We are maintaining our Neutral recommendation on Enbridge Energy Partners, L.P. (EEP), given its fee-based and diversified businesses, along with its increased exposure to the Bakken Shale, the Haynesville Shale and Granite Wash.

This is partially offset by the lower-than-expected results in the fourth quarter of 2010.

Enbridge is engaged in the gathering, processing and transmission of natural gas and crude oil and is best known for its ownership of the Lakehead System, one of the world’s longest petroleum pipeline systems. The partnership’s focus on fee-based and diversified businesses has enabled it to dilute its business risks, as well as provide a stable and steadily growing earnings profile.

We also remain positive on Enbridge given its increased exposure to the Bakken Shale, the Haynesville Shale and Granite Wash. For this year, we expect that the partnership’s Liquids segment should benefit from rising volume stemming from the Bakken Shale and Canadian Oil Sands regions.

Importantly, despite the Line 6A & 6B pipeline oil spills, Enbridge maintained its quarterly distribution rate at $1.0275 per unit during the fourth quarter, or $4.11 per unit annualized. An improving macro environment and growth projects in the emerging resource plays with favorable natural gas liquid (NGL) fundamentals have helped the partnership to retain its long-term distribution growth rate at 2%–5%.

Besides, Enbridge’s September 2010 acquisition of Elk City Gathering and Processing System for $682 million will expand the partnership’s exposure in the liquids-rich Granite Wash region.

However, we remain on the sidelines given Enbridge’s lower-than-expected fourth-quarter 2010 results attributable to higher operating costs in liquids and natural gas segments. These were countered partially by additional revenues from liquid pipelines resulting from the incremental volumes and rates associated with Alberta Clipper and North Dakota expansions.

Notably, Enbridge’s cash distribution growth profile does not compare favorably with the other players in the master limited partnership (MLP) space, reflected in its discounted valuation. Additionally, spills on lines 6A and 6B are expected to wrought earnings volatility over the next few quarters and may delay cash distribution growth.

The Houston-based partnership expects 2011 organic capital spending of $1.14 billion, 61% of which comprises liquid-rich projects and the remaining 39% Natural Gas projects. Although the partnership’s organic capex guidance remains encouraging for 2011, it expects its maintenance capital outlay to nearly double to $120 million in 2011 from $66 million in 2010, largely due to pipeline integrity spending.

Taking into account the aforesaid factors, we expect Enbridge to perform in line with the broader market exemplified by its Zacks #3 Rank, equivalent to a short-term Hold rating. Enbridge competes with Enterprise Products Partners LP (EPD), Kinder Morgan Energy Partners L.P. (KMP) and Energy Transfer Partners (ETP).

 
ENBRIDGE EGY PT (EEP): Free Stock Analysis Report
 
ENTERPRISE PROD (EPD): Free Stock Analysis Report
 
ENERGY TRAN PTR (ETP): Free Stock Analysis Report
 
KINDER MORG ENG (KMP): Free Stock Analysis Report
 
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