Published: October 27, 2008

I always like to see insiders put their money where their mouths are, and that is that case with  Energy Transfer Equity (NYSE: ETE, $19.50). Energy Transfer is a major player in the midstream energy sector. The company owns over 17,000 miles of natural gas pipelines in several states, including the largest network serving the prolific gas basins of Texas. It also gathers natural gas from 2,400 wells, manages various treating, processing and storage facilities, and supplies propane to over one million retail customers around the country.

Energy Transfer Equity is a master limited partnership (MLP). As you may know, 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). As an incentive to boost those distributions, the GP is paid a percentage of them on a sliding scale that ratchets upward along with payouts (in some cases reaching 50%).

In this case, the LP is Energy Transfer Partners (NYSE: ETP), while Energy Transfer Equity (ETE) owns all GP interests -- as well as 62.5 million LP units (46%) of ETP. To confuse matters, ETE itself is set up as a limited partnership. However, don't let this complicated ownership structure scare you away -- taking a few minutes to become acquainted with all this legalese is well worth the effort.

For every dollar that ETP distributes, ETE is entitled to roughly 37% thanks to its GP stake and incentive distribution rights. As for the remainder that actually goes to limited partners, ETE owns almost half of those units as well.

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. And consider this, from the second quarter of 2006 through today, distributions have already soared +102% to $0.48 per share. At the current rate, unitholders can expect annual payments of $1.92, for a hefty yield of 9.8%.

Even more promising, those who know the company best have been voting with their wallets lately. 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.

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.

Energy Transfer is a cash-producing machine. And as an MLP, the partnership pays no tax at the corporate level -- instead channeling virtually all of its cash flows to unitholders each quarter.

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.

ETE 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.

Nathan Slaughter
Editor
Half-Priced Stocks

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Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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