Chicago, IL – November 19, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Ford (F), CarMax (KMX), AutoNation (AN), Apartment Investors (AIV) and Equity Residential (EQR).

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Here are highlights from Wednesday’s Analyst Blog:

CPI Up on Cars, Energy

The Consumer Price Index (CPI) for October rose by 0.3%, a little bit hotter than the 0.2% that was expected. If one strips out volatile food and energy prices to get the core consumer price index, prices were up 0.2%, also one tick higher than the 0.1% expected.

A rise in energy prices was not unexpected. Heck, one only has to see what the price of crude oil and natural gas have done over the last month or so. For the month, the price of energy rose 1.5% overall. The rise was sharpest among energy commodities, like gasoline and heating oil, which rose by 1.9%. Energy services, like electricity rose a more moderate -- but still steep -- 0.9%.

The rise in core consumer prices was a bit more of a surprise. However, the rising prices were very narrow, with almost all of the increases due to higher prices for cars and trucks, both new and used. For the month, the prices of new cars were up 1.6% while the prices for used cars jumped by 3.4%. That is very good news for Ford (F) as well as indirectly for the U.S. taxpayer, since we are now major stockholders at both General Motors and Chrysler.

The increase for used cars is also beneficial for the car dealers like CarMax (KMX) and AutoNation (AN). The Cash for Clunkers program continues to reverberate through the economy, even though it ended over two months ago. Every car that was turned in under the program was destroyed (at least the engine was, other parts could be stripped and reused). This reduction in supply helped support prices of the remaining used cars. This is the third month in a row of sharply higher prices for used cars, coming on top of a 1.6% increase in September and a 1.9% increase in August. I suspect that this effect is likely to wear off in the near future.

On a year-over-year basis, the overall consumer price index is down 0.2%, while the core consumer price index is up 1.7%, both of which are historically very low. The huge decline in energy prices happened a year ago and is in the process of rolling off. Thus look for the headline consumer price index to start to outpace the core consumer price index in the months to come on a year-over-year basis.

The divergence could become very large. The reason is that a very large part of the index is for Shelter, and the biggest part of that is rent -- both the normal rent that is paid by people who do not own their own houses, and "owners equivalent rent" (OER) or what it would cost you to rent an identical house next door to where you are living now. OER is how the government measures housing prices for inflation; what happens to the actual price of houses is totally irrelevant when it comes to measuring inflation. Thus, measured inflation was very much under control, even as the price of houses were soaring during the housing bubble, and the CPI did not decline as the bubble was bursting.

Together, regular rent paid to landlords and OER make up over 30% of the total consumer price index, and almost 40% of the core consumer price index. The overall price of shelter was unchanged in October, the second month in a row it was unchanged. Regular rent fell by 0.1%, over the last three months it is down at a seasonally adjusted annual rate of 0.7%, and it is unchanged over the last six months.

Since most people own rather than rent where they live, OER has a much higher weight in the index (24.4% of the total index vs. 6.0%). It was unchanged on the month, is off by 0.3% over the last three months and up by just 0.2% over the last six months. However, if the reports from the big housing-oriented REIT’s like Apartment Investors (AIV) and Equity Residential (EQR) are to be believed, then the decline in regular rents is significantly understated.

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The table at the right summarizes the percent change between January 6 and November 11 in the cash prices of 19 commodities reported in the Wall Street Journal (downloaded via Webstract). The average commodity in this list has appreciated 37% since the start of the year.

A recent paper by Ke Tang and Wei Xiong documents an increasing tendency for commodity prices to move together over the last few years. A decade ago, what happened to oil prices was largely unrelated to movements in most other commodity prices. The graphs below show how the correlations between oil prices and the prices of four representative commodities have increased significantly over time.

Correlation (using a rolling sample beginning one year before indicated date) between returns on oil and specified commodity. Source: Tang and Xiong (2009).

One explanation I often see in the popular press is that movements in commodity prices are driven by changes in the value of the dollar relative to other currencies. However, the magnitude of movements in commodity prices greatly exceeds the size of changes in the exchange rate. For example, the table above shows that since the start of this year oil prices have increased five times as much as the dollar price of a euro; see also Steve Gordon's graphs. While the depreciation of the dollar is part of the story, most of the explanation must be found elsewhere.

Another important factor is resurging real economic growth outside the United States, which produces pressures for both the dollar to depreciate and the real price of commodities to appreciate. According to this theory, the increasing correlations between commodity prices results from the fact that countries like China are so much more important for the world economy today than they were a decade ago.

A third explanation is that investors are making increasing use of commodities as an investment class. Although Treasury Inflation Protected Securities offer a hedge against an increase in the U.S. consumer price index, they don't offer protection for foreign investors against depreciation of the dollar. Insofar as increases in the prices of commodities like oil may depress real economic activity, holding commodities as an investment also offers useful diversification against risks to equities. Particularly when interest rates are low, there is an incentive to hoard physical commodities as an investment vehicle.

The paper by Tang and Xiong proposes that the increased use of commodities as a financial investment accounts for the increasing correlation among commodity price changes over time. In support of that claim, they note the growing popularity of investment strategies based on the Goldman Sachs Commodity Index or the Dow Jones Commodity Index. Tang and Xiong document that correlations among commodities included in the indexes have increased faster than those not included. For example, one of the regressions they estimate relates the return on commodity i to equity returns, bond yields, the value of the dollar, and oil prices, where the coefficients are allowed to grow with time at different rates before and after 2004, and with different trends on these coefficients estimated for commodities included in indexes as for those excluded. The figure below shows their estimated time path for the coefficient on oil prices comparing the indexed and non-indexed groups.

Coefficient relating return on average commodity to return on oil as a function of time for commodities included in the GS or DJ indexes (top curve) and those excluded (bottom curve). Source: Tang and Xiong (2009).

For any of the explanations in this third class, one of the important challenges is to reconcile the story of commodity speculation with supply and demand for the underlying physical commodity. If we propose that speculators have driven the price of the commodity up, the physical quantity demanded should decline as a result. In order to be sustained, a coherent speculation-based theory of commodity price appreciation requires increased physical storage of the commodity.

The solid black curve in the figure below plots the typical U.S. crude oil stocks (excluding those held in the Strategic Petroleum Reserve) for each week of the year, based on the average over 1990-2007. The red line gives the actual values for 2008, which were significantly below the historical average, particularly in the spring of 2008 when oil prices were rising so dramatically. Those below-normal inventories were one reason I focused on what was going on to the fundamentals of supply and demand in trying to understand the behavior of oil markets in the first half of 2008.

Weekly U.S. crude oil ending stocks, excluding SPR, in thousands of barrels, from EIA. Black line: average over 1990-2007. Red: 2008. Green: 2009.

On the other hand, inventories of crude oil this year, shown in green above, have been substantially above normal, meaning that in the absence of that oil going into storage, we would have expected to see lower oil prices than we currently have.

Moreover, much of the current stockpiling may be taking place outside the United States. For example, Yves Smith noted this story from Bloomberg last August:

Copper, nickel and other base metals stockpiled by speculative Chinese investors including pig farmers may be sold when "market sentiment turns," said Scotia Capital Inc.

A price surge and easy bank credit this year encouraged pig farmers, stock brokers and businessmen to buy copper and nickel for speculation, Liu Na, an analyst with Scotia Capital, wrote in a note dated Aug. 17, citing reports from the state-owned China Central Television....

"These stockpiles are in 'weak hands' as speculators have no real use for base metals," Liu wrote. "When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank's money is involved."

I also found this November 3 story from the Financial Times of interest:

Gold prices continued to rise on Wednesday extending the all-time highs which followed India's central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country's finance minister warned the economies of the US and Europe had "collapsed".

India's decision to exchange $6.7bn for gold equivalent to 8 per cent of world annual mine production sent the strongest signal yet that Asian countries were moving away from the US currency.

Policy-makers in the Federal Reserve have traditionally thought of inflation as a broad movement in all wages and prices, which to some extent is under their control, and viewed changes in relative commodity prices as outside their control. I believe that this is not the correct understanding of the current situation. Concerns about inflation, particularly on the part of foreign dollar-holders, are likely to show up first in the relative prices of internationally traded commodities. Insofar as these relative price changes can be destabilizing in themselves, it cannot be wise for U.S. policy-makers to ignore them.

Production during the quarter, before royalties, averaged 214 thousand barrels of oil equivalent per day (MBOE/d), or 184 MBOE/d net of royalties, comprising 83% crude oil and 15% natural gas. Production before royalties was down 14% year over year, mainly due to turnarounds and
maintenance activities at a number of fields. On a net-of-royalty basis, production was down slightly by 12% year over year to 184 MBOE/d.

While the quarter’s productions were hampered by the scheduled turnarounds on a number of the company’s fields, current production (275 MBOE/d) is increasing with the ramp-up of production at Ettrick, Longhorn and Long Lake. Management hinted that the fourth quarter production will be higher than the reported quarter level.

Nexen’s average oil price realization during the quarter was C$72.95 ($66.4) per barrel, down approximately 37% year over year but up approximately 6.8% sequentially. Natural gas average price realization during the quarter was C$3.04 ($2.76) per Mcf, down 19% sequentially and
6.5% year over year.

Nexen spent C$671 million ($611 million) on capital programs during the quarter. At the end of the quarter, the company had C$2.1 billion ($1.91) in cash and C$7.4 billion ($6.74 billion) in long-term debt, with a debt-to-capitalization ratio of 50.1%.

Nexen’s diversified portfolio of E&P assets includes high-impact exploration prospects in the U.S. Gulf of Mexico, offshore West Africa and the North Sea, stable operations in Yemen and Canada and an attractive unconventional resource base in Canada. This provides the company with a multi-year inventory of development projects and a positive long-term production-growth profile. We, however, believe that this is already discounted in the current valuation.

Additionally, we are also concerned about the downside risks such as execution risk and cost inflation. Rising costs remain a major concern, as cost increases are observed on all fronts. In the first nine months of 2009, costs increased more than 10%, a trend that is not expected to
subside in the near term. We are unchanged with our Neutral rating.

Total volumes during the quarter increased approximately 4% year-over-year to 195.9 billion cubic feet equivalent (Bcfe), or 2,129 million cubic feet equivalent per day (MMcfe/d), 76% of which was natural gas and 24% liquids. Natural gas volumes decreased 3% year-over-year, led by an approximately 6% decrease in the U.S. volumes to 1,128 MMcf/d, and more than 2% decrease in Canadian volumes to 219 MMcf/d.

Crude oil and condensate production during the quarter was 59.5 thousand barrels per day (MBbl/d), up nearly 23% from the year-ago level. This was primarily driven by a 24% growth in domestic volumes, reflecting increased production in North Dakota. Natural gas liquids (NGL) volumes increased almost 69% from the year-ago quarter to 24.1 MBbl/d.

Average realized natural gas prices decreased roughly 63% year-over-year to $3.01 per Mcf. Prices decreased across all the geographical segments, with domestic realizations down nearly 64% year-over-year to $3.27 per Mcf. Average realized prices for crude oil and condensates decreased approximately 45% year-over-year to $60.65 per barrel.

Prices decreased across all the geographical segments, with domestic realizations down nearly 45% year-over-year to $60.79 per barrel. Quarterly NGL prices were $31.14 per barrel, down approximately 55% year-over-year.

At the end of the quarter, EOG had cash and cash equivalents of $608.5 million and long-term debt of $2.8 billion, representing a net debt-to-capitalization ratio of approximately 22.7%. During the quarter, EOG generated approximately $819.3 million ($3.24 per share) in discretionary cash flow (DCF), compared to a DCF of $1.17 billion ($4.66 per share) in the year-ago quarter.

The company has set a full-year target of $3.1 billion (excluding acquisitions) for exploration and development activities. Additionally, the company has allocated $300 million for natural gas gathering, processing and other expenditures.

With the performance of its North American plays, EOG has increased its 2009 total production growth target from 5.5% to 6%. Total liquids growth target was also increased from 25% to 27%. For 2010, the company has set a total organic production growth target of 13% that includes total liquids production growth of 50%.

EOG has an industry leading organic production-growth profile, strong inventory of drilling opportunities, attractive cost and return metrics and impressive long-term growth prospects. We see EOG as a core holding in the large-cap E&P space. However, its natural gas weighted assets currently is a concern. We recommend a Neutral rating for the stock.

Chicago, IL – November 6, 2009 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the Oil & Gas sector, including CNOOC Ltd. (CEO), China Petroleum and Chemical Corporation, or Sinopec (SNP), Cameron International (CAM), Nabors (NBR) and Patterson-UTI (PTEN).

The strengthening oil price environment should benefit producers, particularly those international players having attractive growth opportunities in their home markets. Two such standout names are China’s CNOOC Ltd. (CEO) and China Petroleum and Chemical Corporation, or Sinopec (SNP), both of which remain well-placed to benefit from the country’s growing appetite for energy.

CNOOC enjoys a monopoly on exploration activities in China’s very prospective offshore region in addition to having a growing presence in the country’s natural gas and LNG infrastructure. On the other hand, Sinopec is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China. Sinopec’s leverage to the lucrative Chinese market and the recent $7.5 billion Addax acquisition is expected to help sustain its growth momentum.

Within the oilfield services group, we prefer to own companies such as Cameron International (CAM), that derives about two-thirds of its revenue from outside North America, thereby playing an offsetting role to the relatively soft U.S. drilling scene. Cameron recently posted better-than-expected third quarter results and raised its 2009 forecast, as a revival in energy prices led to improved drilling activities.

WEAKNESSES

We continue to feel strongly that industry players in the servicing and drilling ends of the business with substantial natural gas-focused and North America-centric operations should be avoided. A major sub-sector that fits that description is the onshore drillers. While we currently don't have any Underperform rated stocks in this group, we remain skeptical of land drillers like Nabors (NBR) and Patterson-UTI (PTEN), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5511.

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Chicago, IL – November 5, 2009 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the Alternative Energy sector, including Evergreen Solar Inc. (ESLR), JA Solar Holdings Co Ltd. (JASO), A-Power Energy Generation System (APWR), LDK Solar Company Ltd. (LDK) and First Solar Inc. (FSLR).

Alternative energy stock prices generally rise and fall in direct proportion to the price of crude oil. While in times of high oil prices this may present an opportunity, it also increases volatility in the sector.

Industry-wide excess solar cell and module capacity have led to stockpiling across the board. As a result, we think the performance of companies such as Evergreen Solar Inc. (ESLR), JA Solar Holdings Co Ltd. (JASO), A-Power Energy Generation System (APWR) and LDK Solar Company Ltd. (LDK) -- burdened as they are with high inventory levels -- will remain under pressure in the near term.

Germany, one of the prime solar markets with a lucrative subsidy program, is considering a roll-back of its grants. This will affect companies such as First Solar Inc. (FSLR), who generate a substantial portion of their sales from Germany.

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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5511.

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In a previous set of papers, Oli Coibion, Michael LeBlanc and I examined the predictive power of energy futures post and paper.

In a new paper, Oli Coibion and I update our results regarding energy futures, and metal and agricultural commodities as well, through the end of August 2008, just before the financial crisis broke out in full force. From the paper:

This paper examines the relationship between spot and futures prices for commodities, including those for energy (crude oil, gasoline, heating oil markets and natural gas), precious and base metals (gold, silver, aluminum, copper, lead, nickel and tin), and agricultural commodities (corn, soybean and wheat). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while energy futures prices are generally unbiased predictors of future spot prices, there are certain notable exceptions. For both base and precious metals, the results are much less favorable to unbiasedness hypothesis. For precious metals and copper and lead, we strongly reject the null that β=1 at all three horizons. For the these other base metals, while we cannot reject that β=1, due to large standard errors. Finally, both corn and soybean futures have β close to 1, while wheat has β<1. Excepting oil and base metals, futures tend to outperform a random walk specification in out of sample forecasts.

The regression we run is:

s_t - s_t-k = β ₀ + β ₁ (f _t|t-k - s_t-k) + ε _t

Where s_t is the log spot price at time t, f_t|t-k is the log futures price at time t-k that matures at time t. The resulting β coefficients at the three month horizons are displayed in Figure 2.

Despite the bias in futures, along a RMSE dimension, futures outperform a random walk for most commodities, except for base metals (the out of sample period is 03M01 to 08M07). That being said, the outperformance relative to a random walk is seldom statistically significant.

Net income from continuing operations was $1.14 per share, higher than the Zacks Consensus Estimate of $1.08. However, net income in the quarter was lower than the $2.77 per share reported in the same period last year.

Daily oil and gas sales volumes increased 6.8%, averaging 628,000 barrels of oil equivalent (BOE) during the reported quarter, compared with 588,000 BOE sold in the third quarter of 2008. Volumes increased by approximately 6% domestically, mainly from California and the Permian, and by about 15% in the Middle East/North Africa, largely in Oman and Dolphin. This was offset by a 6% decline in Latin America, mostly due to a labor strike in Argentina. Increased California volumes resulted largely from the new exploration discoveries in Kern County.

Revenue decreased 41.9% to $4,104 million in the third quarter, compared to $7,060 million a year ago. The decline was due to lower crude oil and natural gas prices during the quarter. Occidental's average realized crude oil and natural gas prices declined in the quarter by 39% and 67%, respectively.

The company continues to maintain its financial flexibility with net debt of $2.8 billion and total debt-to-capitalization of 9% at the end of third quarter 2009. Capital spending for the quarter was $746 million.

Despite losing 15 million cubic feet equivalent per day (MMcfe/d) of production as a result of the sale of its Fuhrman Mascho Field in West Texas at the end of June, total production volumes for the quarter increased 13% year over year, driven by successful drilling results in the
Barnett and Marcellus shale plays. Total volumes averaged at 437 MMcfe/d (84% natural gas), reflecting the 27th consecutive quarter of sequential production growth.

While average oil production decreased 30% from the year-earlier level to 5.8 thousand barrels per day (Mbbl/d), natural gas liquid and natural gas volumes jumped by 57% and 16% year over year to 5.9 Mbbl/d and 367 MMcf/d, respectively.

Average price realization for natural gas during the quarter, including hedging effects, was $6.05 per Mcf (compared to $8.62 in the year-ago period). Average prices for crude oil and natural gas liquids were $63.88 (versus $67.40) and $31.10 ($58.33) per barrel.

Given the thumping drilling success and the proceeds available from the property sale, Range has increased its capital budget for 2009 to $740 million from $700 million. The company intends to deploy this fund to acquire additional leases in areas where it has had drilling success this year. It has also increased its production growth target to 13% from 10%.

We believe that Range is on track to drive down its operating costs by various measures including sale of higher cost properties and ramp-up of production in its core areas with low costs, particularly in the Marcellus Shale play. As a result, operating cost per Mcfe for the quarter came down by 25%.

Range maintains an internally funded capital program with a debt-to-capitalization ratio of 43%. Given its improved financial position, low-cost business model and significant exposure to the shale plays, we believe that the company might be able to add value for its shareholders.

While we have greater confidence in the staying power of the current oil rally, this does not mean that we will not see any short-term pullbacks. On the whole, we expect oil prices in 2010 to be higher than the 2009 levels, but remain significantly below the 2008 peak levels.

Crude oil's near-term fundamentals remain dismal, to say the least. Inventories in the U.S. are at multi-year highs and remain bloated worldwide. At current projections, global 2009 demand will be below last year's level, which itself was below the 2007 level -- the first time since the early 1980's of two back-to-back negative growth years.

The only positive in this otherwise bleak supply-demand picture is OPEC's success at taking a fair amount of oil off the market. OPEC's successful stewardship provided the commodity with a floor in Dec'08 in the low $30's a barrel range.

While the market has been heavily discounting the commodity's near-term problems, we would expect the day-to-day price movement to largely track the news flow about the health of the global economy.

The oil price outlook has historically been the key determinant of the sector's performance. And given our favorable oil price view, we would strongly advocate for taking an over-weight position in the sector.

OPPORTUNITIES

This outlook has major implications for sub-sector choices within the energy space, though the risk-reward trade off for most of these sub-sectors remains compelling despite recent gains.

The strengthening oil price environment should benefit producers, particularly those international players having attractive growth opportunities in their home markets. Two such standout names are Brazil's Petrobras (PBR) and China's Cnooc Ltd. (CEO). Both of these emerging market energy plays offer lucrative growth opportunities going forward. Italy's Eni (E) also remains attractive at current levels.

Petrobras is perhaps the only major oil company worldwide that has discovered substantial oil reserves in recent years. The company's discovery of oil offshore Brazil in the massive Tupi field, expected to be developed in the coming years, has made Brazil a major oil player.

Cnooc Ltd. remains well placed to benefit from China's growing energy appetite. The company enjoys a monopoly on exploration activities in China's very prospective offshore region. Cnooc Ltd. also has a growing presence in China's natural gas and LNG infrastructure.

WEAKNESSES

Despite their strong recent gains, we continue to feel strongly that industry players in the servicing and drilling ends of the business with substantial natural gas-focused and North America-centric operations should be avoided. We also remain wary of refiners, given weak gasoline demand and strengthening oil prices.

A major sub-sector that fits that description is the onshore drillers. We believe that pricing and margins for operators in these two sub-sectors will remain under pressure through 2010, even as the outlook for natural gas price improves. As such, we would avoid Nabors (NBR) and Patterson-UTI (PTEN), two major North American land drillers.

We continue to have a negative view of refiners as well, particularly independent refiners such as Valero (VLO) and Tesoro (TSO), who have no other line of business to support them in the current soft environment. The massive economy-wide job losses are not expected to reverse anytime soon even though the outlook for the overall economy has steadily improved. This, coupled with an unfavorable regulatory landscape, is expected to keep demand under pressure for the foreseeable future. Margins are expected to remain under pressure given the strengthening oil prices (oil is a refiner's primary feedstock).Zacks Investment Research

ConocoPhillips has an equal interest in Merey Sweeny L.P., a limited partnership that owns a 65-million-barrels-per-day delayed coker unit and related facilities at the Sweeny refinery. Used in refineries, a delayed coker unit is a plant that cracks heavy, long-chain hydrocarbon molecules of the residual oil into gas, oil and petroleum coke. PDVSA supplies the refinery with Venezuelan crude oil.

Since the beginning of this year, PDVSA has not supplied enough crude oil to meet contractual specifications. Thus, ConocoPhillips’ deliveries from Venezuela fell to 146,000 barrels a day in the first half of 2009 from 210,000 barrels a year earlier. Following this, ConocoPhillips plans to take full control of the unit.

The takeover follows a year-long battle between the two companies. PDVSA had seized operating control of a joint venture in Venezuela’s Orinoco Belt from ConocoPhillips in May 2007. ConocoPhillips left the country, filed for arbitration and wrote off $4.5 billion rather than accepting a non-operating stake.

Although the expropriation of projects in Venezuela has been temporarily hindering ConocoPhillips’ growth objectives, we believe this shortfall will be made up in the medium-to- long-term with this takeover and through production ramp-up in other areas.

ConocoPhillips also anticipates strong growth in the Asia-Pacific, Russia and Caspian, and the Middle East regions to offset natural declines in its North American and North Sea assets. We currently rate the company as a Neutral.

Company Description

El Paso Corporation is a large independent natural gas producer and operates one of North America's largest interstate natural gas pipeline systems.

El Paso Surprised by 19.05% on the Second Quarter

On Aug 6, El Paso reported its second quarter results and beat the Zacks Consensus Estimate by 4 cents. Earnings per share were 25 cents which was lower than the 39 cents from a year ago. Lower natural gas and oil prices impacted the results.

The company saw production rise in the Central and Western divisions by 6% and 5%, respectively, over the year ago period.

With the drop in crude and natural gas prices, the company reduced its drilling rig activity by 70% since the third quarter of 2008. In response to the economic conditions, it has cut its overall per-unit cash costs.

On the positive side, the Pipeline Group grew compared with the same quarter in 2008 but this was offset by the decline on the E&P side of the company. The Pipeline Group brought two projects into service during the quarter.

El Paso has price protection through hedging for 70% of its domestic natural gas production for the second half of 2009. The company also hedges its oil production, with fixed-price hedges on 1.3 million barrels of crude oil with an average price of $53.75 per barrel.

Full Year Zacks Consensus Estimate Moves Higher

The third-quarter Zacks Consensus Estimate has been stable over the past 60 days, holding at 21 cents per share.

Analysts are a bit more bullish on the full year, as the Zacks Consensus Estimate has risen 8 cents to $1.07 per share in the last month.

Value Fundamentals

El Paso is a Zacks #1 Rank (strong buy) stock. It has a price-to-book of 2.35. The company has a solid 5-year average return on equity (ROE) of 10.31%. As an added bonus, El Paso pays a dividend with a current yield of 2.10%.

Zacks Investment Research