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Energy Stocks

Oil and Dividends

By Roger S. Conrad, on Feb. 6, 2015

When we first added Enbridge Energy Partners to the Lifelong Income Portfolio, the stock had zero Buy ratings from the analyst community.

The market has caught on to the changes under way at the partnership. Not only has the stock generated an almost 43 percent total return since July 2013, but the units have also held their value exceptionally well in a challenging market.

We see more upside to come, fueled by a pipeline of low-risk growth projects and drop-down transactions from its general partner, Canadian midstream giant Enbridge (TSX: ENB, NYSE: ENB).

Last year, Enbridge Energy Partners completed about $2 billion worth of liquids pipeline projects, resumed distribution growth in the second quarter and in December came to terms with its general partner on the drop-down of the Alberta Clipper Pipeline.

These developments prompted management to increase the MLP’s first distribution in 2015 by 3 percent.

Next year, Enbridge Energy Partners has three major pipeline projects slated to come onstream, while Enbridge continues to evaluate the best schedule for dropping down its more than US$10 billion worth of US liquids pipelines to the MLP.

Enbridge Energy Partners’ sister company, Enbridge Income Fund (TSX: ENF, OTC: EBGUF), which we hold in Energy & Income Advisor’s International Portfolio, has rallied more than 65 percent in US dollar terms since the end of last year’s second quarter. The primary upside catalyst: A plan for Enbridge to drop down CA$17 billion worth of assets to the fund.

We expect Enbridge Energy Partners to enjoy a similar pop once its sponsor finalizes plans to drop down its US assets to the MLP.

The partnership will announce 2015 guidance when it reports fourth-quarter results on Feb. 19; there’s a good chance management will take this opportunity to highlight Enbridge’s strategy for dropping down its US liquids pipelines—a major upside catalyst.

Meanwhile, the severe downdraft in crude-oil prices has increased the appeal of Enbridge Energy Partners’ Lakehead and North Dakota pipeline systems to producers in the Bakken Shale; both should enjoy solid throughput growth in 2015.

But lower NGL prices present a headwind for Midcoast Energy Partners LP (NYSE: MEP), an MLP that Enbridge Energy Partners created to monetize its gas-related infrastructure and raise low-cost capital to help fund its own growth projects.

Enbridge Energy Partners plans to drop down all its equity interest in its gas business to Midcoast Energy Partners by the end of 2017. However, as Midcoast Energy Partners’ general partner, Enbridge Energy Partners’ cash flow still has some exposure to NGL prices. The parent may also need to lower the prices on future drop-down transactions.

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