- 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.
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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 1Q 2020 Results
In the middle of one of the largest oil business interruptions, Enbridge has performed incredibly well.
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.
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.
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'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.
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.
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