Enbridge Energy Surges 13.4% on Midstream Stake Sale - Analyst Blog

Enbridge Energy Partners L.P.'s EEP share price rose 13.4% to $35.09 on Jun 19, 2014 from the previous day's closing price. This was primarily attributable to the announcement of the drop-down sale of a 12.6% interest in its mid-stream natural gas business Midcoast Operating, LP to Midcoast Energy Partners, LP MEP for $350 million.

After the closure of the transaction, Enbridge Energy Partners will retain the remaining 48.4% limited partnership interest in Midcoast Operating. The transaction is expected to close on or about Jul 1, 2014.

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 Bakken Shale, Haynesville Shale and GraniteWash. Also, we believe these growth prospects have not been fairly captured in its current yield of approximately 6.9%.

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. The infusion of $350 million from the sale of limited partnership interest in Midcoast Operating will stand Enbridge Energy Partners in good stead.

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.

At present, Enbridge carries a Zacks Rank #3 (Hold). However, better-ranked stocks in the same sector include Magellan Midstream Partners LP MMP and Ultra Petroleum Corp. UPL. Both stocks have a Zacks Rank #1 (Strong Buy).

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