Enbridge Energy Partners May Gain From Keystone's Pain

By Stephen D. Simpson, CFA | March 30, 2012 AAA

Whatever the objections people had to TransCanada's (NYSE:TRP) Keystone XL pipeline, the fact remains that the U.S. needs ways to get more oil from over there (wherever "there" may be) to over here. With its ownership of the U.S. side of one of the largest North American crude oil pipelines and extensive gas gathering operations in Texas, Enbridge Energy Partners (NYSE:EEP) may yet be able to benefit from the situation.
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A Valuable Asset Becoming More Valuable
Key to the stories of Enbridge Energy Partners and parent/general partner Enbridge (NYSE:ENB) is the Enbridge Pipeline System. It includes about 1,200 miles of Canadian pipeline and the Lakehead System - 1,900 miles of U.S. pipeline than can move well over 1 million barrels of oil from oil fields in Western Canada down through Chicago and (through connecting pipelines) on to storage facilities in Oklahoma (Cushing) or along the Great Lakes, up to Montreal.

Not only is this a crown jewel in its own right, with stable regulated cashflows, but it could be even more valuable if TransCanada cannot get approval for its Keystone XL pipeline.

SEE: The Keystone XL Pipeline Explained

Tying into The Bakken
Enbridge Enterprise Partners also stands to gain from the ongoing growth in oil production in North Dakota and Montana's Bakken region. The Enbridge Pipeline System runs by and through North Dakota and it seems like a no-brainer for the company to expand its reach and tie Bakken oil production into its existing infrastructure.

Moreover, this is something that oil producers and customers are likely to support. At present, a lot of Bakken oil production is handled by railroads like Union Pacific (NYSE:UNP) and rail is not nearly as efficient of a means of handling oil as a pipeline.

More Growth on The Drawing Board
During a recent analyst day presentation, EEP management laid out as much as $4 billion in potential organic expansion projects that could be undertaken over the next three years. In addition to the aforementioned expansion in the Bakken, EEP is considering expanding its Clipper and Southern Access assets - a decision that would arguably be much more likely in the wake of the rejection of the Keystone XL plans.

EEP is also looking to continue growing its gas business. While the gas gathering and transport business isn't quite as fundamentally appealing as the oil pipeline business, it could offer more growth - particularly if the company expands into fractionation and continues to build out its natural gas liquids capacity.

Nuts and Bolts
Investors considering EEP need to realize that it is a master limited partnership (MLP) and ownership of MLPs add complexity to tax returns. Much of EEP's distributions are tax-advantaged, but these units are not appropriate for all investors or accounts.

Investors should also note that Enbridge owns about one-quarter of the units, the general partner interest, and holds incentive distribution rights. There is also another aspect to this company in Enbridge Energy Management (NYSE:EEQ); an entity that pays distributions in additional units instead of cash.

SEE: Oil: A Big Investment With Big Tax Breaks

The Bottom Line
Right now, the sell-side is expecting substantial growth in EEP's distributions over the next five years. Although that seems logical given the prospects for the oil pipeline business (and the potential of expanding those assets), investors should note that EEP's recent distribution history is not so great when compared to other MLPs.

If EEP can kick up distribution growth into the mid-to-high single digits over the next five years, these units are certainly worth a look. I would argue that EEP controls better assets than ONEOK Partners (NYSE:OKS) or Energy Transfer Partners (NYSE:ETP), while still offering a healthy yield. MLPs are not for everybody, though, so investors need to consider their tax situation as well as the fundamentals of these companies.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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