Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Should You Sweat Your Enbridge Investment?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

When investing in master limited partnerships, one of the most critical objectives is to make sure that the company can continue to pay its distribution. Investors in Enbridge Energy Partners (NYSE: EEP  ) might start to have their confidence shaken by the company's recent performance. At the most recent earnings release, the company's coverage ratio was at 0.79, which means that the company is taking in less money in free cash flow than what is required to service its debt and pay its distribution obligations. Could this be a bad sign for Enbridge's 7.4% distribution yield? Let's look at what's happening and find out why this might not be as bad as it seems.

New market needs new infrastrucutre
Much like many players in the midstream space, Enbridge Energy Partners and its operating company, Enbridge Inc. (NYSE: ENB  ) , built its energy infrastructure around the theory that oil and gas needed to be imported into the United States. While there are still some imports coming to the country, the necessity of those imports is falling off every day. Greater and greater production from emerging unconventional energy plays has bumped domestic supplies and created severe price differentials on oil and gas throughout the nation.

As recently as 2012, Enbridge used both commodity-sensitive and fee-based pricing structures to generate more than 66% of its revenue. This makes the company very vulnerable to commodity prices. With gas trading at about $3.50 in the most recent quarter, it severely cut into revenue for the company.  

Another major reason the company has been taking a hit as of late is the emergence of rail as a method for transporting oil from these emerging oil plays. Both Phillips 66 (NYSE: PSX  ) and Valero (NYSE: VLO  ) recently announced the purchase of 2,000 and 1,000 railcars for moving oil, respectively. These rail cars will be used to move mostly Bakken crude to refineries on the East and West coasts to help replace high-cost Brent and Alaskan North Slope crudes that these facilities are currently processing. While rail is a more expensive option for moving crude than pipeline, it works for the time being because midstream companies lack the infrastructure to deliver crude from these emerging plays to the places of need.

Big plans, bigger profits
These changes in market dynamics have put Enbridge in catch-up mode. To meet the changing times, the company has needed to pour lots of money into capital expenditures. In 2012, Enbridge spent about $1.7 billion in capital expenditures. The company intends to bump that number to about $2.2 billion for 2013 and a return to 2012 numbers until about 2016. The most encouraging sign for all this investment is that it will almost completely change the revenue structure for the company. These new projects will use take-or-pay contracts, which will ensure that the company receives payment even if the pipeline isn't used. It's a much more stable revenue source than a fee-based contract. Once all of the slated projects are complete, Enbridge anticipates that the company will receive 60% of its revenue from take-or-pay contracts.

The largest project the company has coming online soon is the joint venture with Enterprise Products Partners (NYSE: EPD  ) for the reversal of the Seaway Pipeline from Cushing, Okla., to the Gulf of Mexico. This will also be tied to an extension in the works that will extend from Cushing to its mainline hubs around the Chicago area. This pipeline will put it in direct competition with TransCanada's (NYSE: TRP  ) Keystone XL pipeline to deliver Canadian oil sands to the Gulf of Mexico. Luckily for Enbridge, it hasn't met the political resistance for its project that TransCanada has, and it will more than likely bring the project online sooner.

Enbridge also intends to tackle its rail problem by reversing and expanding its Eastern Access pipeline network. The project plans to add a spur to the Utica shale play in Ohio and will provide essential takeaway capacity for East Coast refiners. Once complete, it should provide even more options for those refiners to kick their expensive Brent habits.

Once all of these projects come online, Enbridge anticipates a return to a better than 1.0 times coverage ratio by 2016. It also still plans to maintain a 2% to 5% distribution yield growth between now and 2016.

What a Fool believes
Enbridge management anticipates that rail will continue to eat into pipeline revenue throughout 2013. Rail is still a $10 premium to pipe on average, but refiners are more than willing to pay the transport premium because it's still better than Brent. Once midstream gets its act together, though, expect a shift back to pipe.

Until these projects get up to speed, don't expect any great big upticks in Enbridge revenues unless we see a major upswing in oil and gas prices. At the same time, investors shouldn't worry too much. The company's plans should bring it back on the right track, and investors who hang on through this stagnant time will be rewarded.

There are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations and is poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the 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 company before the market does. Click here to access your report -- it's totally free.

Read/Post Comments (2) | 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 February 18, 2013, at 3:49 PM, DAG_Investments wrote:

    Good stuff, thanks. I'm a new EEP holder and I'm still confident in my long-term thesis so it looks like I just started buying too early.

  • Report this Comment On February 19, 2013, at 1:32 AM, jjonezzz wrote:

    This is interesting background on the Enbridge company. I recently divested from Enbridge and the oil and gas sector in general after my daughter brought issues of social responsibility to my attention.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2261207, ~/Articles/ArticleHandler.aspx, 9/29/2016 11:15:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:00 PM
EEP $25.14 Down -0.18 -0.71%
Enbridge Energy Pa… CAPS Rating: ****
ENB $43.84 Down -0.38 -0.86%
Enbridge CAPS Rating: *****
EPD $27.42 Down -0.08 -0.29%
Enterprise Product… CAPS Rating: ****
TRP $47.60 Down -0.04 -0.08%
TransCanada CAPS Rating: ****
VLO $51.71 Down -3.40 -6.17%
Valero Energy CAPS Rating: ****