Elliott Gue is a long-standing investment expert in the energy sector. Here, in his Energy & Income Advisor, he reviews two midstream energy stocks that continue to earn his buy rating.
The decision by Enterprise Products Partners (EPD) to cancel its planned Midland-ECHO oil pipeline in Texas is the latest sign of scaled back midstream capital spending to reflect reduced prospects for drilling.
Ironically, the financial impact on Enterprise from this move should be positive, despite the $45 million impairment charge management plans to take against Q3 earnings.
That’s because it will result in reduced legal and regulatory risk as well as $800 million lower CAPEX through 2022, which will lift free cash flow needed to pay dividends.
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Canceling Midland-ECHO will reduce cash flow growth anticipated for 2022-23, when the pipeline had been expected to enter service. But yielding more than 10 percent, units are pretty much pricing in zero growth in any case.
And fewer new pipelines coming on stream in the next few years will only make existing infrastructure more valuable when the cycle turns higher again. Enterprise is still a buy.
Energy Transfer LP (ET) still expects to increase the capacity of its Dakota Access pipeline system (DAPL) to 570,000 barrels a day by Q3 of 2021.
That’s despite the continuing court battle to reverse a judge’s order earlier this year to shut the entire system pending the reissue of a U.S Army Corps of Engineers permit. Our view is the company and its partners will ultimately succeed in keeping DAPL open.
Meanwhile, management announced the completion of a 400,000-barrel per day expansion of its Lone Star Express Pipeline to move natural gas liquids from the Permian Basin. And it appeared to reach an accord with Pennsylvania regulators to re-route its Mariner East 2 NGLs pipeline project.
The situation with DAPL is far from certain and the company is facing efforts from some customers to walk away from contracts. But from a current price of 83 percent of book value and a yield higher than 20 percent, we still see more upside than downside for aggressive investors.
The company is still apparently able to bring new projects on stream, as it winds down what has been a robust multi-year CAPEX program. On track to generate positive free cash flow next year after all spending and dividends, Energy Transfer is still a buy for those who don’t already own it.