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Low Natural Gas Prices a Boon for Enterprise

|Includes: CHK, EOG, Enterprise Products Partners L.P (EPD), EPE, RRC

You wouldn't need to read Enterprise Product Partners (NYSE:EPD) conference call transcript to know that they are having a great year, all you would have to do is look at the chart.  The stock closed just off a new 52-week high today, after setting the new high intraday.  The glut of Natural gas from US shale has collapsed prices, hurting the short term forecasts of producers like CHK, RRC, and EOG among others, the low prices are spurring tons of activity in the pipelines EPD runs.  CEO Mike Creel mentioned that the quarter's profit was

"supported by record natural gas transportation volumes and near record NGL, crude oil, refined products and petrochemical pipeline volumes."

The transcript goes on to explain that, because the leases the E&P companies signed require them to continue to drill, there should be no decrease in activity on the pipelines.  About the acreage, he says

" it’s the discretionary gas that has to continue to be drilled to hold this acreage or these creatures have to walk away from the acreage. So, they are going to lie on the street or they are going to perform, and that’s the wild card. So, the next 12 to 18 months, we think they are going to continue to drill and in and around our assets, we are just having a rig count of north of 50. So, we are very comfortable with where they are at, and the key producers that we deal with, are all telling us the 12 to 18 month inventory to hold the acreage."

He goes on to say that all the joint ventures formed with foreign companies changes the cost structure and allows the E&P companies to support drilling, and that Enterprise is positioning its assets (pipelines) to benefit from this.

All that being said, I like EPD for the very long term, with its strong backlog, strong history of dividend growth, and solid distribution coverage of 1.4 times.  My only concern is that with the price up here near $43, the yield is down to 5.5%, which is no longer as attractive as it once was.  Also, MLPs tend to issue stock to pay for new construction projects, and with the stock up here it seems logical management will tap the equity markets to raise funds.  I believe a prudent investor will pounce on the 3-4% drop the stock takes on this offer, and begin to build a position.  A similar strategy could be to get long EPE , since EPD will be taking over EPE in an all stock deal before the end of the year.

Disclosure: Long EPD and EPE

Disclosure: EPD EPE NRGY