Enbridge's Version Of The Keystone Pipeline Should Bring Profits

 |  About: Enbridge, Inc. (ENB), Includes: EPD
by: David White

Enbridge Inc. (ENB) engages in the transportation and distribution of crude oil and natural gas primarily in Canada and the US. (Yahoo Finance).

Enbridge makes much of its money by charging fares in much the same way as a taxi does. The fare from Hardisty, Alberta to the Texas Coast is $6.80/bbl. The fee from Hardisty, Alberta to Chicago, Illinois is $3.85/bbl., etc. Enbridge transports 60% of all Western Canadian production to the US -- 1.2 million bpd. Enbridge transports approximately 13% of all US imports. Among its big customers are the Alberta oil sands and the Bakken. Enbridge has a market cap of $30.42B and an enterprise value of $47.00B. Some might consider this too big to grow very fast, but apparently ENB did not get that notice. Its total shareholder return CAGR over the last 10 years has been a stellar 17%. It is being judicious with its money too. Its bonds are rated A- by S&P and Baa1 by Moody's. Not many oil & gas companies do better than that. Approximately Sixty Five percent of its earnings come from liquids transportation.

In Enbridge's latest announcement on March 26, 2012, it again established itself as the leading liquid pipeline company in North America. It announced that it will upsize the Flanagan South Pipeline from Flanagan, Illinois to Cushing, Oklahoma. The Flanagan South Pipeline will be upsized to a 36 inch diameter line with an initial capacity of 585,000 barrels per day. In separate announcements ENB and Enterprise Products Partners (EPD) have announced that the Seaway Pipeline flow (150,000 bpd) will be reversed by sometime in June of 2012 to flow from Cushing, Oklahoma to the Texas Coast. Subsequently ENB and EPD will expand the capacity of the Seaway Pipeline to 400,000 bpd by early 2013. After that is done, they will expand the pipeline further to 850,000 bpd (2014).

Upon completion of the Flanagan South Pipeline expansion, it together with the existing Spearhead Pipeline will offer transportation of 775,000 bpd from Flanagan, Illinois to Cushing, Oklahoma. In the case of the Flanagan South Pipeline, ENB is teaming with Emprise Products Partners of Houston. The Seaway and the Flanagan additions should make ENB the preeminent mover of Canadian oil sands crude from Alberta to the Texas Gulf Coast. Admittedly the Flanagan South Pipeline still has to be approved. However, it faces fewer regulatory problems than the Keystone-XL Pipeline. It does not have to cross an international border. That part of the system already exists. Plus ENB will be building the pipeline right next to its existing pipeline. It will be a very hard argument for regulators to say that a second pipeline in the same place as the first is much more dangerous than having the first there at all. I would expect relatively quick approval with perhaps a few minor regulatory issues. The 600 mile Flanagan South Pipeline has already garnered the fervent support of Gov. Jay Nixon of Missouri and US Senator Claire McCaskill.

All told Enbridge plans to spend approximately $3.8B on these two pipelines. However, they should prove to be well worth it. If you figure roughly 750,000 bpd transported from Alberta to the Texas Coast at $6.80/bbl (today's dollars) for 365 days a year, you get $1.86B+ per year in revenues for at least 20 to 30 years. If ENB only gets $1B/year of that, it should easily earn back its investment. If you could pay off a rental home in 5-6 years from the rent, you would jump at the chance. Given that Enbridge's shortest term of service is 10 years for this pipeline, there is little question of profitability. It's that great a deal. Naturally the accounting is not nearly that simple, but you get the idea. This should help Enbridge immensely in its efforts to increase the return to the shareholder.

Are these the only plans of Enbridge? Not by a long shot. It has a $48B Opportunity Portfolio of which $13B are secured projects to be completed from 2011-2015. It has further risk adjusted projects of $7B to be completed from 2011-2015. Most other projects are to be completed by 2020. One of the most notable of these is the Western Extension from Alberta to the B.C. coast. This is scheduled to go into service in 2017. It is planned to carry 500,000 bpd of crude in its main line. A second condensate line will carry 180,000 bpd. Canadian oil will be going to China soon. You may question how good this is for the US and/or Canada, but it is unquestionably good for ENB. The Chinese will not be quibbling about the transport charges to the coast.

Enbridge's plans might seem grandiose to some, but in reality they are plans Enbridge has made a habit of achieving. It may be planning to spend its entire enterprise value in the next ten years, but keep in mind that it has been growing its total return to the shareholder by 17% annually. Shareholders will benefit immensely from these plans that will help it to continue that rapid growth. They make sense. They make Enbridge a great investment for a long time to come. You get this great growth. Plus you get to collect a substantial $1.13 (2.91%) dividend. With oil in a secular growth trend due increasing demand from emerging markets, you will be able to find few safer, higher yielding investments. You get the security of the nearly 3% dividend. Plus you get additional growth which has averaged 14% (17% - the 3% dividend) over the last 10 years. This is the kind of stock you want to own through hard times. Even if it goes down, it will almost certainly come back up to even higher levels. All you have to do is to continue to own it (and to collect the dividend).

The five year chart of Enbridge gives some technical direction for this trade.

Click to enlarge

On this chart the 2008-2009 recession looks like a minor disturbance to an extremely strong uptrend. That fact speaks volumes for the strength of Enbridge stock. The slow stochastic sub chart shows that Enbridge is neither over bought nor over sold. The main chart shows a still strong uptrend. Enbridge is perhaps a bit farther above its 200-day SMA than you would want, but it would be reasonable to start to average in at this time. The new announcements may push Enbridge up quickly. With the nearly three year long consistent uptrend, there doesn't seem to be anyone perfect time to get into this stock. The PE of 29.87 seems a bit high; but with a one year total return to shareholders of 40% (most recent year), it does not seem unreasonable. Averaging in is still a good strategy though. The EU troubles could easily spread throughout the world.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ENB over the next 72 hours.