Thursday, March 27, 2008

a long idea - ep

one company i'd like to buy asap is ep - it is part natural gas exploration and part the largest natural pipeline network in the country. but at about 16, 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 ep in the open market yesterday, according to an SEC filing this morning. this is just one more reason to like a stock that already has a lot of catalysts.

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 ep accrued to buy another exploration business, Peoples Energy Production, last fall.

and while the company is probably best known for its pipelines, its e and p division is also firing on all cylinders. earnings before interest and taxes (EBIT) grew 92% year over year in the fourth quarter. ep 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, ep 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.

overall, i expect that the company can trade up through $20 over the next several quarters, led by growth in both of its divisions.

disclosure - do your own DD! i'm looking to buy asap

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