New El Paso Corp. president and chief executive Doug Foshee's long-term plan to turn the embattled company around has won Street praise for vision, but warnings that execution will be tough. "In our view, there are many challenges to El Paso's long-range plan, and the stars would have to align for it to be achieved as desired," says Gordon Howald, an analyst with Credit Lyonnais Securities. "We believe the likelihood of achieving this plan in the timeframe described by El Paso is at best 75%, but even this could be aggressive," he says. The plan, revealed in December, lays out a blueprint of where the company wants to be in 2006-the first year in which all asset sales, debt reduction and cost-cutting initiatives could be completed and reflected in El Paso's financial performance. The goal is to cut debt to $15 billion at year-end 2005 from $22 billion at the end of the 2003 third quarter, in part by closing $3.3- to $3.9 billion of asset sales. The company got a nice head start when it announced the sale of a good deal of its interest in midstream master limited partnership GulfTerra Energy Partners to Enterprise Products Partners. El Paso will receive about $1 billion in cash when the deal closes in 2004. Other assets for sale include $900 million to $1.2 billion in its power-sector business, $500- to $600 million in its downstream business, $600- to $700 million in its upstream business, and $250- to $350 million midstream. "We view it as a positive that El Paso does not plan on selling any of its major natural gas pipeline assets," Howald adds. Michael Heim, an analyst with A.G. Edwards, says, "I'm impressed they were able to identify [so many] assets for sale without dipping into core opportunities." The main businesses that will remain after the sales will be gas pipelines in the U.S. and Mexico, oil and gas production in the U.S. and Brazil, and a marketing and physical trading group focused primarily on selling internal oil and gas production. By 2006, the company hopes its businesses will achieve $500- to $725 million of net income, which would equal earnings per share of $0.75 to $1.10; cash flow from operations of $1.9- to $2.2 billion; free cash flow after capital expenditures and dividends of $200- to $400 million; annual growth and maintenance capital of $1.6- to $1.7 billion; and $150 million in cost reductions in addition to the $445 million already identified. The biggest challenge by far, analysts agree, will be turning around the E&P business, which has been marked by declining production and high spending. At one time, El Paso's E&P operations were spread all over the globe. But going forward, it will concentrate on a handful of growth areas, including the Gulf of Mexico's deep shelf, coalbed-methane in the Raton, Arkoma and Black Warrior basins; the Vicksburg and Wilcox trends in South Texas; and north Louisiana and east Texas. It will retain its holdings in Brazil and Nova Scotia, but will sell its properties elsewhere in Canada, and in Hungary and Indonesia. Perhaps the most challenging aspect of El Paso's E&P plans is its proposal to boost production while slashing spending. E&P spending is to be reduced from $1.4 billion in 2003 to $850 million in 2004, while production is to grow from some 900,000 cubic feet of gas equivalent in 2004 to 1 billion in 2006. A greater emphasis on coalbed-methane operations is expected to help stabilize production and lower costs. Howald says, "In a period of rising E&P costs, we believe it will be very challenging to cut costs as aggressively as El Paso plans without some negative repercussions. Cutting E&P capital expenditures...and selling $600- to $700 million of additional assets would make it hard to keep production flat through 2005." However, Foshee says El Paso wants to take advantage of third-party capital by bringing on partners on a promoted basis. It struck this type of deal in October through a drilling venture with Nabors Industries and Lehman Brothers that will result in an additional $350 million of drilling activity through later this year. Lehman is contributing 50% toward the $500 million drilling program in exchange for a 50% net profits interest; and Nabors, 20% for 20%. Upon payout, the net profits interests of each will convert to overriding royalty interests in the wells. El Paso is contributing $150 million toward the drilling program and retains a 30% interest and operatorship. By drilling lower-profile, lower-risk projects, El Paso will be able to trim its E&P costs, says John Olson, an analyst with Sanders Morris Harris. "They can cut a lot of fat." To lead the E&P effort, Foshee recently hired Lisa A. Stewart of Apache Corp., to become president, production and non-regulated operations, after Rodney Erskine resigned as president of El Paso Production Co. Olson describes the loss as one of "a first-class explorationist at a time when this company cannot afford to be a first-class exploration company." Donato Eassey, an analyst with Royalist Independent Equity Research, says that while growing production is a question, he doubts El Paso would dare set up the market for a disappointment. "I don't think Foshee's one to tolerate false expectations." Foshee moved to El Paso in September from Halliburton, where he was executive vice president and chief operating officer. He is well-known for crisis-management experience-he helped Halliburton resolve its asbestos-claims exposure, an undertaking that engulfed the company and resulted in a proposed settlement worth $4 billion. Before joining Halliburton, Foshee was president, chief executive and chairman of Nuevo Energy. While some analysts may have expected El Paso to find a leader with a midstream background, Foshee's E&P experience is expected to be valuable to the company. Moody's Investors Service says Foshee's plan "provides only a modest near-term change from its preexisting initiatives and limited immediate change from factors we considered in changing its outlook to negative [in November]." Standard & Poor's Ratings Services isn't optimistic either. "The long-range plan released by El Paso has many credit-friendly elements, but considerable risks remain as the company tries to execute the plan," says S&P credit analyst Todd Shipman. MLP CONSOLIDATION Midstream executives have been predicting consolidation among master limited partnerships (MLPs) for some time. The first was announced in December-that of Enterprise Products Partners and GulfTerra Energy Partners. The combination will create the second-largest publicly traded energy partnership-second to Kinder Morgan Energy Partners-with an enterprise value of about $13 billion. Enterprise Products Co. and El Paso Corp. will each own 50% of the general partner of the combined MLP, which will retain the Enterprise Products Partners name. El Paso will receive $1 billion in proceeds from the deal, which it will use to pay debt. The combined company is expected to experience approximately $30 million of annual cost savings in its first year, and its cash distribution rate is expected to be $1.58 per unit on an annual basis-a 6% increase from what Enterprise has been paying. The combined partnership will own more than 30,000 miles of pipelines, 164 million barrels of gas liquid storage capacity, 23 billion cubic feet of gas storage capacity, six offshore Gulf of Mexico hub platforms, import and export terminals along the Houston Ship Channel and interests in 19 fractionation plants and 24 gas-processing plants. The first-of-its-kind merger is a multifaceted transaction that will take place in several steps among both MLPs and their general partners. It was a deal done without any precedent, says J. Vincent Kendrick, a partner in the Houston office of law firm Akin, Gump, Strauss, Hauer & Feld LLP, which represented GulfTerra. "MLPs are very unique corporate animals," Kendrick says. "There is not a lot of guidance out there in terms of the law as to how you deal with a lot of the issues that come up in a traditional merger." In 1998, Kinder Morgan acquired Santa Fe Pacific Pipeline Partners LP for $1.4 billion and became the largest pipeline MLP. However, it was not done as a merger, Kendrick says. The Enterprise-GulfTerra deal "is a true public-to-public merger...and I suspect it's likely to be the format that you'll see in the future." The board of directors of the Enterprise general partner will consist of 10 directors-five designated by Enterprise Products and five by El Paso. Six of the directors must be independent. Completion of the merger is expected in the second half of 2004. Financial advisors were Lehman Brothers for Enterprise, UBS for GulfTerra and Credit Suisse First Boston for El Paso.