The combination of the oil crash and recent market correction has proved devastating for many energy stocks, including Enable Midstream Partners which recently received downgrades from several analysts, including Goldman Sachs , Zacks, and Credit Suisse .
With its 10% forward yield, Wall Street doesn't seem to have much confidence in Enable Midstream's ability to sustain or grow its distribution. Let's take a look to see if analysts are right to be bearish about this midstream MLP or if this is actually a great long-term, high-yield income growth opportunity.
Enable Midstream's business model
Enable Midstream Partners owns 13 natural gas processing plants, full or partial stakes in 10,200 miles of natural gas, natural gas liquids, and oil pipelines, 11,900 miles of well gathering systems, and 87.5 billion cubic feet of natural gas storage capacity. It mainly serves the Anadarko, Arkoma, Ark-La-Tex, and Williston basins, which are some of America's most prolific oil and gas producing areas.
With natural gas and West Texas Intermediate oil prices at $2.56 per MMBTU and $45.70 per barrel, respectively, as of Sept. 25, management's assurance that the payout is currently safe and will continue to grow requires that oil and gas prices rise by at least 20% and 17%, respectively, by the end of the year and remain that high for all of 2016.
While it's possible that energy prices will recover to that extent, most analysts don't believe this is likely to happen because of the ongoing supply glut in both commodities. In fact, the Energy Information Administration estimates that WTI will average only $54 a barrel through 2016, which could force Enable Midstream to cut its distribution next year if that forecast proves accurate.
Takeaway: Enable Midstream's sky-high yield is well deserved
I continue to be bullish on the long-term growth of America's shale oil and gas and thus think a good case can be made for Enable Midstream Partners as a fine long-term income investment.
That being said, given the relatively high commodity exposure the MLP faces, and the overly optimistic assumptions for a strong short-term recovery in oil and gas prices required to secure and grow its distribution, I think Enable Midstream's 10% yield is warranted. Thus, any income investors who want to acquire units at today's prices should be aware of the increased risks and allocate their diversified income portfolios accordingly.
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The article Analysts Have Downgraded This High-Yield MLP: Should Dividend Investors Be Buying Instead? originally appeared on Fool.com.
Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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