Enbridge Energy Partners (EEP) went through a brutal year in 2017, shedding more than 45% of its value. Deteriorating conditions in the energy market fueled that sell-off by putting pressure on the master limited partnership's (MLP) finances. That tightening spot drove the company's parent, oil pipeline-giant Enbridge (ENB 2.58%), to complete several strategic transactions with its MLP to shore up its financial situation.
That plan seems to be working given Enbridge Energy Partners' guidance for 2018 and beyond. However, even though it's starting to turn things around, its valuation hasn't followed. Because of that, it's selling for such a ridiculously low price these days that I just couldn't pass it up.
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What a difference a year makes
Last January, Enbridge Energy Partners issued a concerning outlook for the coming year. The MLP's guidance was that distributable cash flow (DCF) would be between $750 million to $800 million, which was down sharply from 2016, when DCF was $942.8 million.
Two factors drove that weaker outlook. First, the company noted that "further weakening of its natural gas gathering and processing business due to lower realized commodity prices and volume flows" would impact cash flow. In addition to that, Enbridge Energy Partners noted that "a reduction in drilling activity in the Bakken region has resulted in reduced revenue projections from portions of EEP's existing North Dakota Liquids assets." Because of that declining cash flow, the company was no longer pulling in enough money to cover its distribution to investors.
That led the MLP to announce several strategic transactions with Enbridge in April, including selling its natural gas gathering and processing business to its parent and cutting its distribution 40%. That decision helped put the company's financial situation on firmer footing.
This improvement was evident in the company's guidance for 2018. It noted that DCF should be in the range of $775 million to $825 million, which is enough to cover its reset payout by 1.2 times. That's excellent news for income seekers because it suggests that the company's 11.8% yielding distribution is sustainable, especially considering that the company also expects to grow DCF per unit by 3% per year through 2020 due to acquisition options and contractual volume growth it has coming down the pipeline.
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A high yield for a low price
One reason Enbridge Energy Partners offers such an attractive yield these days is that the company currently sells for an absurdly low valuation. Assuming the midpoint of its 2018 guidance, Enbridge Energy Partners sells for just 8.7 times DCF. For comparison's sake, Enbridge's other MLP, Spectra Energy Partners (SEP), currently sells for 11.8 times DCF, while many other MLPs trade at more than 15 times DCF.
On the one hand, it makes sense that Enbridge Energy Partners trades for a lower valuation than rivals. For starters, even after its strategic repositioning transactions, it still has an elevated leverage ratio of 4.5 times debt-to-EBITDA, though it does anticipate that metric falling to a more comfortable 4.0 times by 2020. That said, Spectra Energy Partners, for example, expects its debt-to-EBITDA ratio to be below 4.0 times through 2020. Meanwhile, Enbridge Energy Partners only anticipates DCF per unit growth of 3% annually through 2020. That's a slower pace than Spectra Energy, which expects to generate enough cash flow from its organic growth projects to fuel 7% distribution growth this year, with 4% to 6% annual growth in 2019 and 2020.
That said, even with the higher leverage and slightly weaker growth prospects, Enbridge Energy Partners still trades at an unjustifiably low valuation. If nothing else, it should at least trade above 10 times DCF considering that many other MLPs trade at a mid-teens rate.
The formula to outperform
I see two ways investors can win with Enbridge Energy Partners. First, simply collecting its nearly 12%-yielding payout alone should produce market-beating returns, especially when also factoring in the expectation that DCF will grow at a 3% annual rate for the next few years. In addition to that, as Enbridge Energy Partners' growing excess cash pushes down its leverage ratio, it should help nudge its valuation up closer to its peer-group average.
This combination of income and a steady improvement in the company's valuation, as the weight of debt lifts, has the potential to fuel market-crushing returns in the coming years, with further upside if the company makes an acquisition, or completes some high-return expansion projects. That's upside I didn't want to miss, which is why I recently added this dirt-cheap high-yield stock to my portfolio.
