Enbridge Energy Held in Balance - Analyst Blog

We issued an updated research report on Enbridge Energy Partners L.P. EEP on Jun 2, 2014. The partnership's diversified business portfolio and stable fee-based operating income are catalysts to unlock value for shareholders. However, a volatile natural gas price environment is expected to weigh on the stock.

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 that transfers over 60% of the Canadian oil output to 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 steadily increase its earnings profile. We remain positive on Enbridge given its wider 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 approximately 7.0%.

The partnership has a number of natural gas liquids (NGLs) and crude oil focused organic growth projects lined up for the next two years. The projects are backed 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.

Enbridge's Liquids segment is also poised to benefit from the current economics of producing oil, increased output from the Bakken Shale and Canadian Oil Sands regions as well as higher revenues from Alberta Clipper. In Liquids, the emphasis will likely be on rising crude takeaway capacity in the Bakken and intensifying capacity to ship crude eastward to the upper Midwest and Canada refineries. Enbridge is also assessing other expansion projects including Alberta Clipper and Southern Access crude pipeline expansions.

Moreover, the Texas Express Line, expected to come online in 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.

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.

This Zacks Rank #3 (Hold) stock delivered negative earnings surprises in three of the last four quarters, with an average miss of 40.9%. The partnership's first-quarter earnings of 20 cents per unit came in line with the Zacks Consensus Estimate. The quarterly figure however deteriorated 4.8% from the year-earlier profit of 21 cents.

Key Picks in the Sector

Currently, we prefer to remain at the periphery regarding Enbridge Energy. However, some top-ranked stocks in the oil and gas sector such as Talisman Energy Inc. TLM, CVR Refining, LP CVRR and Boardwalk Pipeline Partners, LP BWP, all sporting a Zacks Rank #1 (Strong Buy), are worth reckoning.

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