Two Pipelines for Dividends, One to Be Wary Of
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A growing problem for the growing North American oil business involves transportation. Simply stated, oil production exceeds pipeline capacity. While a problem for producers, this situation opens a big door for midstream pipeline companies and their investors. Recently, Enbridge Energy Partners (NYSE: EEP) and Enterprise Products Partners (NYSE: EPD) responded to this pipeline bottleneck by expanding their joint venture Seaway Pipeline. While these two companies collaborated on this pipeline, for investors, the two companies are two different kinds of investment. Further, not all pipeline companies are growing dependable investments as we’ll see with Energy Transfer Partners (NYSE: ETP).
High current yield with great growth prospects
Enbridge Energy Partners currently yields about 7.2% in distributions. Distribution growth averages 2.68% over the past five years. In addition to the Seaway Pipeline venture mentioned above (and expansion along that route may not be over), Enbridge is expanding other pipelines in its system. Further, Enbridge has initiated improvements in its Berthold rail facility in North Dakota and expanded its rail operations. These rail developments will allow Enbridge to ship oil not only to Gulf Coast refineries, but refineries in South Philadelphia, too. Oil transport by rail is a booming business and Enbridge is positioning itself to take advantage. For all its spending and distributions, debt is not a problem. The downside is the stock has declined about 10% over the past year or so. Hopefully all the pipeline expansions and rail business will boost the stock price as well as the distribution.
High total return with no end in sight
Enterprise seems to be one of those companies in the right place, at the right time, doing the right things. Like Enbridge, Enterprise is building out its pipelines to accommodate increased domestic oil production. As Matt DiLallo pointed out, many of these expansion projects come in under budget. Unlike Enbridge, Enterprise does not have rail operations, but does have offshore natural gas and oil pipelines in the Gulf of Mexico. Enterprise even has barges for oil transport and recently signed a multi-year deal with an ExxonMobil subsidiary to use barges and tugboats for transporting Exxon’s various products. It pays a distribution yield of about 4.75% with a five year distribution growth rate of 5.39%. The stock is up 22% over the past year. In my opinion, the financial beauty of Enterprise is total returns. The chart below spells it out best.
And then there’s Energy Transfer Partners...
At first blush, Energy Transfer looks like a great deal. A natural gas pipeline company paying a 7.5% dividend, paying down debt through the sale of its propane operations to AmeriGas and expanding into crude oil transport. The problem is, distributions haven’t been raised since 2008. You may argue since Energy Transfer spent a pile of money on its Sunoco acquisition and spent $3.1 billion in building the company, there’s no way the company could increase its distributions. However, companies like Enbridge and Enterprise have made acquisitions and spent money building their business and still managed to increase their distributions. What’s the difference? One reason may be the business model employed by Energy Transport. Unlike others, Energy Transport hasn’t used fee-based leasing for its pipelines. This meant no guaranteed cash flow, which in turn, meant higher credit costs. Instead, Energy Transport used an energy sales model and was subject to natural gas prices.
To its credit, Energy Transfer is working on both increasing its distribution and transitioning to a fee-based leasing model. Management seems to understand distributions are important to investors. Management also seems to understand that oil is where the action is at the moment and the Sunoco acquisition gives them exposure to Eagle Ford shale oil. Bear in mind though, while revenues and distributions should increase from all these efforts, they haven’t yet. As I see it, Energy Transfer is late coming to the fee-based business and to oil transport. Investing now is betting that they will successfully make the transition.
Final Foolish Thoughts
Enterprise and Enbridge offer investors stable growing returns. Enbridge looks like a better immediate term income play while Enterprise looks like a better long term total return play. Energy Transfer looks to me like a riskier investment as you’re hoping management pulls off a transition to a different revenue model and the Sunoco acquisition delivers oil related revenue. It may happen, but then again, it may not. For my money, Enbridge or Enterprise are the best investments. In my opinion, Energy Transfer’s place in a portfolio should be a smaller holding hoping for a big turn-around.
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!