Enbridge Underperforms - Analyst Blog

Enbridge Energy Partners L.P. (EEP) reported fourth-quarter 2010 earnings of 56 cents per unit, well below the Zacks Consensus Estimate of 68 cents and the year-earlier profit of 64 cents. The lower-than-expected fourth quarter results were mainly due to higher operating costs in liquids and natural gas segments. These were partially offset by additional revenues from liquid pipelines resulting from the incremental volumes and rates associated with Alberta Clipper and North Dakota expansions.

However, total revenue in the quarter increased 33% year over year to $2.17 billion, compared with the Zacks Consensus Estimate of $1.87 billion.

Importantly, Enbridge maintained its cash distribution rate of $1.0275 per unit or $4.11 per unit annualized in the quarter. Moreover, the partnership also maintained a 2−5% distribution growth through 2013.

Operational Performance

Operating income in the Liquids segment increased nearly 10% year over year to $128.9 million, primarily driven by the Lakehead and North Dakota systems associated with completion and start-up of the Alberta Clipper Pipeline and the North Dakota Phase VI expansion project.

The partnership's volumes in the Liquids system upped nearly 1% year over year to 2,048 thousand barrels per day. 

Operating income in the Natural Gas segment shot up more than 76% year over year to $49.1 million, due primarily to the Elk City Natural Gas Gathering and Processing system acquisition, in association with the higher natural gas volumes on Anadarko as well as East Texas systems.

During the quarter, Natural Gas throughput improved nearly 25% from the year-earlier period to 2,646,000 million British thermal units per day (MMBtu/d).

The partnership's Marketing segment reported an operating income of $2.1 million, down from the year-earlier level of $3.4 million. The decline can be credited to the restricted scope of recognizing benefits from price differences between receipt and delivery locations where natural gas is bought and sold by the segment.

Outlook

Enbridge is fairly active on organic as well as inorganic growth fronts. Its largest organic growth project, the Bakken crude oil pipeline expansion, in association with Enbridge's recent acquisition of Elk City Gathering and Processing System, is expected to expand the partnership's exposure in the liquids-rich region.

The company has made significant progress related to its Natural Gas segment and secured additional growth projects around oil and natural gas pipeline systems, which are expected to be the catalysts for long-term growth. Consequently, Enbridge expects net income between $465 million and $495 million for the year.

The expansion and diversification of Enbridge's asset base over the past few years have created opportunities for internal growth. While long-term prospects for the partnership's primary liquids transportation asset, the Lakehead System, are positives, we see limited volume growth opportunities in the near to medium term.

Additionally, its midstream natural gas business is sensitive to changes in natural gas supply, demand fundamentals and commodity cycles associated with gas processing margins.

However, intense competition from MLPs such as Kinder Morgan Energy Partners L.P. (KMP), Enterprise Products Partners L.P. (EPD) and Energy Transfer Equity (ETE) is an added cause for concern.

Our long-term Neutral recommendation remains unchanged and the company holds a Zacks #3 Rank, which is equivalent to a short-term ‘Hold' rating.