Enbridge Energy Partners - Reliable Dividend Yield Of Almost 10%

| About: Enbridge Inc. (ENB)
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Summary

Enbridge Energy Partners has seen its equity price take a big hit in the past year despite the fact that it has been increasing its dividends.

The company took a $20 million hit from the Alberta Oil Sand fires but now expects volume to recover which should help its future earnings.

The company's capex program should allow it to expand its earnings with its reliable investment grade customers in the coming quarters.

Introduction

Enbridge Energy Partners (NYSE: EEP) is an energy company based in Calgary, Canada that focuses on the transportation and generation of energy across North America. The company operates Canada's largest natural gas distribution network making it highly reliant on Canada's growing natural gas market and is continuing to rapidly expand in the North American midstream market.

Enbridge Energy Partners Pipeline - Calgary Herald

Enbridge Energy Partners stock price has tracked that of other major midstream companies since the start of the oil crash. The company saw its stock price remain fairly constant until mid-2015 when its share price began falling from $38 in May 2015 down to less than $15 per share in January 2016 when oil prices then dropped to less than $30 per barrel.

Since then, the company's stock price has partially recovered and it currently is trading at just over $23.5 per share. Throughout the crash, the company has continued to build its dividend increasing it by almost 10% from the start of the oil crash from $0.54 / quarter to $0.58 / quarter. The company's present dividend provides investors with a very respectable yield of almost 10% annually for a strong midstream company.

Line 6B Update

One of the big updates for Enbridge Energy Partners that helps to increase the relative security of the stock is its settlement with both the U.S. Department of Justice and Environmental Protection Agency on the Line 6A and 6B pipeline spills that occurred in 2010.

The details of the agreement are as follows. The company will be paying $62 million in the coming weeks to the U.S. government under the Clean Water Act. At the same time, the company has been significantly improving the safety measures of its pipelines for an expected annual cost of $28 million per year that has already been built into its spending plans.

Lastly, and most expensive, Enbridge Energy Partners replaced the entire 285-mile length of Line 6B in 2014 for a total cost of roughly $2.6 billion. This is a very high cost but it means that Line 6B will be able to move oil for decades to come and will generate Enbridge Energy Partners many millions in cash flow for the coming years. This cash flow from a young pipeline will help Enbridge Energy Partners to support its dividend.

Market Demand

Now that we have an overview of Enbridge Energy Partners' Line 6B update, it is now time to discuss the overall market demand that will drive Enbridge Energy Partners' growth in the coming years.

Enbridge Energy Partners Supply Growth - Enbridge Energy Partners Investor Presentation

The above image shows the growth in crude supply in Western Canada along with the capacity for moving this oil around. As you can see, for the next year or so, the pipeline supply overwhelms the demand. However, this is expected to change in the coming years and over the next eight years after that, the supply shortfall is expected to become 500 thousand or more barrels per day. Enbridge Energy Partners as the prime operator in this region has the ability to take advantage of this capacity shortfall.

Enbridge Energy Partners Key Markets Served - Enbridge Energy Partners Investor Presentation

The above image shows the key markets served by the Enbridge system. As you can see, Enbridge dominates the Canadian markets but as you move further South into the larger markets (the circle area represents the market size), Enbridge's market position gets worse. However, the company's dominance in the northern markets will give it a strong position to slowly expand southwards.

And there are a number of potential paths for this expansion. As you can see in the images gray represents Canadian companies except for Enbridge. Enbridge could expand south by acquiring these companies or acquire these companies to cement its position in the northern markets. Americans are very proud of American companies providing American oil infrastructure and by acquiring Canadian companies with assets to the south, Enbridge will not have to worry about having to "steal" the market from American companies.

Financial Summary

Now that we have an overview of the market demand including increasing oil supply from Canada along with Enbridge's potential avenue for expansion to larger markets in the South, it is time to look over Enbridge's financial results.

Enbridge Energy Partners Adjusted EBITDA - Enbridge Energy Partners Investor Presentation

The above image shows Enbridge Energy Partners 2Q 2016 financial results. The company had adjusted EBITDA of $490 million up 16% year over year and resulting in $263 million in distributable cash flow. This distributable cash flow was enough for the company to cover its entire dividend yielding almost 10%. However, the company watched its Debt / EBITDA ratio increase to 4.6x placing it in a financially worse position should the crash worsen.

More importantly, the company's earnings were in spite of the Alberta wildfires which had a $20 million impact in the 2Q. Assuming that this hurt the company's EBITDA and taking account the company's distributable cash flow / adjusted EBITDA ratio of 0.54 that means the company's distributable cash flow could have been even higher by $11 million improving the company's coverage ratio to a more secure 1.05x.

The above image of the company's 2Q 2016 financial results helps provide an overview of Enbridge Energy Partners is a good investment. In spite of rapidly falling oil prices the company's market leading position meant that it was able to increase its distributable cash flow by roughly 15% (more than 20% not counting the Alberta wildfires). This significant increase in earnings means the company will be able to maintain its dividend yield of almost 10%.

Operations and Investments

Now that we have a strong overview of the market demand and have discussed the company's 2Q 2016 financial results, it is now time to discuss the company's operations and investments.

Enbridge Energy Partners Deliveries - Enbridge Energy Partners Investor Presentation

The above image shows the volumes that Enbridge Energy Partners has been moving around on a daily basis each quarter. As you can see, mainly from the Lakehead pipeline, the company's volumes have been expanding significantly. The Alberta wildfires impacted deliveries by 0.255 million barrels per day significantly hurting the average for the quarter but that issue has since resolved itself.

Enbridge Energy Partners has shown a strong ability to grow production since the start of the oil crash. These continued deliveries mean that the company's earnings will continue to remain strong which in turn will allow it to continue to pay out its dividend. And when volumes recover going into the 3Q and 4Q 2016, the company's earnings will increase again and the company's distribution coverage on its dividend of almost 10% will once again comfortable be over 1.

Enbridge Energy Partners 2016 Capital Plan - Enbridge Energy Partners Investor Presentation

And the company's capital investment into future growth is continuing to remain strong. The company's 2016 capital plan of $885 million comes out to $221 million per quarter which will allow it to expand a number of its major projects. Out of these capex expenses, the company's earnings are enough to cover them but the company also has more than $1 billion in liquidity after a $0.75 billion one year credit facility with Enbridge (NYSE: ENB).

Enbridge Energy Partners Cash Flows - Enbridge Energy Partners Investor Presentation

And the best part of the company's capital program is the reliability of future earnings this capex produces. Less than 5% of the company's cash flows are subject to direct commodity exposure with the vast majority of the company's earnings coming from investment grade companies. The number on risk to the company in fact comes from companies going out of business and not being able to pay their contracts, otherwise they are reliant on Enbridge Energy Partners to move the oil they produce. This means as Enbridge builds new pipelines and expands it can reliably increase its cash flow.

Conclusion

Enbridge Energy Partners has had a difficult time since mid-2015 like all other midstream crashes. This difficulty occurred as it became obvious that the oil crash would be drawn out and as a result that there was a real risk of customers that were originally bound to contracts going bankrupt and not being able to provide the reliable cash flow these midstream producers used for their dividends.

Despite this, Enbridge Energy Partners has managed to consistently improve its earnings and has been steadily improving its cash flow. The company has gone back to coverage of >1.00 on its dividend which now provides investors with a reliable dividend yield of almost 10% and this was in-spite of the Alberta Oil Sand fires during the quarter.

As a result, I recommend all investors looking for a reliable dividend yield invest in Enbridge Energy Partners at the present time.

Disclosure: I am/we are long EEP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.