Enbridge Inc Is One Stock to Own Forever
Insiders are earning huge profits from a small oil firm called Enbridge Inc (USA) (NYSE:ENB).
This stock—I call it my picks and shovels business—has crushed the market by 15-to-one by supplying a vital service to the oil patch.
This company doesn’t risk it all trying to find the next big strike. Rather, it just sells the stuff every driller needs to run its business.
But here’s the best part.
Industry insiders are earning yields of four percent…6.4%…even 11.2%. And now, regular folks can cash in on this type of income, too. Let me explain…
The No. 1 Stock for 2016…and Beyond
In 1848, Samuel Brannan opened a store at Sutter’s Fort, California.
When prospectors found gold nearby, Brannan traveled back to San Francisco. He shouted to the crowds, “Gold! Gold on the American River!” By the end of the year, almost every man had left town to strike it rich in the mountains.
Most of those miners returned home poor and discouraged. Brannan, though, became California’s first millionaire. He made a fortune by selling shovels, picks, and other supplies to miners.
This pattern plays out in every resource boom. From oil and gas to gold, the real money isn’t made by searching for the big strike; rather, the businesses supplying “picks and shovels” make out with the most money.
Case in point: Enbridge stock.
Enbridge is in the energy business, but the company doesn’t actually haul oil out of the ground. Rather, the company owns thousands of miles of pipelines and terminals. This is the infrastructure that ships and stores oil and natural gas around the country.
Most people ignore this business. They tend to focus on the sexier (and much riskier) drilling side of the industry. But handling the boring back office of the oil patch can be much more lucrative for several reasons.
First, Enbridge’s cash flows are steady like bond coupons. The company simply earns a fee on every barrel that flows through its network. Sure, energy prices can swing from year to year. The actual volume of crude flowing through the pipelines, though, remains remarkably consistent.
Drillers aren’t so lucky. Wild swings in the oil market can wreak havoc on profits. Some strike it rich on a big gusher. Most wildcatters, however, get wiped out after a string of dry holes.
Better yet, pipelines are not all that costly to maintain. Sure, a new line will need a big upfront investment. But once it is in place, the pipeline just sits there, delivering oil to customers.
Ongoing costs are a fraction of the revenue. You’re talking about a handful of engineers to check in once in a while. The rest of the money can be paid out to owners.
The oil business is more akin to running on a treadmill. Every time you pull a barrel out of the ground, you need to find another one to replace it. This requires costly new wells that leave little in the way for dividends.
Best of all, pipelines have little competition. Trucks, railcars, barges: nothing can compete once Enbridge is in the area. A pipeline is the cheapest means of moving oil from point A to point B.
The only way to compete against Enbridge is to build a competing pipeline. But even if you wanted to build a second line, chances are you couldn’t do it. The costs to lay another route will cost you a few billion dollars. Governments and landowners are also hesitant to grant the needed right-of-ways.
As a result, Enbridge cranks out oversized cash flows year after year, most of which is passed on to shareholders.
Over the past decade, this “picks and shovels” stock has crushed the S&P 500 Energy Index. Over the same period of time, Enbridge stock’s dividend has grown nearly fourfold. (Source: “Enbridge Dividend History,” Enbridge Inc, last accessed April 20, 2016.)
Chart courtesy of www.StockCharts.com
Enbridge also operates two related entities for income investors: Enbridge Income Fund Holdings Inc (TSE:ENF) and Enbridge Energy Partners, L.P. (NYSE:EEP). Both entities own pipelines and other energy assets. Today, these funds currently yield six percent and 11.2%, respectively.
The Bottom Line on Enbridge Stock
Enbridge stock isn’t the only way to invest in the oil patch. Phillips 66, Halliburton Company, and Core Laboratories N.V. are other options.
You won’t strike it rich with these backdoor plays. These stocks, though, can be far more lucrative over the long haul.
Bottom line: when you’re investing in the resource sector, think “picks and shovels.” They’re a great way to make a diversified bet and make huge returns.