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MLP Portfolio in Review

By Roger S. Conrad on Jun. 4, 2015

When we first highlighted Enbridge Energy Partners LP’s turnaround story after the National Association of Publicly Traded Partnership’s 2013 MLP investor conference, the stock had zero Buy ratings from the analyst community.

The market has caught on to the changes underway at the partnership. Not only has the stock generated a 37 percent total return since we launched the MLP Portfolio in November 2013, but the units have also held their value exceptionally well in a challenging market.

We see more upside to come, fueled by a pipeline of low-risk growth projects and drop-down transactions from its general partner, Canadian midstream giant Enbridge (TSX: ENB, NYSE: ENB).

At the NAPTP’s recent investor conference, CEO Mark Maki indicated that Enbridge would announce its plans for transferring its US oil infrastructure to the MLP in July—potentially a major upside catalyst for the stock and drive distribution growth.

Management’s initial guidance for 2015 calls for the between $900 million and $960 million in distributable cash flow—an 11 percent to 18 percent increase from the prior year. This forecast implies distribution growth of 2 percent to 5 percent and coverage of 110 percent to 120 percent on a cash basis and 90 percent to 96 percent if you include paid-in-kind units.

Overall, management expects volume growth of 10 percent on its liquids systems, fueled by a full year’s contribution from last year’s project start-ups and customers’ growing preference for pipeline transportation over rail in the Bakken Shale.

Enbridge Energy Partners will also bring onstream three pipeline projects this year, which should help to bolster volumes and cash flow in the back half of 2015.

Regulatory issues in Minnesota have delayed Enbridge Energy Partners’ Sandpiper Pipeline until 2017. This joint venture with anchor shipper Marathon Petroleum Corp (NYSE: MPC) will transport crude oil from the Bakken Shale to the Midwest .

And lower prices for natural gas liquids (NGL) present a headwind for Midcoast Energy Partners LP (NYSE: MEP), an MLP that Enbridge Energy Partners created to monetize its gas-related infrastructure and raise low-cost capital to help fund its own growth projects.

Enbidge Energy Partners plans to drop down all its equity interest in its gas business to Midcoast Energy Partners by the end of 2017. However, as Midcoast Energy Partners’ general partner, Enbridge Energy Partners’ cash flow still has some exposure to NGL prices. The parent may also need to lower the prices on future drop-down transactions.

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