Enbridge Goes Back to Basics

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.

Enbridge caters to 3.7 million customers in Ontario, Quebec, New Brunswick and New York. The company 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 is huge comprising of 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 also owns interests in nearly 3,000 MW of renewable generation capacity.

Enbridge operates through five reporting segments –

  • Liquids Pipelines (52% of 2018 earnings),
  • Gas transmission and midstream (22%),
  • Gas Distribution (17%),
  • Green Power and Transmission (4%), and
  • Energy Services (5%).
ENB - Pipeline Layout
Source: Enbridge 2018 Q4 Presentation
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%).

Revenues are driven by volumes transported and the corresponding tolls for transportation services. The company typically enters into long-term contracts proving 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.

The company engages in providing integrated transport services and connectivity to key energy supply basins and demand markets. As North America’s premier energy infrastructure company, Enbridge connects major supply basins with key consumer markets. Its core assets comprise of pipeline and utility assets having highly predictable cash flows.

Enbridge Inc. transports 25% of the crude oil produced in North America through the world’s longest crude oil and liquids network. It also moves 22% of the natural gas consumed in the U.S. Customers trust the Enbridge brand for providing safe and reliable movement of oil and natural gas throughout North America.

Enbridge is shifting its focus towards a more regulated asset mix to reduce risk in future and about 98% of 2019 estimated earnings are expected to come from regulated businesses. During the last year, the company sold $7.8 billion worth of its non core assets which helped it achieve pipeline-utility model in one year. Enbridge continued to invest in core pipeline projects across the liquids and gas transmission businesses.
Huge capital investments over the next three years should support business growth in future.

Dividends

Enbridge is a Canadian Dividend Aristocrat paying dividends for 66 straight years and raising them for 22 consecutive years. The company has maintained a double digit dividend CAGR over the past few years. It has increased its payout at an average compound annual growth rate of 13% over the last decade. The company last raised its dividend payout by 10% and sports an attractive dividend yield of 6.2%.

Enbridge is expecting annual dividend growth of 10% through 2020 and targeting a dividend payout is below 65% of ACFFO. Its secured capital project program is expected to translate into 10% ACFFO CAGR through 2020. Given its large scale, leading position and growing demand of energy, the company is well placed to grow its future dividends in the high single to low double digit range.

The company 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. In addition, Enbridge is estimating $540 million in pre-tax annual synergies from the Spectra transaction by 2019.

About 96% of its cash flow are stable and predictable coming from regulated businesses and more than 90% of its clients are investment grade customers. A balanced and diversified asset portfolio, huge customer base and an extensive network of distribution lines form a deep competitive moat around Enbridge’s business.

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.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderGraph
ENBEnbridgeEnergyOil & Gas - Midstream7847.5996.3122.2418.062.146.20137.9442.9519.211
TRPTranscanada PipelinesEnergyOil & Gas - Midstream8165.1860.4215.5916.144.184.6071.7743.0011.321
PPLPembina PipelineEnergyOil & Gas - Midstream7349.1625.0721.9520.712.244.88107.14122.409.041
IPLInter Pipeline LtdEnergyOil & Gas - Midstream7521.808.9015.5718.411.407.84122.14121.7112.151
KEYKeyera CorpEnergyOil & Gas - Midstream7433.867.1920.6519.181.645.32109.76121.8012.251
ALAAltaGasEnergyOil & Gas - Midstream7620.055.5316.8520.221.194.7980.67120.964.611
GEIGibson Energy Inc.EnergyOil & Gas - Midstream6223.313.3915.2427.541.535.6686.2741.326.691

Bottom Line

Enbridge is repositioning itself to a pure regulated pipeline and utility business. A premium natural gas transmission franchise, liquids pipeline and natural gas utility business provides the company with the scale and diversity to compete and grow in future. Enbridge is on track to realize cost synergies as a result of its integration with Spectra and is estimating to grow its dividend by 10% every year through 2020.

The simplification of the ownership structure after acquiring some public companies should help with the company reporting and transparency. The last few years have been hard on the stock and the company appears to be focused on getting back to the basics. Investors have been patient and it takes time for a large corporation to pivot but investors could have a limit to their patience when it comes to future return. It has been a few years now and I know I personally have not been adding to ENB and looking for better growth opportunity.

ENB - Ownership Structure
Source: Enbridge 2018 Q4 Presentation 

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.
Join 6,000+ Investors & Build a Winning Portfolio