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Enterprise Products: Weathering the Bear

08/13/2015 7:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

The market has struggled during the last couple of weeks and the culprit is obvious: sharply lower oil prices, observes Mark Skousen, editor of High-Income Alert.

This is clearly bad news for oil exploration and production companies that depend on higher prices to protect their profit margins.

Why is cheap oil bad? Bears will say weak demand indicates economic softness overseas. But that’s not the whole story. New technologies—especially horizontal drilling—have created an oil glut in the United States.

And the pending nuclear deal with Iran means millions more gallons soon will hit world markets. This additional supply is putting pressure on prices.

However, lower oil prices are a plus for the thousands of businesses and billions of consumers who depend on it. This short-term negative in the oil patch is a long-term positive.

In short, I remain bullish. And the income ideas below are a great way to take advantage of improving economic fundamentals.

Enterprise Products Partners (EPD) has come off a few % since we got in last month. But part of this is due to the shares going ex-dividend on July 29.

In the most recent quarter, Enterprise, the country’s largest pipeline company, increased gross operating profits to $1.3 billion on revenues of $7.1 billion.

Distributable cash flow increased a modest 2.5% to $1 billion, sufficient to cover the quarterly dividend.

The results were pretty amazing considering that total revenues declined 43% from last year. Fortunately, 85% of its gross margins are set with fixed fee contracts.

In sum, this is how Enterprise Products has weathered the super-bear market storm in energy.

Oil & gas companies have seen their stock prices drop 70% or more in the face of falling oil & gas prices and they largely have been forced to cut or eliminate their dividends. Not Enterprise Products.

In fact, I believe that Enterprise will continue to raise its per unit distributions in 2015. Keep buying.

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