Midstream companies have seen a boom in activities recently that has paid increasing dividends to shareholders. Cash distributions in the industry, however, have not been equal, and some firms have disbursed greater amounts than others. Moreover, financial institutions have highlighted Enbridge Energy Partners (EEP, Financial) as a potential market outperformer, granting the stock a “Buy” rating. Morgan Stanley and Credit Suisse are the two institutions in question, raising the target price to the low $30s, barely above the $29 value assigned by Zacks last month. The upside to this side of the oil and gas industry is cash flow, and high return on capital invested, coupled with a high-yield offering a good opportunity for a long-term investment. But, will the trend last long enough to make the investment worthwhile?
Safe Issues Contradict Analysts’ Opinions
For fiscal year 2013, Enbridge Energy reported a decline in net income. The report manifesting the figure eliminates the impact of: (a) additional environmental costs, net of insurance recoveries, associated with the Line 6B incident; (b) non-cash, mark-to-market net gains and losses; and (c) other adjustments.
Additionally, higher deliveries and associated revenues from the liquids segment were more than offset by the combination of: lower natural gas liquids prices impacting the margins; the inclusion of the deferred distribution of $22.4 million relating to the preferred units issued in the second quarter of 2013; and higher non-controlling interest resulting from the Midcoast Energy Partners LP initial public offering.
In all, Enbridge Energy’s performance throughout 2013 has been disastrous. Moreover, the company’s image has been tarnished by activists who highlighted deficiencies at construction sites, and lack of proper security. Additional protests were carried out by Michigan citizens due to the firm’s plan to expand the pipeline that spilled out into the Kalamazoo River. According to the Environmental Protection Agency, the incident allowed an excess of 1 million U.S. gallons of tar sands to flow in the vicinity of the Talmadge Creek, a contributor of the Kalamazoo River.
Changes in management and a $7 billion replacement plan were announced, but such reforms are to have little effect over Enbridge Energy’s performance. Unlike Cameron International (CAM, Financial) which escaped public outcry related to the Deepwater Horizon, Enbridge Energy has been pointed out and repudiated publically for the pipeline burst. Plans for expansion have only angered the public, after the EPA found that warning signs were ignored and operations continued.
Upside and Downside to an Environmental Crisis
Enbridge Energy holds a diversified business portfolio, stable fee-based operating income and strong liquidity position. Exposure to the Bakken Shale, the Haynesville Shale and Granite Wash is another positive characteristic when looking forward. Most importantly, the firm is committed to returning value to shareholders. The challenge is to sustain such model amid great criticism and continued legal issues related to the last spill.
So far, divestiture of non-core business for raising money have succeeded and Enbridge Energy raised $354.9 million. Additional funds are to be obtained from the sale of its gas business ownership interests to Midcoast Energy Partners. Moreover, great capital investment have been announced on the oil pipeline system. The effort plans to secure the company an access to new markets in North America to grow yield from Western Canada and the Bakken.
Future prospects for Enbridge Energy are good as capital investment continues to find founding. However, its image has been tarnished and remains under heavy public scrutiny, limiting fund raising capacities. More importantly, the U.S. governmental agencies have discovered great irresponsibility over operating safety. That is a strong argument for staying away from this stock when thinking about a long-term investment, especially when the largest shareholder continues to purchase and sell stock in a cyclical manner, while aiming to make profits in the short term.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
