and oil prices."  First Call has estimates at $1.19 for the year.

A week ago, Chesapeake Energy (NYSE:CHK) reported a loss of $129 million or $0.29 EPS, primarily due to a non-performing hedging loss of $704 million. Chesapeake’s stock has risen more than 10% since then, mostly on the strength of a year-over-year production increase of 31%. El Paso improved production by about 8% y-o-y. In pre-market trading this morning, El Paso shares are up 1% at $18.50, and Chesapeake is up about 0.6% at $56.50.

The price movements have everything to do with the price of natural gas. EP’s average realized price for the first quarter was $7.57/Mcf, about $1.50/Mcf less than CHK’s average realized price of $9.05/Mcf. The higher prices partially reflect a drop in U.S. imports of LNG. In fact, according to Platt’s, Goldman Sachs (NYSE:GS) is predicting that U.S. natural gas storage inventories will not be full by the end of the summer. The U.S. Energy Information Agency has pegged first quarter 2008 LNG imports at just 860 MMcf/d, about half the agency’s projected monthly average for the year.

GS says that LNG imports won’t increase in the U.S. until NYMEX gas prices rise to equal or surpass international price levels. Competition with Asia and Europe for LNG cargoes will drive spot prices to new highs. If GS is correct, U.S. natural gas prices will need to nearly double to reach the current level of LNG spot prices. EP and CHK and other gas producers can only benefit.

Paul Ausick
May 8, 2008