Growth Potential Big for El Paso

We are upgrading premier pipeline operator El Paso Corp. (EP - Analyst Report) from a Hold to a Buy based on the quality and growth potential of its two core business segments. EP boasts an industry-leading project backlog with exposure to major consuming markets and an impressive growth profile relative to its peers.

Its exploration and production (E&P) business has taken large strides to solidify its position as a low-risk, high-growth operator onshore the U.S. We are raising our price target from $16.00 per share to $27.00 per share.

Our positive investment sentiment toward El Paso Corporation is based on its industry-leading pipeline infrastructure and $7 billion multi-year project backlog, the high grading of its E&P business and production growth profile and the management's ability maximize value for shareholders.

El Paso's onshore future looks solid. With an average production weighted reserve to production ratio of 10 years, the company should be able to maintain high single-digit growth rates into the next decade. The E&P is forecasted to grow production between 8%-12% over the next three to four years. This, coupled with favorable oil and gas prices, should lead to higher margins and earnings growth and will offer investors continued strength in the near term.

Other potential upside will come from El Paso's exposure in Brazil. With nearly 870 Bcfe [billion cubic feet equivalent] of risked non-proved reserves, Brazil represents an avenue for growth that the market has not priced in.

On June 25, El Paso announced that it will move forward with its Ruby Pipeline project after receiving more than 1.1 Bcf/d of commitments from customers under long-term contracts. On June 23, Southern Natural Gas Company and Colorado Interstate Gas announced offers to purchase $189 MM and $100 MM of total outstanding debt, respectively.

Read the full analyst report on EP