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Coverage Review

By Peter Staas on Apr. 10, 2013

Chevron Corp (NYSE: CVX)

Investment Summary: The world’s third-largest integrated oil company by market capitalization, Chevron Corp generated about 90 percent of its 2012 net income from its upstream operations, with the downstream segment accounting for the remainder. During the firm’s 2012 analyst meeting, management once again reaffirmed the company’s long-standing target of expanding production to 3.3 million barrels of oil equivalent per day by 2017 and noted that projects accounting for 90 percent of this growth are currently under construction. We like the company’s strategy of developing an opportunity set of “legacy” assets—low-cost, long-lived reserves that can be exploited over an extended time frame. The energy behemoth also has 13 major capital projects slated to come onstream between 2017 and 2022. With relatively low production costs, a bulletproof balance sheet, a history of intelligently allocating capital and a long track record of shareholder friendly buybacks and dividend increases, Chevron remains our preferred North America-based Super Oil.

Recent Developments: Chevron Corp in 2012 demonstrated why the company remains a foundational holding for any energy-focused investment portfolio, increasing its dividend by 11 percent and repurchase $5 billion worth of shares. Although firm exited 2012 with lower average production because of the delayed start-up of Angola LNG export facility, management reaffirmed that the company should have no problems meeting its 2017 target for output growth. Buy Chevron Corp when the stock dips to less than $115 per share.

Enterprise Products Partners LP (NYSE: EPD)

Investment Summary: The largest master limited partnership (MLP) by market capitalization, Enterprise Products Partners LP has amassed an unparalleled portfolio of energy-related assets throughout the midstream value chain and in the nation’s most exciting unconventional oil and gas plays. The breadth and diversity of the MLP’s asset base, coupled with an emphasis on fee-generating contracts, provide a degree of insulation against weakness in any particular segment. Enterprise Products Partners’ defensive qualities were on full display in the third and fourth quarters of 2012, when plummeting ethane and propane prices had scant effect on the blue-chip MLP’s distributable cash flow. With a $7 billion backlog of growth projects, a low cost of capital and a prescient management team that consistently ferrets out new opportunities, Enterprise Products Partners should continue its track record of steady distribution growth and remains our favorite infrastructure play on the US shale oil and gas revolution.

Recent Developments: Enterprise Products Partners posted fourth-quarter gross operating margins that were roughly in line with year-ago levels, as weakness in the MLP’s gas-processing margins and equity volumes of natural gas liquids (NGL) weighed on results. That being said, the partnership covered enough cash flow to cover its fourth-quarter payout by 150 percent. Enterprise Products Partners has also announced that the MLP has completed the expansion of its propane export capacity to 7.5 million barrels per month from 4 million barrels per month–a development that should relieve some of the pressure from depressed propane prices. Management is contemplating the addition of another 2.5 million barrels per month of export capacity. Other recently announced projects include an ethane pipeline system that will transmit the NGL from Mont Belvieu to petrochemical plants throughout the Gulf Coast and an open season for a pipeline that would transport condensate from the Gulf Coast to the Midwest. Buy Enterprise Products Partners LP when the stock dips to less than $54 per unit.

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