A Flexible Pipeline Company with Flexible Pipelines

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The boom in domestic oil production in the United States has created a problem: how to get all this oil to refineries?  A pipeline will do the job in the least expensive way, but currently so much oil is being produced, particularly in the Bakken oil shale, that pipeline capacity can’t move it all.  Enbridge Energy Partners (NYSE: EEP), in conjunction with Enterprise Products Partners (NYSE: EPD) responded by enlarging their Seaway Pipeline to 400,000 barrels a day.  This increased capacity helps alleviate the bottleneck at Cushing, Oklahoma and help supply Gulf Coast refineries with inexpensive domestic crude oil.  Further expansion of pipeline capacity along the Seaway Pipeline route may follow.  And, of course, the Keystone XL pipeline may still find life after regulatory death.

The problem with pipelines
Oil pipelines do one thing very well: transport crude oil from Point A to Point B.  Which is fine if Point B is the only place you want your oil to go and Point A doesn’t produce too much oil.  Once Point A production exceeds pipeline capacity, someone is going to be unhappy.  Particularly if there is a Point C willing to take the excess oil.  A new pipeline can be built, or enlarged, such as the one Enbridge is building between North Dakota and Wisconsin.  However, this Lakehead System pipeline expansion won’t open for business until 2015 and there’s oil ready to be shipped to the Midwest or East Coast today.  Similar pipeline expansion projects to the Midwest, such as the Alberta Clipper pipeline, take months to complete. While Enbridge plans several pipeline expansion projects for its Bakken oil operations, many have scheduled completion dates in 2013 to 2015, too late for oil produced now.

Enbridge’s flexible alternative
When you need to move oil now and there’s no pipeline around to carry it, railroads provide a solution.  Railroads function as de facto flexible pipelines carrying oil to multiple refineries.  For example, Bakken oil is shipped by rail to Saint John’s, New Brunswick, home of Canada’s largest oil refinery and to South Philadelphia, home of the oldest operational refinery in the US.  Business is booming for railroads shipping oil out of North Dakota, just ask Warren Buffett and Carl Icahn.   In fact, the demand for oil tank cars far outpaces supply.

What’s better than shipping oil by rail when your pipeline is full?  Building your own railroad system to handle the oil.  And that’s what Enbridge is doing.  A joint venture announced late November 2012 will have Enbridge owning a 75% stake in a unit-train facility and pipeline infrastructure company called Eddystone Rail Company.  Joining with Canopy Prospecting, Inc., Enbridge hopes to bring 80,000 bpd of Bakken crude to Philadelphia refineries in 2013 and 160,000 bpd by 2014.  Not only will this venture include railcars, but barges will also engage in oil transport.  

Enbridge is no rookie to transporting oil by rail.  While rail is a small part of its overall operations, Enbridge operates a fleet of rail cars through its Enbridge Liquids Transportation and Marketing based in Petal Mississippi. Looking to the upstream end of oil transport, Enbridge’s planned expansion of its Berthold Station will allow rail shipment of 80,000 bpd of Bakken crude oil once completed in 2013.  Additional planned expansion will eventually handle 120,000 bp.

Enbridge as an investment    
So why invest in Enbridge as opposed to, say, its Seaway partner, Enterprise?  Both are master limited partnerships in the oil and gas pipeline business.  Does one have an advantage over the other?  Depends on what you need from your investment.

Enbridge currently pays a 7.23% distribution yield with a five year dividend growth rate of 2.68%.  The stock has slid in price from $33/sh a year ago to $30 /sh today.  In contrast, Enterprise pays a 4.8% distribution with a five year distribution growth of 5.39%.  The Enterprise stock has grown from $45/sh to $55/sh.  So if you need income now, Enbridge is the place for your money.  If you’re looking for long term dividend yield, and you assume dividend growth rates remain constant, it will take about 13 years before Enterprise surpasses Enbridge for dividend yield.  However, after 15 years, if you reinvested your distributions, Enbridge will still have paid more in total distributions than Enterprise. If you’re looking for capital gains, Enterprise has the stronger growth record. Enterprise returned 22% capital gains last year while Enbridge declined 10%.  Over the long haul, Enterprise has clearly outdone Enbridge on the capital gains front.

  

                

Put another way, over the past 10 years, Enterprise gained about 180% in capital gains to Enbridge’s roughly 40%.

Final Foolish Thoughts
Enbridge is clearly a dividend/income investment.  The firm transports oil and gas primarily through pipelines but is expanding its rail operations.  The pipeline business is building out as well.  Particularly for those looking for income over the next 10 to 15 years, Enbridge provides a greater initial distribution yield that slowly increases over time.  Its investments in its business bode well for continued distribution growth.  For those looking for total return, particularly capital gains, Enterprise has the clear historical advantage and likely your better choice.

 


dylan588 owns Enbridge Energy Partners. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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