By Jack Barnes
You may be surprised to learn that there's still an energy company out there that's undervalued by the market -- a natural gas company that has two divisions, which makes it difficult to appraise. I'm talking about El Paso Corp. (EP).
Some investors bought the stock to hold as a pipeline company; others bought the stock to invest in an exploration and development company. But in the end, no one quite knew exactly which it was. That caused its assets to be valued at less than the equivalent assets held by its peers. This locked-up value caused El Paso's stock price to stagnate for years, even as other energy stocks surged to new highs.
In the industry, that's called a value trap. Portfolio managers are always looking for a catalyst to unlock trapped value in these investments. That's why I have a list of companies I always return to, just in case such a catalyst shows up.
I always get excited when one of these companies unlocks the hidden value of its stock, and El Paso did just that when it finally decided to spin off its two primary divisions -- exploration and production (E&P) and transportation -- to its shareholders. This gives us a chance to pick up the combined company before the transaction has happened.
El Paso has a large collection of individual assets that have received an overall market discount. And we have an opportunity to enjoy the value-unlocking process. And now it's time to buy EP.
El Paso Corp.'s Premium Assets
El Paso Corp. was founded in 1928 and is based on Houston, TX. The company has about 5,000 employees. And it currently sports a market cap of $16 billion, with an enterprise value of $30.5 billion once you take into consideration net cash and debt levels.
El Paso provides a range of services to producers, marketers, and consumers. It explores, drills, produces, transports, markets, and sells natural gas products. While its diverse array of operations has at times worked against the company, it also gives El Paso a great view of internal market dynamics.
El Paso's exploration and production division is one of the largest independent natural gas producers in the United States. The division focuses on unconventional and low risk drilling programs. El Paso produced about 782 million cubic feet per day (MMCFPD) in 2010. Additionally, El Paso has purchased or built 240 billion cubic feet of natural gas storage. This allows the company to purchase gas when it is cheap in early summer at the wellhead, and inject it into storage for colder winter months when the price of natural gas rises.
And now El Paso Pipeline Partners L.P. (NYSE:EPB), a limited partnership formed by El Paso Corp., is expanding the capacity at its Elba Island liquefied natural gas (LNG) terminal. That's important when you consider that the United States has just 10 facilities capable of importing LNG and converting it for domestic consumption.
The only issue I have with El Paso's fundamentals is the extremely high debt levels it carries. I love the ability for a company to leverage up its balance sheet, but this is predicated on it being able to add more debt. In the case of El Paso, I want to see asset sales bring down its debt levels. Once the spin-offs happen, and the assets and debt levels have been assigned to the different divisions, I will feel a lot better about the future valuation of the spin-offs. The debt levels are an issue I will be tracking going forward.
El Paso stock closed down 20 cents, or 0.97%, at $20.40 on Friday. That's at the top end of its 52-week range of $10.60-21.54.