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Is Enterprise Products the Perfect Portfolio Partner?

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With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
Based on my outperform ratings on companies like HollyFrontier and Samson Oil & Gas, as well as my underperform rating on Enerplus and Rentech in the broad oil and gas industry, the CAPS supercomputer thought I also might be interested in midstream MLP Enterprise Products Partners (NYSE: EPD  ) , one of five Stocks of the Day it offered up for my consideration last week.

With Europe in a deep recession again, China hitting a hard landing, and manufacturing sending the economy into a tailspin, oil prices have taken a beating, with WTI falling below $80 a barrel, and natural gas depressed at around $2.50 per million Btus. So let's see what Enterprise has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Enterprise Products Partners snapshot

Industry Oil, gas, and  consumable Fuels
Sector Energy
Market Cap $42.4 billion
Revenues, TTM $45.4 billion
Return on Capital, TTM 7%
Dividend & Yield $2.51/5.20%
Cash $103.0 million
Long-Term Debt $13.6 billion
Free Cash Flow, TTM (OCF-CapEx) ($994.4 million)
Recent Price $48.25
CAPS Rating (out of 5) *****

Sources: Motley Fool CAPS; S&P Capital IQ. TTM = trailing 12 months.

Free-flowing gas
The natural gas industry is in a fix trying to gain control over a market awash in the fuel, but a CNBC report the other day suggests that the industry's infrastructure is about to be flush with cash -- in the trillions of dollars -- that makes investments in the likes of Enterprise, Kinder Morgan (NYSE: KMI  ) , and Williams (NYSE: WMB  ) something investors ought to consider.

The market researchers at IHS Global Insight expect almost $2 trillion worth of investments to be made in pipelines, transport, and storage facilities by 2035, but with some of the heaviest action coming within the next few years. The report goes on to note that because of the capital-intensive nature of LNG export projects, their future is not so assured, which suggests they might lean away from an investment in Cheniere Energy (NYSE: LNG  ) with its Louisiana export facility.

Going where the money is
While the benefits of that development are still years in the future, Enterprise will soon be receiving the windfall from completing the first phase of its Eagle Ford crude-oil pipeline that it jointly owns with Enbridge. The pipeline is close to the important Cushing hub and is seen as the primary delivery point for the Gulf Coast.

The benefit of investing in these picks-and-shovels operators is that they don't care whether oil is trading at $50 a barrel or $100; their contracts are for what's flowing through their pipelines and ending up in their storage facilities. They're like toll takers who don't care if you're driving alone or operating a clown car with 10 passengers: You pay the same rate regardless. And with the current state of infrastructure unable to meet capacity needs, look for the toll collectors to continue to prosper in the years to come.

It's why TransCanada's (NYSE: TRP  ) Keystone XL pipeline was such a key component of continuing the flow of fossil fuels across our northern border. But with the deal in limbo until further studies are performed, Canadian officials are now moving forward with plans to sell their cheap oil to China. A move that could have helped reduce our dependency on oil from regions increasingly hostile to our interests, as well as lowering its cost, will now go to our trade rival. And it doesn't matter if we change our minds now; there's no mulligan. Canada's prime minister says it can't find itself in a situation again where a trading partner refuses its output.

But that makes the projects Enterprise has even more valuable. As CAPS member cooleyly says, there are just too many superlatives in the MLP's favor: "Great yield, and pipeline that charge a toll no matter what the price of oil and gas. Great for taxes too." Because it's structured like a REIT, Enterprise Products offers tax benefits to investors who realize that the natural gas glut can only make it bigger. I'll be rating it to outperform the market indexes on CAPS.

Risk without reward?
Add Enterprise to your watchlist if you think its opportunities make it a cheap stock, but also let me know on the Enterprise Products Partners CAPS page or the comments section below if you think it's a situation that only works itself out later rather than sooner.

If Enterprise's growth ambitions pique your interest, The Motley Fool has identified a company that will prosper for years to come. Read more about one energy stock set to soar in our special free report "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2012, at 6:40 PM, usssa9 wrote:

    Keystone XL was already just a big pipe to the Gulf, so the oil could b exported. Wasn't ever meant for the USA. We'd Just make a little money off it. AND if it sprung a leak it would do irreparable damage to the Ogallala Aquifer, possibly turning the middle of the country into a ghost town. Lots of homework to be done on that one. Lots.

  • Report this Comment On June 25, 2012, at 9:43 PM, petewsp wrote:

    It is interesting that the Fool said Canada will sell their tar sands oil to China if we do not buy it. The reality is that they will sell it where ever they can get the most money. That is obvious. Vancouver does not want a pipeline to there harbor because it will clog their port. It is difficult to go to Prince Rupert because their is significant protest against the pipeline.

    In the end if rigorous environmental protections can be assured and land rights can be obtained, Canada will get access wherever they can make the most money.

  • Report this Comment On June 25, 2012, at 11:03 PM, ajstudebaker wrote:

    I regard the phrase "structured like an REIT" as somewhat inaccurate. EPD's partnership status results in tax benefits for its holders, but the K-1 forms it (and other partnerships) issue at tax time are more complicated than the 1099s that cover standard dividends.

    Disclosure: Long EPD

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10/24/2016 4:01 PM
EPD $26.72 Down -0.03 -0.11%
Enterprise Product… CAPS Rating: *****
KMI $21.62 Up +0.51 +2.42%
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TRP $46.27 Down -0.89 -1.89%
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