Enbridge's (ENB) Q3 EPS report shows the company is (finally...) starting to exhibit the strong underlying potential of the Spectra Energy acquisition that closed more than two-and-a-half years ago (February 2017). How time flies. Much has happened since the acquisition closed: Enbridge rolled-up all its MLPs, sold billions in non-core assets, and digested Spectra's natural gas pipeline assets into the organization.
Financial returns in Q3 were strong and were highlighted by a significant up-tick in distributable cash flow ("DCF") as compared to previous quarters:
Source: Q3 Presentation
Note that DCF in Q3 was up 33% yoy as compared to DCF growth of 24% and 20% in Q2 and Q1, respectively. As a result, the company said it now expects to exceed the midpoint of its FY2019 DCF guidance of $4.30-$4.60/share.
However - before investors get too excited - I need to remind them that due to the roll-ups, the total outstanding share count is now 2.018 billion versus 1.705 billion in Q3 of last year.
Let's assume that ENB comes in right at the midpoint of its guidance, or C$4.45/share. Currently, the C$0.738 quarterly dividend equates to an annual obligation of C$2.952.
(all amounts in Canadian dollars)
10% Increase In
|Yield Based On Current Price (C$49.62)|
What the table above shows is that Enbridge could theoretically raise the dividend 10% for the next four years and still not fully distribute the DCF it expects to generate this year (i.e. $4.45/share). It also shows that, under this theoretical scenario, investors buying shares today would earn an 8.7% yield in 2023.
But of course Enbridge's DCF is expected to grow moving forward. For instance, the Gray Oak Pipeline, built and operated by Phillips 66 (PSX), is currently undergoing line-fill and is expected to be ramped-up through Q1 of next year. Enbridge owns a 22.75% interest in Gray Oak, which will have an initial capacity of 900,000 bpd.
Demand for capacity on Gray Oak has been very strong. Recently, it was reported that PSXP set spot prices for the pipeline at $4.75/bbl for committed shippers. That was a bit higher than I expected, but even if long-term shipping contracts were to average only $2.50/bbl, at full capacity, that equates to an estimated $185 million on an annual basis (net to ENB). Certainly, there would have to be maintenance and operational expenses deducted, but even at a $170 million annual DCF run rate, that means an estimated $0.08/share in incremental DCF using Enbridge's 2.018 billion shares outstanding at the end of Q3.
Other Growth Catalysts
As the graphic above shows, Enbridge has a plethora of other growth projects in the queue which are expected to go in-service over the next 12-18 months. A near-term catalyst is two projects that will - in aggregate - increase incremental WCSB takeaway capacity by 150,000 bpd over the next two quarters:
These are highly economic optimizations that use existing pipelines and the recently upgraded Line 3 Canada that I wrote about in my previous Seeking Alpha article on Enbridge. Transportation capacity for these incremental barrels is met with strong demand by land-locked Western Canadian oil sands producers.
Meantime, on the Q3 concall, management reported the TETCO rate case will result in an estimated $50-70 million in incremental annual revenue, with the vast majority of that dropping straight down to EBITDA.
In addition, Enbridge continues to sell non-core assets. In Q4, the company said it expects to receive $1.8 billion for the sale of its Canadian G&P Business. That equates to an estimated $0.89/share and can be used for debt reduction (increasing long-term DCF) or cash distributions.
Summary & Conclusion
Enbridge clearly has excellent dividend growth potential even if Line 3 doesn't even go in-service in the 2H of next year as expected. In fact, based on FY2019's expected full-year DCF, the company can quite easily raise the dividend 10% over the next four years. And that is without Line 3 going in-service.
Short-term catalysts include expectations of $1.8 billion of proceeds in Q4 from the sale of Enbridge's Canadian G&P Business as well as an incremental addition of 150,000 bpd of high-demand liquids pipeline capacity out of Western Canada by two highly economic optimization projects using existing pipelines.
I reiterate my BUY rating on Enbridge and my US$45 price target. As the stock chart below shows, note that $45/share simply gets the stock back to where it was in 2015 - before the Spectra merger, before the roll-up simplification, and before a plethora of world class pipeline start-ups. And yes, before the extra debt and dilutive share issuances. But as the Q3 results show, DCF generation is accelerating and will nicely offset the extra shares next year.
$45 represents a total return opportunity of over 25%.
Source: Yahoo Finance (edit by the author)
Disclosure: I am/we are long ENB PSX. 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.
Additional disclosure: I am an engineer, not a qualified investment advisor. While the information and data presented in my articles are obtained from company documents and/or sources believed to be reliable, they have not been independently verified. Therefore, I cannot guarantee its accuracy. I advise investors to conduct their own research and/or consult a qualified investment advisor. I explicitly disclaim any liability that may arise from investment decisions you make based on my articles. Thanks for reading and I wish you much success with your investments.