Hi JC,

I am waiting for an opportunity to sell a covered call against the stock. To this end, I’m looking for a premium of $0.40 to $0.50, but the market has obviously not accommodated that yet, especially given the ugly action over the past week.

If the market can shake off its fears, then that should help Enbridge move higher again, which in turn would help SEP move higher, since its value will be pegged, at least loosely, to the deal terms.

Enbridge has offered to acquire the outstanding units of SEP it doesn’t already own by exchanging 1.0123 shares of Enbridge for each share of SEP. Nevertheless, SEP has traded at a 3% to 4% discount to the implied deal value since the offer.

The other potential catalyst would be if SEP’s independent directors negotiate a better deal for unitholders–Enbridge’s at-market offer is an unfriendly attempt to acquire the remaining stake in these assets at bargain prices. I don’t have high hopes for a revised offer, but I’ve seen it happen with other MLPs in the same situation. Any improvement probably wouldn’t be more than 10%, but that’s better than the alternative.

Even if that doesn’t happen, there may be as many as two more growing payouts from SEP before the deal closes. These would total $1.54. And I would expect Enbridge’s subsequent performance would offer the possibility of further share-price appreciation.

So, Enbridge’s initial offer is a raw deal in the near term, but a better end is in sight thereafter.

Ari

Hi Cyan,

As I mentioned in Friday’s update, Ari is no longer with us and I have taken over portfolio duties for Income Millionaire. Of course, if you don’t want to own SEP you can simply sell the shares that were put to you and be done with it. Alternatively, you can hang on to them and write a covered call option against them to recoup some of the loss. In fact, I intend to issue a covered call recommendation on SEP if/when the current buyout offer is challenged, at which time we should see much better premium for out-of-the-money call options.

Jim