TAKING STOCK: Natural gas firm looking like a 'buy'

Dear Mr. Berko:

A long-time friend of mine (name omitted) who says he knows you well has had some good successes in the market during the past six years buying oil and gas limited partnerships, high-yielding convertibles and preferreds. He just recommended that I buy 200 shares of Regency Energy Partners for my joint account; he says it'll give me above-average income and "decent long-term principal growth."

I'm in my early 60s and don't need the income till I retire in five years. He said that you would approve this recommendation and that I could mention his name in my email to you for your opinion. Since our friend sometimes over-brags, I felt it best to contact you for your opinion.

HC, Oklahoma City

Dear HC:

Yep, I know the fellow not well, but I know his CEO infinitely better because I'm a consultant to the company's retirement plan. Your long-time friend is a nice guy but is known to be over-generous in his self-praise. But even a blind hog can find an acorn once in a while -- an acorn such as Regency Energy Partners.

The fundamental outlook for the oil and gas storage and transportation industry during the next 18 months is positive. Analysts believe that revenues and earnings will continue to expand and that higher crude prices plus the strong demand for natural gas liquids (NGL) will benefit storage and pipeline companies.

The resulting higher prices, profits and cash flow should translate into a significant increase in capital expenditures this year and next. In particular, the Interstate Natural Gas Association of America reckons that the U.S. and Canada will require an annual average midstream investment of $10 billion a year for the next 25 years to accommodate our growing oil and natural gas supply/demand infrastructure needs.

So Standard & Poor's has a "buy" recommendation on Regency Energy Partners (RGP-$24.75), and so do Morgan Stanley, Reuters, Market Edge, Merrill Lynch and Wells Fargo. Apparently, Deutsche Bank, JPMorgan, UBS, Prudential, and Credit Suisse agree, because these predators own millions of shares of common stock.

RGP is a growth-oriented limited partnership engaged in the gathering, contract compression, processing, marketing and transportation of natural gas and natural gas liquids. RGP boasts an impressive operation at the Haynesville Shale site; increased demand for compression in RGP's Eagle Ford Shale field; recent cost-cutting measures; and partnerships in the Marcellus, Fayetteville and Barnett Shales. The investing firms believe that such factors should produce record earnings this year for RGP.

I believe RGP could produce dependable, above-average long-term principal and income growth with low risk. Revenues have more than doubled to $1.4 billion in the last six years. Book value has grown three-fold, and the $1.81 dividend, which was 94 cents in 2006, may be increased to $1.95 in 2012 on $1.54 billion in revenues. RGP appears to be a low-volatility issue that could provide long-term, patient investors with an average annual total return between 8 and 10 percent.

A 200-share purchase in your joint account looks like a good fit, and you might be pleased as a pasha to find that at least 80 percent of the dividends will be treated as "return of capital," so you pay only ordinary rates on the remaining 20 percent. And you might be even more pleased to know that in 2013, when dividends are taxed as ordinary income (up to 39.5 percent beginning in 2013), RGP's dividend exclusion may remain etched in steel. And since you won't need the dividends for several years, reinvest them each quarter so that when you become 67, those 200 shares could grow to an additional 80 or 100 shares.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Mon, Feb 13, 2012