Opening a New Position
Jim Cramer
The company is part natural gas exploration and part the largest natural pipeline network in the country. But at $16.19, neither one of these businesses is getting much credit. And neither is CEO Douglas Foshee, who came in and helped save the company in 2003, two years after its energy trading and power generation businesses collapsed.
Well, Foshee stepped in and bought 50,000 shares of El Paso in the open market Wednesday, according to an SEC filing this morning. This is just one more reason to like a stock that already has a lot of catalysts, and I'm going to buy 2,500 shares of El Paso after you receive this Alert.
Earlier this week, the company closed the sale of some of its lower-margin natural gas reserves. The $650 million of proceeds will help pay down debt that El Paso accrued to buy another exploration business, Peoples Energy Production, last fall.
And while the company is probably best known for its pipelines, its E&P division is also firing on all cylinders. Earnings before interest and taxes (EBIT) grew 92% year over year in the fourth quarter. El Paso generates consistent double-digit revenue growth in this area, and its cash operating costs are declining. About two-thirds of its 2008 production is also hedged between $8 and $10 per million cubic feet.
In addition to taking natural gas out of the ground, the company's core competency is shipping the energy where it needs to go. On this front, El Paso already has firm customer commitments to invest $4 billion to expand its pipeline network. This side of the business is also the foundation for the company's solid cash flow, generating about 60% of total EBIT.
All in all, I expect that El Paso can trade up through $20 over the next several quarters, led by growth in both of its divisions. This purchase gives me an initial 1.2% position in the name, and I will continue to build it up ahead of the upcoming April 16 analyst meeting.
