Enterprise Products Partners (EPD) has no real catalyst for price growth in the near term but has a few projects in the works to generate nice cash flow for the future. Could make a good long term investment with risk but also invites an opportunity for a short term income play.
The signs of a tough 2013 ahead continue to be revealed through these 3rd quarter earnings and those of EPD support this. In the typical fashion of the average company, Enterprise Products beat analyst earnings estimates by $0.06 but fell short on revenue. A drop in total costs and expenses (down almost 9% year over year) also supported growth in the quarter. However, revenues in the quarter declined nearly 8% year over year. It recorded $10.47 million while the market anticipated $11.22 million. What's the reason given for this-lower commodity prices. In the past year EPD has beat the expectations every quarter but it's the revenue that is a concern. Companies can continue to cut spending and get as lean as they possibly can, but eventually earnings have to level out and come back to reality. When there is no more blood to squeeze from the turnip, that's it! One can only raise earnings so long and then it has to correct to what revenue is really like.
Pros & Cons of Investing in EPD Long Term
In terms of long term investments and planning, I like the company. It has projects in the works worth over $4 billion which include:
- Two processing trains at its Yoakum natural gas plant
- The fifth NGL fractionator at Mont Belvieu
- The extension of the Acadian Haynesville
- The Seaway crude oil pipeline reversal
The Eagle Ford natural gas, NGL and crude pipelines are expected to increase in volume over the next couple years. With the possible boost in cash flow from these projects Enterprise Products should be able to provide solid cash flow into the future. What could stifle this from taking place? The instability of gas and oil price is always a challenge in keeping healthy margins in this industry. So investing long term in the company for growth depends upon the gas and oil industry as a whole, but the company looks like it is well on its way for growth.
Since mid July of 2012, EPD has been in a trading channel that has moved very little. From a low of about 51.7 to a high of 54.4, the stock has continued to move between the both numbers but even tighter together than that! So what is happening with this stock? Will it continue to move sideways or will it make a turn one way or the other? Observing the RSI indicator since the stock started to move in this range, I observe e progressive weakness. This is supported by the MACD indicator. The slight downward trend in the RSI reveals weakness. This is not abnormal when the stock moves sideways for a period of time. SO this is not to say that the next move will be down, but it does reveal a bearish lean. And with the MACD continuing down, I like to see it stay progressively higher in the bullish realm but we do not see that going on here. The Bollinger bands have become inconsequential since they have been so tight for so long. I observe sideways movement with a bearish flavor.
The Options Play
The stock is presently trading at 53.34 and I believe it may continue in a slight bearish pattern but very slow-at least for the short term. If I am going to create a short term income strategy, I would lean toward the bearish side. I would straight up buy a put option expiring in January.
- Buy a January 2013 put with a strike of "52.50' (priced at $1.25)
- Net debit to start: $1.25
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Stock has a bearish lean in this tight channel.
- Missed revenue is an impediment to a bullish catalyst.
- The option chosen is on the lower end (but inside) the trading channel.