Enbridge Struggles to Fix Its Payout Cash Cow

  • Partnership has struggled with concentration in Bakken region
  • Investors waiting for parent company to drop down more assets

Enbridge Inc., the Canadian pipeline giant that dominates crude shipments in North America, has spent most of this year trying to fix its flagship partnership unit. Investors aren’t buying it.

Enbridge Energy Partners LP is trailing all but one of its peers after slashing its distribution nearly in half and giving shareholders little hope that the payout will rebound much anytime soon. The master-limited partnership has been dogged by troubled businesses and project delays. The cut in its dividend -- the main reason investors are drawn to MLPs in the first place -- was the “death knell” for the stock, Bloomberg Intelligence analyst Michael Kay said.

“Now it’s kind of a wait-and-see game with them,” Kay said. “Where will they find new avenues of growth over the next year or so in order to propel the stock?”

The woes are extending a fall from grace that started in 2015 after the energy price crash spilled over to the pipeline business as customers shipped less crude and natural gas. With Enbridge taking a breather from a years-long acquisition spree that made it the world’s top pipeline company by market value, it will take some doing to persuade investors of its Houston-based MLP’s growth potential.

The expectation of a distribution cut, announced earlier this year as a tactic the company was considering to stabilize the unit, sent the shares down 18 percent in a day. That fear was confirmed in May, when the payout was slashed by 40 percent and the MLP’s troubled Midcoast business was sold to the parent company.

Those moves may have solved the worst of the partnership’s cash crunch, but they haven’t given investors hope that it can ramp up its payout back to former levels anytime soon. With natural gas prices still down more than a third from three years ago, Enbridge Energy Partners may be able to do little but wait until it can afford to boost its stakes in some of its parent company’s projects, Kay said.

The company also got hit by delays on the proposed Sandpiper Pipeline and the Line 3 replacement.

The partnership’s shares fell 37 percent this year through Thursday, the second-biggest decline in the 43-company Alerian MLP Index. The index as a whole dropped 7.2 percent, compared with an 8.7 percent gain for the Standard & Poor’s 500 Index.

Master-limited partnerships are publicly traded entities, typically operating in real estate, natural resources and commodities, that aren’t taxed on their earnings and pay out a large chunk of their profit to their investors in the form of distributions.

Along with the dividend cut, Enbridge Energy Partners also undertook other actions to improve its financial position. A strategic review ended in April with Enbridge agreeing to buy Midcoast, a struggling natural gas gathering unit, for $1.31 billion in cash, and announcing $1.6 billion in options for the partnership to boost its stakes in the Bakken System Pipeline, the Line 3 Replacement and the Mainline Expansion project.

‘Pure-Play’

Enbridge Energy Partners President Mark Maki said on a conference call after that announcement that the moves transformed the company into a stable, pure-play liquids MLP.

“These actions have positioned Enbridge Energy Partners to generate transparent and highly reliable distributable cash flow growth from its low-risk asset base,” Maki said later in an e-mailed statement.

Enbridge Energy Partners may exercise the Bakken option late this year or early 2018, followed by the Line 3 and Mainline options in 2019, TJ Schultz, an analyst at RBC Capital Markets, said in a note after the parent company concluded its strategic review. Those actions should help the company achieve its target of increasing distributable cash flow by 3 percent a year, he said.

But to entice investors, Enbridge will need to signal to the market that it will be more aggressive in providing the partnership with opportunities for growth, Schultz said.

“Enbridge needs to show a willingness to commit to dropping assets to Enbridge Energy Partners,” Schultz said.

The partnership is currently trading with an estimated dividend yield of about 10 percent. That’s the fourth-highest in a group of 16 peers assigned by Bloomberg Intelligence. Such a high yield, even after the announced distribution cut, shows investors are still wary of the stock and may indicate some fear that the distribution may fall even farther, Kay said.

“The market is signaling that they don’t think it’s enough,” Kay said. “Or they’re waiting for some sort of catalyst.”

Enbridge Energy Partners has said that its restructuring gives it a conservative financial profile that will safely enable it to fund its distributions. The partnership also forecasts that it can increase distributable cash flow per unit by about 3 percent a year through 2020 and that its payout growth will roughly track those gains.

“Distribution increases will be considered as Enbridge Energy Partners’ secured growth projects and investments are executed over the next two to three years,” Maki said.

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