We have reaffirmed our Neutral recommendation on Enbridge Energy Partners L.P. (EEP) on Jun 4, 2013, based on its complimentary position to reap benefits from its diversified business portfolio and stable fee-based operating income. However, a volatile natural gas price environment is expected to weigh on the stock. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.
Enbridge Energy Partners is a master limited partnership, engaged in the gathering, processing and transmission of natural gas and crude oil. The partnership is best known for its ownership of the Lakehead System, one of the world’s longest petroleum pipeline systems, which transfers over 60% of the Canadian oil output into the U.S. This unique position helps the partnership to capitalize on the growing Canadian oil sands production.
A focus on fee-based and diversified businesses has enabled Enbridge Energy Partners to dilute its business risks, as well as provide a stable and steadily growing earnings profile. We remain positive on Enbridge given its increased exposure to the Bakken Shale, the Haynesville Shale and GraniteWash. We believe these growth prospects have not been fairly captured by its current yield of 7.3%.
The partnership has more than $3 billion worth of organic growth projects lined up for the next two years, focused on natural gas liquids (NGLs) and crude oil. The projects – the majority of which will be productive in 2013 – are driven by the sharp rise in liquids drilling from prolific shale plays in the U.S., including the Bakken Expansion, Border to Flanagan Expansion, Cushing Terminal Expansion and the Texas Express NGL pipeline.
Moreover, the Texas Express Line, expected to come online by second quarter 2014, will facilitate the transfer of additional NGL volume to Mont Belvieu. We believe these projects will lead to distribution growth, which is projected at 2–5% for the next couple of years.
The partnership’s $1.7 billion capex budget for 2012 mainly comprises 70% liquids and 30% natural gas projects.
However, Enbridge’s midstream natural gas business is sensitive to changes in natural gas supply, demand fundamentals and commodity cycles associated with gas processing margins.
Furthermore, through the expansion of its natural gas gathering and processing business, Enbridge has increased its risk exposure to commodity prices.
Other Stocks to Consider
While we prefer to remain on the sidelines for Enbridge, there are other stocks in the sector that appear rewarding. These include Delek Logistics Partners, LP (DKL), Enerplus Corporation (ERF) and Ferrellgas Partners LP (FGP), which are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).
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