Enterprise Products Partners L.P. (EPD), Eagle Rock Energy Partners, L.P. (EROC): Two Energy Companies to Consider and One to Avoid

For years now, US and Canadian oil and natural gas production not only helped reduce oil imports to the US, but also rewarded their investors. For all the headlines trumpeting increased production, not all energy companies benefit shareholders. Let’s look at three energy companies with different risk and reward profiles.

The good

Without a doubt and by any metric, Enterprise Products Partners L.P. (NYSE:EPD) delivers capital gains and income growth for its investors. Since 2009, the stock climbed from $22 a share to $66 a share and the quarterly distribution climbed from $0.53 a unit to $0.68 a unit. How do they do it? Simply, Enterprise Products Partners L.P. (NYSE:EPD) moves oil, natural gas, natural gas liquids and refined products from production sites to customers. Enterprise Products Partners L.P. (NYSE:EPD) also processes and stores natural gas and natural gas liquids.

The core business is pipeline transport of crude oil, natural gas and natural gas liquids. Enterprise Products Partners L.P. (NYSE:EPD) operates pipelines that connect most major shale gas and oil plays in the US to Gulf Coast refineries. Enterprise Products Partners L.P. (NYSE:EPD) plans to spend $7.5 billion in various capital projects further connecting field production to refineries and other customers. Oil related business will increase in volume as Enterprise Products Partners L.P. (NYSE:EPD) expands towards the Bakken and Rocky Mountain shale plays.

Not content to rely on pipelines, Enterprise recently moved to expand its export capabilities. Leveraging its Gulf Coast operations in Beaumont, Texas and the Houston Ship Channel, Enterprise plans to export refined products worldwide by 2014. The US exports more than 1 million barrels of refined products a day and Enterprise aims to capture a share of that business.

Financially sound, growing revenues and distributions, and expanding operations all make Enterprise a tough investment to beat.

The interesting

The interest comes from the income. A distribution yield of 11% makes Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) a significant cash machine. The company increased its distributions from 2011 through 2012 and has maintained them into the first quarter of 2013. The concern centers on whether the distributions can be sustained and there are some serious reasons to be concerned.

The company’s first quarter 2013 results highlight these concerns. They were bad and Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) management freely admits it. So was that quarter an indicator of things to come? Management, of course, says no. They point to severe weather and the shut down of its Alabama production for unexpected repairs that cost the company almost $6 million. Accounting changes and charges also hit the company, further reducing earnings.