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CenterPoint, ExxonMobil Ink Deal

Zacks Equity Research

A unit of CenterPoint Energy Inc. (CNP) − CenterPoint Energy Bakken Crude Services, LLC (:CEBCS) − has inked a long-term midstream deal with an affiliate of the U.S. energy behemoth ExxonMobil Corporation (XOM), XTO Energy Inc.

The agreement calls for CenterPoint to collect XTO's crude oil produced in North Dakota in a new crude oil gathering and transportation pipeline system. The system is expected to be able to gather and ship oil produced from wells in McKenzie and Dunn counties, with a maximum capacity of 19,500 barrels per day (:BPD).

The latest pact gives CenterPoint its first client for a pipeline system under construction in the Bakken shale play. This demonstrates the stepped-up infrastructure activity taking place in the shale plays in tandem with reinvigorated U.S. oil drilling. Limited pipeline capacity in the region has led many oil producers to transport their oil through rail and the bottleneck has created a region-specific discount for crude oil prices.

This deal will unlock significant growth opportunities for CenterPoint and allow it to diversify its product gathering capabilities and geographic footprint. We remain upbeat on CenterPoint Energy based on its stable regulated utility and gas distribution operations, growth in the pipeline and gathering system business, higher rates, ongoing infrastructure development projects, a strong balance sheet and a high dividend yield.

For its gas gathering business, the company tends to enter into long-term contracts with volume commitments and acreage dedication, which insulates CenterPoint’s margins from volatility in gas prices and a lower level of drilling activity.

However, we remain cautious on CenterPoint’s stock owing to its pending regulatory cases, including the outcome of the Texas rate case, the tepid economy, lower demand for electricity, falling wholesale natural gas prices and a significant presence in a hurricane prone region of the U.S.

CenterPoint currently has a Zacks Rank #3 (Hold). We rather prefer the Zacks Ranked #1 (Strong Buy) utility stocks Brookfield Infrastructure Partners L.P. (BIP) and Empresa Nacional de Electricidad S.A. (EOC).

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