Enterprise Products Partners (EPD) is a North American midstream energy company providing a range of services to producers and consumers of natural gas, natural gas liquids, crude oil, and certain petrochemicals. It is also engaged in the development of pipeline and other midstream energy infrastructure in the continental United States and Gulf of Mexico.
Since much of the company's revenue comes from the oil industry, the stock has not fared well like many of the major oil producers and it will take time to turn things around for the economy. But this does offer us a nice stable income opportunity through the summer.
This company is a great candidate for income investors as it boasts a forward dividend of 5.4%, but the value of the stock continues to decline. I believe we will continue to see this for awhile longer. The stock peaked for the year in early May just under '$53', but has really been hit hard like many other stocks last month. Presently it is trading at $47.83 - almost 20% off its recent high.
It started well through the gate, but the oil segments have just eaten the company alive as of late. The Petrochemical & Refined Product Services and Offshore Pipelines & Services have both been hit hard. The gross margin of its Petrochemical & Refined Products segment decreased almost 13% year over year in the first quarter. Offshore Pipelines & Services saw the same decrease in gross margin in the first quarter. Struggling to maintain a profit, it has continually been battered by an overall decrease in offshore natural gas and crude oil pipeline volumes owing to lesser exploration and development operations in the Gulf of Mexico region.
Why has this been the case?
Ongoing federal regulatory issues regarding offshore drilling is the culprit. If this is the case, then we could still see downside in this sector through till the election. Getting permits are notoriously slow. The Obama administration lifted a deep-water drilling ban imposed in response to the Gulf oil spill over a year ago, but the offshore energy industry cannot find its footing.
Finger pointing leads to politically-based decisions to draw out the permit process to unreasonable lengths of time. A parade of executives from companies whose fortunes are tied to offshore drilling told the House Natural Resource Committee that they have to spend too much time and effort to win Interior Department approval to drill new wells and plug old ones. It has been described as unduly difficult, time-consuming and unnecessarily contentious.
With the political landscape like it is now and the slow global economy, I do not expect the stock to find a catalyst to move way up. For this reason, I am viewing this stock as a short-term income play, instead of a long-term investment at the moment.
The Options Play
- Buy the July 2012 put with a strike of '32.50' (priced at $1.10)
- Sell the July 2012 put with a strike of '30.00' (priced at $0.20)
- Net Debit to Start: $0.80
- Maximum Profit: $1.70
- Risk: Net Debit
- Length of Trade: 8 weeks
Reasoning behind the Trade
- EPD is heavy into natural gas and that is not coming around any time soon so it remains bearish.
- Oil & Gas remain bearish since it is overly supplied at the moment.
- Services in these sectors will continue to struggle and there is nothing motivating a turnaround.