Houston-based diversified energy company El Paso Corp. has unveiled its long-awaited revised strategic plan for its E&P business, emphasizing a focus on returns and reduced risk. There will be a significant change in the types of wells the company drills and in its capital-allocation choices. This comes in the wake of having to reduce its rig activity significantly during the past few months, from 19 operated rigs working to 12. It also has reduced its proven oil and gas reserves estimate by 40%, and more recently, it cut 17 % of its E&P payroll. The market evidently liked what it heard, as shares of El Paso closed at $7.88, up from the pre-announcement close of $7.69, on heavy volume. Since January, the company has been reevaluating its E&P business. In February, it brought on board Lisa Stewart as the new president of production and non-regulated operations. She most recently managed business development for 1Apache Corp. ... El Paso now predicts stable gas production during the next two years. To facilitate this goal, chief executive Doug Foshee says the new business plan involves reducing production risks, conducting meticulous audits of reserves and implementing rigid cost controls. The company also plans to reduce its exposure to expensive, higher-risk wells on the deep Gulf of Mexico shelf, and evaluate more third-party prospects. "We will shift a lot more attention to workovers, recompletions and other low-risk opportunities on our base properties," Stewart says. "By following strict capital and risk discipline and focusing on our base operations, this business will turn the corner in 2004. When I showed up at El Paso, we knew we had to change the mix of high-risk and low-risk production, so we are making a big shift in capital allocation. This is just the beginning." Going forward, base exploration operations will be concentrated in areas of the Gulf of Mexico and south Louisiana; the Texas Gulf Coast; onshore in the Rockies, ArkLaTex, the coalbed-methane fields in New Mexico's Raton Basin, Oklahoma's Arkoma Basin and Alabama's Black Warrior Basin; and offshore Brazil. The "back-to-basics" strategy will push annual average volumes for 2004 and 2005 to a range of 825- to 875 million cu. ft. equivalent per day, and production is expected generate excess cash flow. The new strategy is hoped to control exposure to risk and create more predictable returns. It will "generate solid risk-adjusted returns at the commodity-price assumptions for El Paso's long-range plan; produce higher returns and cash, if current natural gas and oil prices continue to exceed plan assumptions; and allow current drilling to result in reserve growth, net of asset sales, [during] the next two years," the company reports. The foundation of the plan calls for rigid capital discipline, a push for operational efficiency and cost control, a more meticulous process for booking reserves, and autonomy-and accountability-for all its regions. Also, a reward program will be created for employees who work to help the company reach these goals. The way El Paso allocates capital shows how much it is changing its drilling and production focus. Stewart says that, in 2005, the company will cut its international E&P spending to $75 million from $130 million, and increase its Gulf of Mexico budget to $200 million, up from $150 million. Low-risk areas such as coalbed methane and the Rockies will receive 28% of capital spending in 2004 and 2005, up from 12% in 2003. "The plan is already working," Stewart says. "In March 2004 we identified 10 fields as marginal or providing no operating cash income. After remediation, nine of the 10 are now generating positive cash income and production has increased." -Bertie Taylor and Leslie Haines