Enbridge: 2 ways to play pipelines

Investors can buy the Canadian operator or its high-yielding American MLP.

By TheStockAdvisors Aug 7, 2012 9:50AM

By Lou Gagliardi, Cabot Global Energy Investor


In this chaotic market, search for stocks with high dividend yields, low short-selling interest, good growth prospects and strong balance sheets.


For long-term investors I recommend Canadian pipeline company Enbridge Inc. (ENB) as well as its U.S. master limited partnership affiliate Enbridge Energy Partners (EEP).


Enbridge serves as the general partner to Enbridge Energy Partners with a roughly 23% ownership interest.


I like energy infrastructure because it is in limited supply, and ENB is a good pick in this sector. ENB has relatively low short interest and a good dividend yield of 2.9%. Since 1995, it has traded fairly consistently above its 200-day moving average in an almost upward vertical slope.


Debt interest coverage stands at a reasonable 3.6 multiple. Although the stock is roughly 6% off its 52-week high, it trades in a narrow 38% above its 52-week.


Enbridge Energy Partners is the largest transporter of Canadian oil imported into the U.S. from western Canada. It also moves crude from North Dakota into the Midwest.


The company owns a significant amount of crude oil storage capacity and significant natural gas gathering, transmission and processing facilities.


Both ENB and EEP hit a speed bump with the announcement that the latter had lowered its full-year 2012 forecast to account for timid natural gas prices. The company also intends to reduce spending in its natural gas business.


The good news is that the bad news is now in the price, and EEP sports a dividend yield of 7.1%. The company believes it can grow its distribution by between 2% and 5%.


Short interest is very low, and debt coverage stands at a modest 2.4 multiple. The stock also trades in a narrow range at roughly 12% off its 52-week high and 21% above its 52-week low.


I recommend buying both Enbridge and Enbridge Energy Partners. The stock profile of ENB is less erratic than EEP's, having increased at a compound annual rate of 37% since July 2009.


EEP increased at a compound annual rate of 24% over the same period, and its dividend yield is too good to pass up. It has very good growth prospects and is a 50% owner, with Enterprise Product Partners, of the Seaway Pipeline that is transporting crude from Cushing, Okla., to Gulf refineries.


My six-month price target for ENB is $45 per share. For EEP, my target is $34-$35. Start with small purchases now and look to buy more on pullbacks toward support, particularly if crude prices soften. Invest for the long term and be patient.


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