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    Thursday, June 12, 2003

    I am starting to investigate investing in El Paso (EP). They hit one of my screens a dollar or so ago and I have now spent some time looking over the most recent 10Q in a bid to value them. This turned out to be quite an interesting exercise in valuation. In summary $13.3 - $18.5 is a reasonable valuation based on 8% growth for the next 10 years and 6% growth from there on, with an 18%/12% discount rate and starting earnings of $0.9(low) to $1.25(high) a year. Analyst estimates for this year are 81c. Whether this comes in at 81c or $1.25 is quite dependant on how the unwinding of their trading operation and divestiture of assets goes. Any margin expansion in their pipeline or Merchant Energy business could easily offset their unwinding losses. Even if it is in the 80c range this year over the next few years a significant run up to $1.2/$1.3/$1.4 in 04/05 and 06 seems reasonable based on my income statement analysis.

    They reported a large loss in 03Q1, primarily related to write downs in their Merchant Energy business and their efforts to unwind their energy trading operations. These write downs are probably coming to an end this quarter or next as the finish their program to divest non-core assets and focus on their pipeline business. My estimates assume a 60% contribution by their pipelines business, 33% by Production and 6% for both their Field Service and Merchant Energy businesses.

    As of June 7th their relative strength was 84 with 99 being the highest (price increase compared to the S&P). This is often used by momentum investors and not by me! But it does indicate that EP is currently in the midst of a run up. S&P evaluates their fair value at $12.5, this is really at the lowest end of my valuation.

    I wouldn't make a short term call on EP but within a year I would expect to see at least $13.3 which would be a 44% return from here.

    I am continuing to look out for spin off and other special situations to invest in; I've been coming up pretty dry of late.

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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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