The “units” have been extremely popular with income-oriented investors as investors look for high cash flow back into their accounts and while still looking for upside participation from the markets.  This morning came a report from Zacks naming Enterprise as the “Bull of the Day” when it raised its rating to Outperform from Neutral. More important than the Zacks upgrade is that it has a $54.00 price target objective and that appears to be a “street high” target.

As far as how this compares to analyst calls elsewhere: BofA/Merrill Lynch has a “Buy” rating with a $50.00 target, Morningstar has a “Hold” rating, and S&P has a “Buy” rating.  Thomson Reuters has a $48.40 consensus price target, almost 10% above the $44.13 close on Wednesday.

Here are ten things we have considered…

Chesapeake Energy Corporation (NYSE: CHK) recently announced that it reached an agreement to supply Enterprise with ethane for its proposed pipeline that connects the Marcellus Shale with the Gulf Coast.

The integration of Duncan Energy Partners LP should be beneficial for the partnership and unit holders.  The partnership with Enbridge Energy Partners LP (NYSE: EEP) and Anadarko Petroleum Corporation (NYSE: APC) for building a pipeline called the Texas Express should address transport constraints in place today on the Gulf Coast NGL market.

It is a heavy-weight in the sector with its $37 billion market cap.  The JPMorgan Alerian MLP Index ETN (NYSE: AMJ) lists that Enterprise is the largest single holding in its underlying index with a weighting of almost 15.8%. Kayne Anderson MLP Investment Company (NYSE:KYN), a closed-end MLP fund, also has Enterprise as its highest weighting at 9.4% in its latest report.

Besides being a leader above many peers, its projects tend to generate stable cash flow and they tend to add to the value in the company’s existing portfolio.

The company’s opportunity in the Eagle Ford and Haynesville Acadian Expansion should be great long-term catalysts.  Here is its existing pipeline and facilities system-wide map.

The company increased its quarterly distribution for the umpteenth time in a row and its dividend equivalent is currently over 5.5%. 

Distributable cash flow was $856 million with a coverage ratio of 1.7, and the $341 million in retained cash flow has seemingly lowered its financing needs.

The most recent earnings report was a record for the third quarter in part due to growth in the shale regions and high demand for NGLs in the petrochemical sector.  Earnings per unit were $0.55 (above a $0.50 target from Zacks) and up over 200% from a year earlier.
Revenues was up 40% from a year earlier.

Operating income in the NGL pipeline & services unit was up over 37% and gross operating income in its nat-gas processing segment rose 55%.  Its gross operating income from onshore crude pipelines and services were up over 90% from a year earlier.

The area of contraction was the Offshore Pipelines & Services on the gross operating income, which came down to $53.9 million versus $68.3 million a year earlier, on what was called lower Gulf of Mexico exploration and development on federal regulations.

There are many other things to consider for Enterprise (and other MLPs) for longer term income-oriented investors.  Investors in MLPs in general have to consider the tax ramifications as many quarterly payouts have to be considered “yield equivalent” rather than true income because a large portion of the payouts in the MLP sector are treated as return of capital with a variable portion often treated as income.  Barron’s noted it in the “Top MLPs for Investors” but we would note that Seeking Alpha recently raised a flag of caution on the group and on Enterprise itself.  We like to feature both good and bad when possible.

JON C. OGG

As for the use of funds, the “use of proceeds” indicated funding a portion of its capital expansion projects, for general corporate purposes, or any combination of such purposes.

Morgan Stanley, BofA Merrill Lynch, Citigroup, J.P. Morgan, UBS, and Wells Fargo are listed as the joint book-running managers for the offering.  The underwriters have been granted a 30-day option to purchase up to an additional 1.2 million units to cover any over-allotments.

The selling is coming along with the market this morning, but the selling is deeper and wider than the buyers are getting.  The $28.20 per unit price compares to a $27.50 price indication this morning.  The partnership closed at $29.09 yesterday and shares were above $29.50 at one point yesterday.

The $218 million size compares to a market cap of $7.44 billion based upon yesterday’s close.  In short, 3% dilution is against more than a 5.3% drop in the price.

JON C. OGG

The Partnership gave a “use of proceeds” as being to repay a portion of its outstanding commercial paper, to repay any credit facility borrowings, to fund a portion of capital expansion projects, or any combination of such purposes.

This partnership owns and operates crude oil and liquid petroleum transportation and storage assets.  It also owns and operates natural gas gathering, treating, processing, transmission, and marketing assets and is based in Houston, Texas.

The offering group is rather large.  The listed underwriters for the offering are listed as BofA Merrill Lynch, Wells Fargo Securities, Citigroup, Morgan Stanley, and RBC Capital Markets.  The partnership is expected to grant the underwriters a 30-day option to purchase up to an additional 1.05 million units to cover overallotments.  If so, more than 8 million units will be sold.

Shares are down over 3% at $30.01 and the 52-week trading range is $25.19 to $34.58. On a split-adjusted basis, that 52-week high represents an all-time high as well.   This also offers a high “dividend equivalent” with a payout of about 6.7%.

JON C. OGG

The partnership said that the net proceeds will be used to repay a portion of its outstanding commercial paper and any credit facility borrowings which had been used to finance a portion of its acquisition of the entities that comprise the Elk City Gathering and Processing System.  The partnership also noted that it will use a portion of the proceeds to fund a portion of its capital expansion projects.

The joint book-runners are Morgan Stanley, BofA Merrill Lynch, J.P. Morgan, RBC Capital Markets, UBS Investment Bank and Wells Fargo.  Enbridge Partners has also granted the underwriters a 30-day option to purchase up to an additional 780,000 units to cover any over-allotments, if any.

Enbridge Energy Partners LP is down over 3% at $60.12 shortly before the open and the 52-week trading range is $38.02 to $63.39.  The $300 million compares to a market cap at yesterday’s close of roughly $7.4 billion.

JON C. OGG

The ruptured pipeline, part of Enbridge’s Lakehead system, consists of about 293 miles of 30-inch steel pipeline that was first put into service in 1969. The line transports crude oil from northwest Indiana to Sarnia, Ontario, just across the US-Canada border at the southern tip of Lake Huron.

The pipeline had been checked for corrosion in June 2009, using a device called a ‘smart pig’, which is inserted into the line and creeps along using ultrasonic and other technology to check for weaknesses in the pipe. Enbridge notified the US Pipeline and Hazardous Materials Safety Administration (PHMSA) on July 15th that the company planned to remediate anomalies in the line by replacing rather than repairing the pipe, but that the effort would require more time than Enbridge had been given. The pipeline ruptured on July 26th.

The damaged section of pipeline has now been removed and shipped to Washington for further examination. Here’s a photo of the damaged section.

The damage appears to be along a seam that runs the length of each 50-foot section of pipe. The hole itself is called a “fish mouth” rupture for obvious reasons. The position of the rupture in the photo is oriented approximately as it was when it was underground, with the rupture at about the 3 o’clock position.

A common cause of ruptured oil and gas pipelines is stress corrosion cracking, where water in the pipeline gathers at the bottom of the pipe and slowly corrodes and weakens the pipe from the inside out. Damage to the coating could also occur when the pipe is transported from the factory to the pipeline site or any of a variety of knocks and dings occurs during construction or service.

Under the pipeline pressure needed to move the oil, stress is added to the corrosive effect, particularly near pump stations like the one at Marshall, Michigan. Pressure in the pipeline at the time of the rupture was estimated to be 425 psig, safely below the rated maximum of 624 psig.

It is highly unlikely that the rupture in the Enbridge pipeline was caused by stress corrosion cracking because that anomaly nearly always occurs at the bottom of a pipe (the 6 o’clock position). In a similar pipeline rupture in Minnesota in 2002 the cause was determined to be a stress fracture that started when the pipeline was loaded onto a truck in 1967 for transport.

The service life of a pipeline is typically judged to be about 30-40 years. In general, periodic inspection of the pipelines leads to sections being replaced piecemeal rather than replacing the pipeline at one time. New pipeline construction costs could total as much as $2 million/mile.

From 1990 through 2009, the US has averaged more than one serious incident on an oil or gas pipeline every week. That totals nearly 1,100 in twenty years. For ‘significant’ incidents on all oil pipelines, the 20-year total is 5,626, or more than five incidents per week. A ‘significant’ incident releases 50 or more barrels of liquid into the environment or costs more than $50,000 in 1984 dollars; a ‘serious’ incident is one in which someone is killed or a hospital stay is required.

As will be the case with offshore drilling, onshore, and offshore, pipelines are sure to come under greater scrutiny after the Gulf of Mexico and Michigan spills. More frequent inspections and a quicker response from the industry to repair deficiencies are the two likeliest outcomes.

Paul Ausick

After reviewing this data, 24/7 created a list of The Twenty Companies Wall St. Can Trust The Most. The firms are ranked based on their Accounting and Governance Risk scores.

The list represents companies that have practices which should be emulated by every public company that wishes to serve the needs of its shareholders by presenting accurate financial data and providing conservative management of shareholder’s investments.

The Twenty Companies Wall St. Can Trust The Most:

Methodology: The Audit Integrity Accounting and Governance Risk (AGR) rating is a forensic measure of the transparency and reliability of a corporation’s financial reporting and governance practices. The focus of AGR analysis is on identifying the measures most highly associated with fraud, and quantifying those risks for interested stakeholders in relation to company stock price, securities litigation, and major restatement probabilities.

Audit Integrity applies over 100 accounting and governance metrics to a company’s publicly-filed information. The resulting calculation produces the AGR, a percentile score ranging from 0 to 100, with corresponding ratings from Very Aggressive to Conservative.

Companies rated Very Aggressive or Aggressive have proven to be much more likely to face class action litigation and financial restatements, and to suffer severe equity loss. Conversely, those companies that have been consistently rated Conservative have been shown to be the most trustworthy.

AGR significantly improves the predictivity of traditional risk models.

The AGR and its underlying metrics are used by regulators, auditors, insurance companies, investment managers, and corporations, and are often incorporated in reporting by major financial media.

Douglas A. McIntyre

Enbridge Inc. (ENB) and Enbridge Energy Partners, L.P. (EEP) had a pipeline blow late yesterday that has oil up as much as $4 today; two workers were killed; the explosion and fire on an Enbridge Energy Partners’ crude oil pipeline approximately three miles southeast of Enbridge’s Clearbrook, Minnesota terminal is apparently one of the Canadian pipelines that comes down to the U.S. and it is a supply risk.
Fred’s (FRED) $0.12 EPS after $0.02 "timing event" versus $0.14 estimate; hired Merrill Lynch to help it review strategic alternatives after receiving interest from multiple parties.
HJHeinz (HNZ) $0.71 EPS vs $0.69 est.; put guidance at higher end of range for next quarter.
Lululemon (LULU) trading up 10% after beating earnings and raising guidance.
Medco Health (MHS) announced a 2 for 1 stock split.
Men’s Wearhouse (MW) trading down 12% after disappointing earnings.
Sigma Designs (SIGM) traded up 14% after posting $0.79 EPS vs $0.54 estimates.
Ultralife Batteries (ULBI) receive a $2.6 million order from the U.S. Defense Department.
VeraSun Energy (VSE) and US BioEnergy (USBE) are going to merge operations into a single company; USBE shares up 8%.
Vimpel-Comm (VIP) trading up 5% after beating earnings expectations.
WellCare Health Plans, Inc. (WCG) traded up 10% after-hours after announcing that on November 21, it received an executed Contract between the Centers for Medicare & Medicaid Services. This one had been battered after that FBI raid killed the stock in recent weeks.

Jon C. Ogg
November 29, 2007