(MONEY Magazine) – At first glance, El Paso (EP) and Enron have a lot in common. Like its fellow Houston-based company, El Paso had a sizzling energy-trading business and is battling a federal investigation into alleged price manipulation in California. Both have been plagued by accusations of accounting chicanery. And both trade under a ticker symbol that starts with the letter E. But the two energy concerns differ in one important respect: Investors are still betting that El Paso will thrive.

After reaching a high of $54 over the past year, El Paso's stock has plummeted 72% to a recent $15.75 and sports a P/E of just 7.5 based on projected earnings per share of $2 for 2002. But a big drop in share price or a low P/E isn't necessarily a guarantee of value.

Edgar Wachenheim, portfolio manager at Greenhaven Associates, who dubs El Paso's beleaguered stock price a "gift," points out that what makes the shares so compelling is that El Paso owns first-class assets. These include gas reserves equivalent to over a billion barrels of oil, as well as the largest natural gas pipeline network in the U.S. Thanks to onerous regulations, these assets are pretty much shielded from competition and generate a steady stream of cash flow. The pipeline and production units generated 79% of El Paso's $2.3 billion in operating income in 2001. Sanford Bernstein's Duane Grubert calculates that El Paso now trades at 16% below the book value of its tangible assets.

Those assets will only become more valuable as the economy picks up, argues David Dreman, manager of the Scudder Dreman High Return Equity fund, who has 2.3% of his fund staked on El Paso. "We're going to have a shortage of natural gas in two or three years, because everyone's stopped building infrastructure," he says. "The survivors are going to do very well."

Some concerns still linger. There's the ongoing investigation in California, for one. And the possibility of El Paso's losing its investment-grade credit rating due to liquidity concerns. Then there's the complexity of its SEC filings. As a topper, Oscar Wyatt, the former CEO of Coastal, which El Paso bought in 2001, has gone so far as to send letters to federal regulators about the way management accounts for derivatives.

El Paso proponents dismiss these issues. The California investigation, they say, at worst will result in a fine that won't kill El Paso. As for liquidity concerns, bulls point to El Paso's second-quarter 10-Q, which shows $1.8 billion in cash and $4 billion in credit lines. Plus, El Paso's management insists that it has made great strides toward cleaning up the balance sheet by issuing an additional $2.5 billion of equity. It also plans on selling up to $2.5 billion in assets to pay down debt. Shareholders like Chip Carlson of the Greenspring fund, which owns about 115,000 shares, calls the company's accounting "sound." As for Wyatt, one of El Paso's largest individual shareholders, some speculate that he may be working on a management coup.

Many believe that El Paso's stock is likely to languish in the near future as it tries to distance itself from the energy sector debacle, but true believers are confident that El Paso has what it takes to emerge as a survivor. Carlson, who added to his stake in early June, bets El Paso's stock could reach the mid-$20s--a 60% pop--and notes that it pays a hefty 5.5% dividend yield in the meantime. Says Dreman: "If you can overlook the next six months of volatility, you'll be very well rewarded." --Cybele Weisser