El Paso Corp.’s drastic cut in its proven reserves of natural gas, announced earlier this year, will cause El Paso to reduce the pretax value of its oil and gas reserves by $2.7 billion, the company announced Monday.
Further, El Paso’s practices of hedge accounting for natural-gas transactions will reduce shareholders’ equity by a further $1 billion as of December 31, 2003, added the company.
El Paso also noted that its future depreciation, depletion, and amortization rate would be significantly lower; that 2004 net income would increase; and that its exposure to ceiling test charges would decrease. The company added that cash flow will not be affected in any period.
The Houston-based company has been undergoing a financial review since cutting its proved reserves estimate by 41 percent in February. Earlier this month, El Paso announced that its review had uncovered problems with its accounting for natural-gas hedges, and that the company’s financials would likely need to be further restated to eliminate hedges designed to protect it against swings in natural-gas prices.
Monday’s announcement maintained that there would be “no impact on cash flow for any period” as a result of the changes. According to El Paso, the company’s financial position is improving and its debt, which currently stands at $18.6 billion, will be cut to $15 million by the end of 2005.
“With $3.5 billion of asset sales closed or announced, we have effectively met the asset sales goal that we had targeted for year-end 2005,” said president and chief executive officer Doug Foshee. “This has led to a sharp reduction in debt, and we expect that reduction to continue as we close as much as $1.8 billion in asset sales in the third quarter of 2004. Our cash flow has been consistent with our long-range plan, and we continue to benefit from natural gas and oil prices that are well above plan assumptions.”
The Financial Times noted that under the revised accounting treatment, El Paso’s production will now be virtually unhedged, which will lead to increased earnings volatility. The FT added that the company said it would reveal a new risk management policy later this year.