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.
Here’s the rub. Even if normal operations resume, low natural gas and natural gas liquids prices will hamper the company’s revenues, a fact acknowledged by management. Further, the company’s cash flow has not covered its distributions and the company has limited cash on hand. Admittedly, the secondary stock offering helped its financial position. However, unless revenues and cash flow improve, funding both its current distributions and ongoing operations could prove difficult.
The ugly
While Eagle Rock had a bad quarter with potential to reverse its fortunes, Penn West Petroleum Ltd (USA) (NYSE:PWE) Exploration has had bad quarters with no reversal of fortunes. The company produces oil and natural gas primarily from western Canada. Since 2011, earnings, revenues and distributions have all declined. For the most recent quarter, production of oil and particularly natural gas declined from the same quarter a year ago. Gross revenue and earnings continued declining. Debt to cash flow runs approximately 3:1 with nothing to show for it.
To its credit, the company completed a strategic review that, among other things, cut the distribution from $0.27 to $0.14 per unit. Penn West Petroleum Ltd (USA) (NYSE:PWE) also announced a 10% reduction in its workforce. A new CEO has been named and insiders are buying stock. Take away problems seem to be disappearing as rail competes with pipelines for oil transportation business. Does this portend a long awaited turn around? Perhaps, but I would wait for tangible results before taking the investment plunge.
Final Foolish thoughts
For safe steady returns, Enterprise Products takes the prize. Its track record, trajectory and business plan all point to continued income and capital gains. Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) presents a dilemma. If the worst of its operational problems are behind it, capital gains and an enviable yield await investors. If the first quarter presages the rest of the year, Eagle Rock investors face distribution cuts and further reduction of their unit’s value. Investing in Eagle Rock is a risky bet management can keep operations online and growing enough to pay for capital and operational expenses while maintaining a hefty distribution.
The article Two Energy Companies to Consider and One to Avoid originally appeared on Fool.com and is written by Robert Zimmerman.
Robert Zimmerman has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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