This article is part of our Rising Star Portfolios series.
Back in January, I bought about $500 worth of El Paso (NYSE: EP) shares for my public, real-money Motley Fool portfolio. I liked the company because of its combination of midstream and pipeline assets, which provides stability and cash, in addition to its exploration and production, or E&P, division, which is a more high-growth industry.
Since my purchase, the stock has gone up more than 45%. However, what has happened in the last few days has really caught my attention, and should warrant your investing acumen for the rest of the year.
A happy split-up!
On May 24, the company announced that the Board of Directors had approved a plan to split the company into two separate entities by the end of 2011. El Paso as we know it will be comprised of the Pipeline group, the Midstream group, and its general and limited partner interests in El Paso Pipeline Partners LP (NYSE: EPB). The second company, yet to be named, will consist of the exploration and production division, which produces about 800 million cubic feet equivalent per day and is about 85% natural-gas-oriented.
The company plans to have a 2012 dividend of $0.60 per share, and it has targeted low double-digit rate growth for that dividend moving forward. El Paso was already a highly coveted dividend stock, and now with the split-up, you can expect even more yield-chasing investors to be interested in the company.
The tax-free spinoff is following a trend within the industry, as others such as Williams (NYSE: WMB) announced a similar plan in early 2011; it's planning an IPO in the third quarter of this year. In January, Marathon Oil (NYSE: MRO) announced it was also going to separate into two companies, with one focused on refining and the other on E&P.
Shareholders seeing early gains
Analysts and shareholders alike have to be happy about this move. Since the announcement, El Paso's stock has shot up by about 10%.
The main reasons for the positive reaction:
- El Paso has long contemplated a split-up but was waiting until it shored up its balance sheet; the announcement indirectly implies that the financials are on solid ground.
- The pipeline company will benefit from less commodity volatility as well as the capital-intensive nature of the E&P industry.
- The E&P company will benefit from a more narrow focus on exploring and finding undeveloped oil and gas fields; the company currently operates in the U.S., Brazil, and Egypt.
According to El Paso's CEO Doug Foshee, the reason for the split was because the company "saw a significant discount between our intrinsic value and our share price."
Hopefully the CEO is right and after the split shareholders will benefit from more favorable multiples. I guess we'll just have to wait and see.
If you want to see as much as I do how this corporate maneuvering shakes out, then feel free to add El Paso to My Watchlist. This way you'll get the latest news and commentary about the company, and can follow the stock as well.
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