Kinder Morgan Energy Partners LP (KMP), Enbridge Energy Partners, L.P. (EEP), Union Pacific Corporation (UNP): Do Rails Trump Pipelines?

Editor’s Note: The initial article stated Phillips 66 signed a five-year contract with Union Pacific to deliver crude from the Bakken. That was incorrect; the contract was with Global Partners. This article has been amended.

A couple of high-profile project cancellations have raised questions over the attractiveness of crude oil and liquid petroleum pipeline companies such as Enbridge Energy Partners, L.P. (NYSE:EEP) and Kinder Morgan Energy Partners LP (NYSE:KMP) , while making a strong case for rail haulage companies like Union Pacific Corporation (NYSE:UNP). Here is a closer look at all three.

Kinder Morgan Energy Partners LP (NYSE:KMP)

Kinder Morgan announcement

Earlier this month, after major West Coast refiners said they were not interested in taking oil from Kinder Morgan Energy Partners LP (NYSE:KMP)’s proposed Freedom pipeline, Kinder Morgan Energy Partners LP (NYSE:KMP) announced that it would not move forward with the project, which would ship oil from the Permian Basin shale play in Texas to refineries in Southern California. This comes as a major blow to the $2 billion project announced last October. The company is now forced to explore the higher-cost rail transport method. Understandably the announcement had a negative impact, though not very high, knocking off a couple of percentage points.

Kinder Morgan Energy Partners LP (NYSE:KMP) is a large company, and its stock is not driven by an announcement of a project getting slightly derailed, but this small speed bump does allow for good entry points in this high-growth stocks. Kinder Morgan has corrected from its 52 week high of $91.6 in April to $85 but has a target of $102 from Deutsche Bank. Kinder Morgan Energy Partners LP (NYSE:KMP)’s forward price earnings ratio of 29.6 is slightly on higher side but offers strong future prospects with an excellent dividend yield of 6%.

Similarly, Enbridge Energy Partners, L.P. (NYSE:EEP) faced a major setback for its $2.5 billion sandpiper pipeline project when the U.S. Federal Energy Regulatory Commission (FERC) rejected the company’s application for approval of a toll agreement. The 600 km pipeline would have linked the prolific Bakken Shale in North Dakota to a refining capacity in the U.S. Midwestern state of Minnesota. The FERC decision does not reject the project, but it has effectively pushed back the pipeline’s start-up target of early 2016, as Enbridge Energy Partners, L.P. (NYSE:EEP) will now have to look into alternative ways of financing the project. Like Kinder Morgan Energy Partners LP (NYSE:KMP), Enbridge Energy Partners, L.P. (NYSE:EEP) is a big company with a market capitalization of $9.3 billion and remains unfazed by these small setbacks but the development has certainly taken some sheen off this stock, which has gained less than 5 % over the last quarter, thus underperforming the markets. The loss in stock price is compensated by the boost in dividend yield. At $29.60, it offers a yield of 7.3% while its fundamentals are still strong. A forward price-earnings ratio of 23.3 and a debt gearing of 1.37 indicate that the stock is in line with market valuations.