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Enbridge Energy Remains Neutral

COG EEP

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We have reaffirmed our Neutral recommendation on Enbridge Energy Partners L.P. (EEP - Analyst Report) on January 3, 2013, based on its complimentary position to reap benefits from its partnership’s diversified business portfolio and stable fee-based operating income. However, a depressed natural gas price environment is expected to weigh on the stock. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.

Why Maintained?

Enbridge Energy Partners is a master limited partnership, engaged in the gathering, processing and transmission of natural gas and crude oil. The partnership is best known for its ownership of the Lakehead System, one of the world’s longest petroleum pipeline systems, which transfers over 60% of the Canadian oil output into the U.S. This unique position helps the partnership to capitalize on the growing Canadian oil sands production.

The partnership has more than $3 billion worth of organic growth projects lined up for the next two years, focused on natural gas liquids (NGLs) and crude oil. The projects –majority of which will be productive in 2013 – are driven by the sharp rise in liquids drilling from prolific shale plays in the U.S., including the Bakken Expansion, Border to Flanagan Expansion, Cushing Terminal Expansion and the Texas Express NGL pipeline.

Moreover, the Texas Express Line, expected to come online by second quarter 2014, will facilitate the transfer of additional NGL volume to Mont Belvieu. We believe these projects will lead to distribution growth, which is projected at 2–5%, over the next couple of years.

The partnership’s $1.7 billion capex budget for 2012 mainly comprises 70% Liquids and 30% Natural Gas projects.

However, Enbridge’s midstream natural gas business is sensitive to changes in natural gas supply, demand fundamentals and commodity cycles associated with gas processing margins.

Its Marketing segment reported a loss of $1.2 million in the third quarter due to weak natural gas pricing and narrower natural gas basis differentials. Furthermore, through the expansion of its natural gas gathering and processing business, Enbridge has increased its risk exposure to commodity prices.

No earnings momentum has been witnessed for the stock over the last 7 days for the fourth quarter of 2012 and for the full year 2012. The Zacks Consensus Estimates for the fourth quarter and for the full-year 2012 is currently pegged at 26 cents per share and $1.06 per share, reflecting a year-over-year decrease of 18.8% and 23.7%, respectively.

Other Stocks to Consider

While we prefer to remain on the sidelines for Enbridge, there are other stocks in the sector that appear rewarding. These include Cabot Oil & Gas Corp (COG - Analyst Report) and Lone Pine Resources Inc. , which are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy). 

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