"Energy Transfer Equity (NYSE: ETE) is a cash-producing machine," says leading value investor Nathan Slaughter.
The editor of Half-Priced Stocks explains, "Even more promising, those who know the company best -- the CEO and one of its co-funders -- have been voting with their wallets lately." Here's his review of the master limited partnership.
"Enterprise Transfer Equity owns over 17,000 miles of natural gas pipelines in several states, including the largest network serving the prolific gas basins of Texas.
"MLPs come in two classes: general partner and limited partner. The general partner (GP) typically handles all of the day-to-day operations and in return gets a cut of the distributions that are dished out to the limited partners (LP).
"In this case, the General Partner is Energy Transfer Equity, our recommendation, which should not be confused with the Liimted Partner -- Energy Transfer Partners (NYSE: ETP).
"Energy Transfer Equity owns all the General Partner interests -- as well as 62.5 million LP units (46%) of ETP. All of which is a convoluted way of saying that ETE unitholders can expect to be showered with cash.
"Management is making the most out of these assets. In fact, the volume of natural gas transported through Energy Transfer's network has jumped from 8,572,000 Million British Thermal Units to 11,632,000 so far this year. But the company is not resting on its laurels.
"In fact, management just unveiled details regarding the Fayetteville Express Pipeline, a massive $1.3 billion joint project with Kinder Morgan (NYSE: KMP). This pipeline will move over 2 billion cubic feet of natural gas daily from the Fayetteville shale region of Northwest Arkansas to facilities in Mississippi.
"It won't be up and running for a couple years, but leading producers like Chesapeake Energy (NYSE: CHK) have already signed up for 10-year commitments, utilizing 75% of the available capacity.
"This project could soon become a major growth driver for the partnership and distributions. At the current rate, unitholders can expect annual payments of $1.92, for a hefty yield of 10.8%.
"In July, CEO and Chairman Kelcy Warren invested over $42 million to acquire 1.5 million shares. The same week, co-founder Ray Davis plunked down almost $10 million.
"All of that followed a 100,000-share commitment made by Ray Davis, a Director of ETE, who completed a series of 10 different purchases over a short two-week span.
"The recent purchases by Kelcy Warren and Ray Davis represent a big vote of confidence. In fact, Davis more than doubled his position to 627,000 shares, despite having retired just a few months earlier -- a time when you'd think he might be selling shares, not buying them.
"Best of all, these purchases were all made at prices above where the units are trading today -- so you can get in even cheaper than they did.
"As an MLP, the partnership pays no tax at the corporate level -- instead channeling virtually all of its cash flows to unitholders each quarter. One caveat, though, accounting for MLP distributions can be tricky at tax time.
"Overall, Energy Transfer Equity is likely to be more aggressive than some other MLPs, so it should be considered more than just an income-producing vehicle. And with the recent drop in the units, investors should expect to see some capital appreciation along with those steadily rising quarterly paychecks."
