Enbridge: Respectable Rewards, Unparalleled Reliability

Summary

• Enbridge is the largest remaining publicly-traded midstream company, with strong cash flow abilities and utility-like characteristics.
• We expect the company to continue generating cash flow going forward. At the same time, the company has some exciting potential growth projects.
• Going forward, we expect Enbridge to generate strong shareholder rewards for those who take advantage of current prices to invest.
• There are some risks due to COVID-19 and government regulation; however, the business has strong visibility on these.
• I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Enbridge (NYSE:ENB) is a Canadian multinational energy transportation company, one of the largest publicly-traded energy companies with a market capitalization of more than $65 billion. The company operates a mid-high single-digit dividend and has seen its share price remain strong during the oil price downturn. However, despite that, the company has significant potential going forward.

Enbridge - BOE Report

Enbridge 1Q 2020 Results

In the middle of one of the largest oil business interruptions, Enbridge has performed incredibly well.

Enbridge 1Q 2020 Results - Enbridge Investor Presentation

The company had 1Q 2020 results with DCF of $1.34/share. That means annualized cash flow at $5.36/share. The company is still predicting 2020 FCF at $4.65/share. That's quite respectable, and given the company's current price of roughly $32.45/share USD that means a market capitalization to FCF ratio of less than 7.5.

That highlights the strength of the company's position.

The company's results have exceeded its budget. The company took advantage of the collapse to sell $0.4 billion of assets and is advancing other projects. At the same time, the company has deferred $1 billion of growth capital spending, reduced costs by $0.3 billion, and increased available liquidity to $14 billion.

These things together support the company's financial position.

Enbridge 1Q 2020 Results - Enbridge Investor Presentation

Looking at the details of the company's 1Q 2020 financial performance, the company performed incredibly well. The company saw 1Q 2020 adjusted EBITDA virtually the same as 1Q 2019 adjusted EBITDA. The 0.2% decline in the company's adjusted EBITDA came with a 2% increase in adjusted earnings and a 2% decline in DCF.

Overall, the company's 1Q 2020 earnings were very respectable.

Enbridge Portfolio Resiliency

The company's strength in the COVID-19 related collapse is supported by its portfolio's resiliency.

Enbridge Portfolio Resiliency - Enbridge Investor Presentation

Enbridge has a variety of diversified sources of cash flow with a respectably conservative 4.5-5.0x debt EBITDA and 95% of the company's customers as investment grade. The company has a 68% cost of service/contracted revenue and 30% of the company's revenue from mainly revenue. That combination means the company's financials are 98% secured.

That's in line with the company's DCF only dropping only 2% during an unprecedented oil collapse. Let's take a look at the specific aspects of the resiliency of various aspects of the company's portfolio.

Enbridge Gas Transmission Resiliency - Enbridge Investor Presentation

Enbridge's gas transmission is a significant portion of the company's business and continues to be highly utilized. The company's gas business has been much more significant than the company's oil business and gas has had a much less difficult time than oil from the COVID-19 collapse. Most significantly, however, the company saw >99% re-contracting on TETCO.

That was despite a during COVID-19 April 1 rate settlement. The company expects to continue to focus on its system integrity. It sees potential modest load reductions; however, overall, it expects cash flow to remain strong with ~1% consolidated EBITDA exposure. That strength highlights the company's financial strength during the downturn.

Enbridge Gas Distribution & Storage - Enbridge Investor Presentation

Enbridge's gas distribution and storage businesses have continued to perform well too. The company faced warmer than normal seasonal weather, however, that's not particularly surprising or unexpected. It's within the realms of seasonal volatility for the company.

More importantly, the company continues to have a significantly residential/commercial customer base serving population centers. In this regard, the company is effectively operating, as with all of the low risk, of a utility company.

Enbridge Renewable Power - Enbridge Investor Presentation

Another significant aspect of Enbridge's impressive utility like positioning is the company's renewable energy portfolio expected to provide $0.5 billion in 2020 EBITDA. The project here is incredibly exciting, and the company has a number of development projects here with 99% investment-grade customers. I'd like to see continued success for the company here.

Enbridge Liquid Performance - Enbridge Investor Presentation

The largest aspect of Enbridge's portfolio is its liquids portfolio, supported by the Canadian mainline, which provides $7.5 billion in 2020e EBITDA (55% of consolidated EBITDA). That pipeline provides an integrated system of mainline pipelines while at the same time being well diversified with the company's other assets.

Overall, the company has a well distributed portfolio with strong resiliency.

Enbridge Growth Projects

On top of its existing portfolio, Enbridge has access to significant growth projects.

Enbridge Growth Projects - Enbridge Investor Presentation

Enbridge has a massive $10+ billion in capital projects underway of which the company has $4.5 billion in remaining spending. These projects are all expected to generate high returns at $2.5 billion in incremental cash flows. As a result, if the company finishes investing another $5.5 billion, it'll see a dramatic increase in its cash flow, which will support significant shareholder rewards.

The company has deferred $1 billion in 2020 spending; however, its strong planning means it expects to see minimal impact from in-service dates. The company is continuing to remain diversified and has health and safety protocols to protect the business. The company's strong planning will allow this cash flow to come online soon.

Enbridge Financial Strength

The company will continue to invest in its businesses while maintaining strong financial strength.

Enbridge Financial Strength - Enbridge Investor Presentation

Enbridge has roughly $14 billion in available liquidity counting $3 billion in new standby committed credit facility the company has secured. The company has sufficient liquidity to get all the way through 2021, counting debt due, without further access to the capital markets. However, the company's funding obligations relative to its size are fairly minimal with $1.5 billion in funding remaining.

Specifically, the company has ~$4 billion in cash flow after common dividends highlighting the strength of the company's cash flow position. The company's $1 billion in maintenance expenditures are fairly minimal, but the company's $4.5 billion in secured growth capital spending, as we saw above, will lead to significant growth in future cash flow.

While we expect that the company should start slowly lowering its debt towards ~3.5-4x debt/EBITDA, in the immediate term, the company has the financial strength to avoid that. It's also worth noting that even in the downturn, the company has taken advantage of the markets to maintain opportunistic asset sales to improve its cash position.

Enbridge Customer Strength

Going forward, we can expect Enbridge to maintain its overall strength, liquidity, cash flow, etc. because not only does its core businesses have minimal risk but its customers are also financially strong.

Enbridge Customers - Enbridge Investor Presentation

Enbridge's customers across its businesses are highly investment grade. The customers have strong credit protections with letters of credit and parental guarantees. The company delivers significant power to end use markets, and as a result, with its investment-grade customers, has that utility grade security.

Overall, the credit profile of the company's customers is incredibly strong. Worst case, assuming all of the company's non-investment-grade customers go bankrupt, that would cost the company roughly 4% of its annual EBITDA. That's a fairly minimal amount for the company and it's incredibly manageable by the company.

Enbridge Headwinds

Despite the bullish outlook we have on Enbridge, it's worth noting that not only does the company have some risks (which we'll discuss in the next section) but outside of those risks it also has some significant headwinds.

Enbridge Business Model - Enbridge Community Update

We discussed the strength of Enbridge's portfolio above. However, the company is clearly seeing some threat to its business as it's focused on aggressively cutting costs. Companies that expect a <2% cash flow drop don't normally look at cutting a significant % of their workforce, so Enbridge is setting itself up for a potentially worse scenario.

The company has strong resiliency for a downturn - but it's important to pay attention to management concerns and preparations for a longer downturn. At the same time, in the immediate term, the company continues to have significant COVID-19 related headwinds. That means its future potential depends on COVID-19 resolving itself, which continues to have significant uncertainty.

Enbridge Risk

Enbridge's risk is fairly minimal. Enbridge's risk comes from two things - a long term decline in income from a prolonged shutdown and increased government regulation.

The first risk is the risk from a prolonged shutdown. As has been seen, the company saw volumes decline significantly from a shutdown. While it can handle a short-term shutdown, a longer term shutdown could result in more issues among the company's customers as prices drop. That drop in prices could put Enbridge in a very difficult position.

Enbridge's other risk is the risk from increased government regulation. There has been a dramatic increase in regulation and protests against natural gas and oil pipelines in Canada. While the company has built up much of its existing portfolio, that could put additional pressure on potential future growth. That's a risk that investors should pay close attention to.

However, neither of these risks should stop investors from investing at this time.

Conclusion

Enbridge has an impressive portfolio of cash flow generation and the company has continued to generate significant FCF. The company's FCF is enough to cover its dividend and near the majority of its capital expenditures. The company's significant capital expenditures should provide significant potential growth for the company.

At the same time, the company has minimum COVID-19 related risks. The company's DCF and income have remained very strong despite the collapse, and given the path to recovery is already visible, we expect minimum additional cost for the company. The company's customers are mainly investment grade, and these things together will support strong income.

We recommend investing - let us know what you think in the comments below.

Analyst’s Disclosure: I am/we are long ENB. 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.

Comments

[autofocus111]

Offshore wind is the future of wind power and is an excellent strategy by ENB to slowly shift focus towards renewable power. L3RP, after long delays, is jumping the last couple of hurdles and will be cleared for construction likely before end of 2020. Look for either ENB or TRP to buy a 51% stake in the Canadian government's TM pipeline when the expansion is completed. I also would not be surprised to see ENB eventually acquire a US natgas distribution system that ties into their pipeline network, to go along with their Ontario natgas utility business. ENB will continue to grow for many years.

[autofocus111]

ENB CEO on the green shift.

business.financialpost.com/...

[Bernie Madeoff1]

Adding the now retired Bank of Canada Governor to ENB's board of Directors was a brilliant move and worth at least 5-8 % points....The future looks GREEN!!!

[Humble_Traders]

Enbridge Line 3 project faces more delays from longer permit process again. Enbridge is a quality company but it will face some downward pressures again soon. So prepare to load up on puts or short the market in the short term

[ESGFIRE]

Do you expect enbridge to drop down again a in share price ? Why?

[Humble_Traders]

As I have seen before when news of these delays surfaces, there is some confusion then a drop. Also if you look at RSI, %W and fib, they are already in the top bands. So the chances of going lower is high. The average bottom could be 27ish range using US Enbridge stock. I cannot say if it will be violent drop or slow grinding choppy drop, however

[Vandooman]

Good analysis. I am long ENB but US investors need to be aware of a) currency risk and b) Withhold tax. I recommend holding ENB in an IRA or 401K to avoid withhold. You can get a foreign tax credit in a taxable account but you will not recover 100% and the tax forms are annoying to say the least. For those who poo poo currency risk I avoided a 30% loss on my Canadian holdings by divesting at par, and the low point in 2002 was 62 cents. Don't bet the farm in foreign currencies.

[ESGFIRE]

Isn’t enbridge listed on both the Toronto and NYSE?

[Pro Dist]

Perfect timing-another Minnesota Line 3 delay today!

[bertpom]

Yes, and the story keeps repeating itself for years now... It's unfortunate, at least for investors.

[User 25319]

What else would we expect from the totally incompetent MN government?

[Rjkhk_1960]

Thank you

[Ján Mazák]

The $1.34 is in CAD, so the stock is 35% more expensive than you think. And you mix up DCF and FCF in the text as if it was the same.

A portion of DCF is a return of capital (in the economic sense --- portions of the assets have very finite life). Do you really think that this ~9% DCF yield (adjusted for ROC, but even without that just 10%) compensates for all the risks?

Perhaps better than owning cyclicals at P/E (with normalized E) of 25-30 as some of them trade at, but not that much of a bargain.

[Matthew Brown]

Using P/E to value enbridge is not ideal. They make high use of depreciation to artificially deflate earnings.
Value this and other utilities on cash flow

[Vandooman]

Artificially? You mean they follow accounting standards? What on Earth are you talking about?

[The Sherif]

Yes they follow accounting standards which artificially lowers their earnings. Hence why any company with a high fixed cost asset base uses depreciation to reduce taxation at the corporate level. Such a firm is usually priced based on their cash flow and ability to cover their coats and dividends.

[trsales]

You identify the following risk in the article.

"There has been a dramatic increase in regulation and protests against natural gas and oil pipelines in Canada. While the company has built up much of its existing portfolio, that could put additional pressure on potential future growth."

I view this as a benefit. They experienced much more stable stock pricing compared to Permian pipelines during the recent market crash due to there currently being insufficient capacity from Canada. If companies were going to reduce production the pipeline would still be fully booked as the cuts would come from rail.

[Canuck_in_LV]

The current Canadian government is a threat to any hydrocarbon based energy company. We need a change in government here to bring more balance back into the energy industry.

[BarbieJ]

I agree with you re: change in government. but the covid crisis is going to force the Liberals to rethink their policy decisions on pipeline expansion and the environment. Even the Courts are getting tired of hearing the constant applications that are only intended to prevent economic growth; a few recent decisions have swung the pendulum in favour of pushing ahead with pipelines and focusing on more development in the resource sector. Remember: Justin & his merry band of Liberals bought a pipeline! (TransMountain for 4.5 billion). What are the liberals going to do with it? I suggest that pipeline will be built to kickstart our economy and pay off the quazillion $ in debt the Liberals have spent due to covid. To think that Canada can survive economically by ignoring the hundreds of years of having a resource based economy (to the exclusion of developing other economic strengths) and pretending we can continue to maintain the social 'safety nets' we have to pay for is unrealistic. I think Enbridge is going to thrive with the anticipated changes in Canadian environmental policy that the Liberals will unilaterally impose; how else are they going to get votes in Western Canada? How else will they collect revenues to pay down the debt?

[Canuck_in_LV]

I completely agree with your analysis - it's solid rational thinking. The only problem that I have with it is that you expect the Liberal government to pursue solid rational thinking - this is the party that panders to every minority to buy votes with tax dollars. The overall population of Canada is too ignorant to understand your points, unless they are in the west. I don't have faith in the average Canadian to understand the economy and thus make the right political choices that would support their economic analysis. They are too interested in "free" (long term debt money supplied by the taxpayers) money and not going back to work. I wish that reality meets your analysis - I really do.

[Canuck_in_LV]

This analysis is consistent with everything else I have read about ENB. Wish I had more cash right now to buy more. It's been a solid performer for me at an entry point of less than $30 USD /share.

[Allinvestor]

Been thinking about dropping KMI and replacing it with ENB due to apparent higher resilience at ENB and better growth pipeline, while the yield is pretty much the same. Any thoughts?

[trsales]

@Allinvestor
Remember the Canadian tax on non retirement accounts when calculating your dividend yield.

[wdjax0n]

Canadian dividend tax withheld can most often be claimed as one-to-one credit as if payment against US federal tax.

[Thomas Yeggy]

I am currently trying to submit documents that will waive the w/h tax.There is a tax treaty between the US and Canada (See Article XXI Para 2) but best to hold in individual account lots of paperwork in retirement accounts

[Pro Dist]

Biden is the big risk-that is the internal view at ENB.

[Old Professor]

@Pro Dist No doubt about that.

[RamBird]

Takes more than one monkey to make a zoo. I wouldn’t waste too much time trying to outsmart an uncertain future!

[lithops]

@kieks Not sure what you mean by monkeys. We seem to have enough for a zoo if you mean Biden and Trump and practically all the rest of our politicians. I remember Biden making a speech he copied from the British Prime Minister Callaghan. He was speaking in Pennsylvania, which had a lot of coal mines, so he thought it apropos to include the line in which Callaghan mentioned his coal miner relative. Sadly, while Callaghan had such relatives Biden did not.

Trump...ineffable. "Material for a whole conference there" (if you remember Fawlty Towers). But I'm going to vote for him. At least he isn't afraid to say what he thinks. And...no, that's pretty much it.