Enterprise: Bargain in the Energy Patch

12/08/2015 8:00 am EST

Focus: ENERGY

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Oil prices remain weak at $40 a barrel while supplies are plentiful, but that could change if unrest in the Middle East heats up again, argues Mark Skousen, editor of Forecasts & Strategies.

Meanwhile, Johns Hopkins University economist Steve Hanke predicts that oil will double in price in the next two-to-three years.

Our current strategy is to buy bargains in energy stocks such as Enterprise Products Partners (EPD), which pays a rising 5% dividend.

The Houston-based pipeline company reported third-quarter earnings in November. Most Wall Street analysts expected higher profits (34 cents a share) and revenues ($6.3 billion).

But because it boosted its quarterly cash distribution 5.5% to 38.5 cents per unit, the stock rose on the news.

Most importantly, the distributable cash flow was $970 million—or 1.3 times its dividend payout—a vital indicator of dividend stability.

Enterprise Products deliberately keeps distributions lower than the amount of cash it receives; thus, the company doesn’t have to resort to tapping the equity and debt markets for new sources of capital.

Overall, EPD has one of the strongest balance sheets among master limited partnerships, with a strong investment-grade rating. It has plenty of cash flow to continue to raise its dividend.

And with $8 billion in projects under construction, it is likely to increase its income stream down the road, leading to higher distributions and capital gains.

The worst oil crash in decades has not been kind to independent oil & gas producers, whose stock prices have fallen 70% or more. But Enterprise’s business model is much less risky.

It has the advantage when it comes to being able to grow its payout sustainably during a protracted period of low energy prices. Enterprise has long-term, fixed-fee contracts to ensure recurring and stable cash flows with very little exposure to commodity prices.

It is known for its slow, but steady, record of 45 straight quarterly payout increases. And it has enough free cash to continue to cover its quarterly distributions.

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