Enbridge: Investing In Oil And Gas Transportation

| About: Enbridge Inc. (ENB)

Over the past 5 years, shale oil and gas production from the Bakken formation has increased significantly. As this is the case, Canadian oil and gas have been competing with the significant increase in Bakken oil and gas for pipeline space. Because of this competition for pipeline space, there is a need for increased infrastructure projects to help supply crude to the refineries in the U.S. and to the coasts for shipping overseas.

As there is not enough infrastructure to move all the crude to the refineries and to ports for shipping, a backlog of oil is building. This backlog of oil has generated a painfully steep discount compared to U.S and global light crude benchmarks. Because the Canadian companies are having to sell their crude at a discount, this has brought the price of many Canadian oil and gas companies down. An increase in infrastructure to move the oil and gas to refineries and to the coast for shipping overseas will help create stimulus for all companies affected by the backlog of oil, and in turn, the Canadian Economy. Enbridge President and CEO Patrick Danie stated that the increase in infrastructure and particularly the Northern Gateway is a "national imperative" worth $270 billion to the Canadian economy over the next 30 years.

One company that would benefit from the expansion of infrastructure is Enbridge Inc. (NYSE:ENB). Currently, "Enbridge is Canada's largest transporter of crude oil with approximately 24,738 kilometers (15,372 miles) of crude pipeline. This system is delivering on average more than 2.2 million barrels per day of crude oil and liquids."

Chart sourced from (The Green Grok)

In the section below, I will analyze the three year performance of Enbridge. I will look at the company's past profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

All numbers sourced from Company Webpage and Morningstar


Profitability is a class of financial metrics used to assess a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $970 million.
  • Net income 2011 = $1,004 billion.
  • Net income 2012 = $715 million.

Over the past three years Enbridge's net profits have decreased from $970 million in 2010 to $715 million in 2012. This signifies a decrease of 26.29% in earnings over the past 3 years.

  • Operating cash flow 2010 = $1.506 billion.
  • Operating cash flow 2011 = $1.891 billion.
  • Operating cash flow 2012 = $1.512 billion.

Operating cash flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company's operating cash flow has increased slightly. Enbridge's operating cash has only increased by 0.4%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2010 = $970 million.
    • Net income 2011 = $1.004 billion.
    • Net income 2012 = $715 million.
  • Total asset growth

    • Total assets 2010 = $30.120 billion.
    • Total assets 2011 = $34.343 billion.
    • Total assets 2012 = $47.172 billion.
  • ROA - Return on assets

    • Return on assets 2010 = 3.22%.
    • Return on assets 2011 = 2.92%.
    • Return on assets 2012 = 1.52%.

Over the past three years, Enbridge's ROA has decreased from 3.22% in 2010 to 1.52% in 2012. This indicates that the company is making less money on its assets than it did in 2010.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.


  • Operating cash flow 2010 = $1.506 billion.
  • Net income 2010 = $970 million.


  • Operating cash flow 2011 = $1.891 billion.
  • Net income 2011 = $1.004 billion.


  • Operating cash flow 2012 = $1.512 billion.
  • Net income 2012 = $715 million.

Over the past three years, the operating cash flow has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2010 = $30.120 billion.
    • Total assets 2011 = $34.343 billion.
    • Total assets 2012 = $47.172 billion.
    • Equals and increase of $17.052 billion
  • Total liabilities

    • Total liabilities 2010 = $22.555 billion.
    • Total liabilities 2011 = $25.502 billion.
    • Total liabilities 2012 = $36.672 billion.
    • Equals and increase of $14.117 billion

Over the past three years, Enbridge has acquired more total assets than total liabilities. This indicates that the company has not been financing its assets through debt. Over the past three years, the company's total assets increased by $17.052 billion, while the total liabilities increased by $14.117 billion.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2010 = $3.761 billion.
    • Current assets 2011 = $4.295 billion.
    • Current assets 2012 = $6.600 billion.
  • Current liabilities

    • Current liabilities 2010 = $3.355 billion.
    • Current liabilities 2011 = $4.860 billion.
    • Current liabilities 2012 = $7.069 billion.
  • Current ratio 2010 = 1.12.
  • Current ratio 2011 = 0.88.
  • Current ratio 2012 = 0.93.

Over the past three years, Enbridge's current ratio has decreased from 1.12 in 2010 to 0.93 in 2012. As the number has declined over the past three years, the most recent number indicates that the company would not be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 761 million.
  • 2011 shares outstanding = 785 million.
  • 2012 current shares outstanding = 797 million.

Over the past three years, the number of company shares have increased. The amount of common shares have increased from 761 million in 2010 to 797 million in 2013. This signifies a 4.73% increase over the past 3 years.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $3.836 billion / $15.127 billion = 25.36%.
  • Gross margin 2011 = $4.548 billion / $19.402 billion = 23.44%.
  • Gross margin 2012 = $5.520 billion / $25.306 billion = 21.81%.

Over the past three years, the gross margin has decreased. The ratio has decreased from 25.36% in 2010 to 21.81% in 2012. As the margin has decreased, this indicates the company has been slightly less efficient.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $15.127 billion.
    • Revenue 2011 = $19.402 billion.
    • Revenue 2012 = $25.306 billion.
    • Equals an increase of 67.29%.
  • Total Asset growth

    • Total assets 2010 = $30.120 billion.
    • Total assets 2011 = $34.343 billion.
    • Total assets 2012 = $47.172 billion.
    • Equals an increase of 56.61%.

As the revenue growth has increased more than the assets on a percentage basis, this indicates that the company is making money on its assets.

Based on the fundamentals above, Enbridge is showing mixed results. Over the past three years, many of the profitability margins have decreased. A couple of strengths for the company are: the revenues have become stronger and the company has increased its asset base more than the amount of liabilities. Based on the above criteria, Enbridge is showing that it is a solid company that has been preparing itself to capitalize on a need for increased oil an gas infrastructure.

Looking forward:

Currently, Enbridge has many different projects on the go to meet the need for improved infrastructure. One project is the "Light Oil Market Access Program." According to the company website "the $6.2 billion initiative is comprised of a number of individual projects. Together, these projects will accommodate transportation of approximately 400,000 barrels per day (bpd) of additional light oil to refinery markets in Ontario, Quebec, and the U.S. Midwest."

As part of the Light Oil Market Access Program, Enbridge is working on a project that will increase its transport infrastructure in the Bakken Region. This expansion, "will carry crude oil from Berthold, North Dakota to Cromer, Manitoba where crude volumes can then access the Enbridge mainline pipeline system that serves the U.S. Midwest, Mid-continent and eastern Canada."

Map sourced from (The Tyee.ca)

As well, Enbridge has the controversial "Northern Gateway Project." This much debated project is located in Alberta and British Columbia, Canada. This project has been delayed for political and environmental reasons but would deliver Alberta oil sands bitumen to the growing Asian market.

Analysts' Estimates

Analysts at MSN Money are estimating a strong year for 2013 and the growth to continue in 2014. EPS estimates for FY 2013 are $1.83 while growth is expected to continue into 2014 as EPS estimates increase to $2.09. Bloomberg Businessweek supports this idea as they expect the company's EPS to be around $1.80 for FY 2013 and increase to $2.14 for FY 2014.

Price Targets

  • Finviz has a price target for Enbridge at $48.95
  • Goldman Sachs analyst Theodore Durbin increased his price target to $46.00.
  • Recently, Deutsche Bank gave the company a "buy" rating and increased its target to $49.00

Since 2008, the average P/E ratio for Enbridge has been 21.46. As the company has averaged a P/E of 21.46 and is expected to have an EPS in 2014 of approximately $2.14, this would give the stock a price target of around $45.92.

As the need for oil and gas transportation grows Enbridge is positioned to capitalize on this need. Currently, Enbridge has many projects on the go. Even though these projects are loaded with environmental and political debates, the potential for the lines to go through is there. If Enbridge can get the lines up and running, this would prove to be very profitable for the company, for the investors and the Canadian economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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