Strength in its Regulated Business

ENB - Enbridge

Enbridge Inc. is the largest energy infrastructure company in North America, engaging in the collection, transportation, processing and storage of oil and gas. It is Canada’s largest natural gas distributor. The company caters to 3.7 million customers in Ontario, Quebec, New Brunswick, and New York. Enbridge is known for its high-quality liquids and natural gas infrastructure assets. It owns an extensive network of about 192,000 miles of natural gas and NGL pipelines across North America and the Gulf of Mexico. Its crude oil and liquids transportation system are huge, comprising more than 17,000 miles of active pipelines. In addition, Enbridge has 3.1 Bcf/d of processing capacity and 438 Bcf of net natural gas storage capacity. It delivers more than 3 million barrels of oil every day and also owns interests in 4,000 MW of renewable generation capacity. Enbridge transports 25% of the crude oil produced in North America through the world’s longest crude oil and liquids network. It also moves 20% of the natural gas consumed in the U.S.

Enbridge operates through three reporting segments –

  • Liquids Pipelines (50% of 2019 EBITDA),
  • Gas transmission (30%), and
  • Gas Utilities (20%).
Investment Data

Revenue Growth & Market Exposure

Enbridge generates revenues from three primary sources:

  • transportation and other services (~30% of revenues),
  • gas distribution sales (~10%) and
  • commodity sales (~60%).

Enbridge engages in providing integrated transport services and connectivity to key energy supply basins and demand markets. Revenues are driven by volumes transported and the corresponding tolls for transportation services. The company typically enters into long-term contracts providing strong cash flow visibility. A majority of its revenue is insulated from volume and price risk, as revenues reflect the terms of the underlying contract for services or are charged in accordance with tolls established by the regulator. As North America’s premier energy infrastructure company, Enbridge connects major supply basins with key consumer markets. Its core assets consist of pipeline and utility assets having highly predictable cash flows.

Enbridge is shifting its focus towards a more regulated asset mix in order to reduce risk in the future and is currently procuring 98% of its earnings from regulated businesses. Enbridge continued to invest in core pipeline projects across the liquids and gas transmission businesses. The company is in a good position to capitalize on LNG growth as its gas systems follow the U.S. Gulf Coast from South Texas to Louisiana, where it can play a key role in supplying existing and new export facilities. It is working on several opportunities to expand its existing LNG footprint as well. Enbridge currently supplies Cheniere’s Sabine Pass and Cameron plants and is making good progress on further buildout. In terms of rate filings, Enbridge is making good progress and expects to reach settlements in the future. Enbridge placed ~$7B of new projects into service in the last year including Gray Oak, Hohe See & expansion, and Canadian segment of Line 3R.

Enbridge is on track to add another 50,000 customers this year in the Gas utility business. It is focusing on low-cost organic expansions that boost returns by enhancing revenue while minimizing investment. It has added over 700,000 barrels per day of throughput since 2011 through low-cost innovative optimization and expansions and is looking at adding another 85,000 barrels per day, later this year. It is expected to bring in about 100,000 barrels per day of incremental capacity by year-end. On the Gas utility front, Enbridge benefitted from synergies from the combination of two large utilities. The Spectra integration is now complete. The company has been investing in renewables and currently has 21 renewable projects and a growing offshore presence in Europe.

Dividends

Enbridge returns approximately 65% of its cash flows to shareholders annually. The company increased its dividend again by ~10% for the third year in a row. It has demonstrated resilient growth despite the business and commodity price cycles.

Enbridge is a Canadian Dividend Achiever paying dividends for 69 straight years and raising them consistently over the last 25 years. The company has maintained a double-digit dividend CAGR over the past few years increasing them at a rate of 14%+ CAGR over the last decade. Enbridge last raised its dividend payout by 9.8% and sports an attractive dividend yield of 9.5%.

Enbridge is set to benefit from a growing demand for power and is strategically positioned to capitalize on strong energy fundamentals over the long term. Future earnings and cash flow growth of 5%-7% is expected post-2020 on the back of strong business and capital growth. Given its large scale, leading position and growing demand for energy, the company is well placed to grow its future dividends in the high single range.

Enbridge has successfully repositioned itself to a pure regulated pipeline and utility business. About 98% of earnings are from regulated business and more than 90% of its clients are investment-grade customers. A balanced and diversified asset portfolio, a huge customer base and an extensive network of distribution lines form a deep competitive moat around Enbridge’s business.

Enbridge continued to simplify the structure, de-risking its business mix through non-core divestitures and deleveraging its balance sheet significantly. It sold non-core assets worth $8 billion, further strengthening the balance sheet. The company is now in self-funded growth mode. It further has a pipeline of $11 billion in secured organic growth projects that are well diversified both by geography and by business line. The company’s earnings should continue to grow driven by strong operating performance from core assets and incremental contributions from the new capital growth projects.

Competition

Enbridge Inc. is one of the largest energy companies in North America. Its low-risk business model, large pipelines network and strategic business platforms are key differentiators. The company competes with the likes of TransCanada TSE:TRP, Pembina Pipeline TSE:PPL, Keyera Corp TSE:KEY, Inter Pipeline TSE:IPL, etc. Pembina Pipeline is a leading midstream and transportation service provider in North America while TransCanada Pipeline is a North American infrastructure company, supplying more than 25% of natural gas consumed daily across the continent. Keyera is known for its integrated business, strategic locations, and large scale. A superior low-risk business model, high-quality infrastructure and strong organic growth are Enbridge’s strong competitive advantages.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ENBENBEnbridgeEnergyOil & Gas - Midstream0.6743.9262.8544.3513.280.990.07387.383.272743.240.190478Standard BusinessYESYESYESNOCanada1
TSE:TRPTRPTranscanada PipelinesEnergyOil & Gas - Midstream0.6862.7141.7714.2413.284.400.05175.170.736443.240.122069Standard BusinessNOYESYESNOCanada1
TSE:PPLPPLPembina PipelineEnergyOil & Gas - Midstream0.7632.9118.0912.3113.282.670.07667.660.9438122.520.118879Standard BusinessNONOYESNOCanada1
TSE:IPLIPLInter Pipeline LtdEnergyOil & Gas - Midstream0.4711.594.939.1013.281.270.04144.140.3780120.480.070325Standard BusinessNONOYESNOCanada1
TSE:KEYKEYKeyera CorpEnergyOil & Gas - Midstream0.5620.794.609.1113.282.280.09249.240.8421121.920.155457Standard BusinessNONOYESNOCanada1
TSE:ALAALAAltaGasEnergyOil & Gas - Midstream0.5915.214.2510.0413.281.520.06316.310.6316120.960.063147Standard BusinessNONONONOCanada1
TSE:GEIGEIGibson Energy Inc.EnergyOil & Gas - Midstream0.4621.103.0918.2513.281.160.06456.451.172441.360.064526Standard BusinessNONONONOCanada1

Bottom Line

With indications that the economy might go into a recession negatively impacting global oil demand, the Canadian energy stocks have been the hardest hit lately. The supply-and-demand fundamentals in oil markets have also been challenging as Russia fails to make a deal with OPEC and Saudi Arabia pulls out of the deal too. All these factors have driven oil prices down.

Enbridge is one of the strongest companies in Canada. The company is repositioning itself to a pure regulated pipeline and utility business to increase earnings visibility. It is also making solid progress on low-cost in-franchise expansions. A premium natural gas transmission franchise, liquids pipeline, and natural gas utility business provide the scale and diversity to compete and grow in the future. Huge capital investments and a low-risk business model also ensure strong and consistent dividend growth.

ENB has a place in a portfolio for income as opposed to growth. You may feel the pullback can give you growth but the focus should be in the income generated. As you can see, it underperformed the TSX over the past 5 years when other business were growing.

ENB vs Indexes - March 2020

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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