Company Profile:

Enbridge Inc. (TSX: ENB) is a leading North American energy infrastructure company. The company’s core businesses include Liquids Pipelines (that transports crude oil and other liquid hydrocarbons). The company boasts of transporting about 25% of the crude oil produced in North America. Besides transporting crude oil, Enbridge, through its Gas Transmission and Midstream segment, transports about 20% of the natural gas consumed in the US. Meanwhile, Enbridge, through its Gas Distribution and Storage services, serves nearly 3.8 million retail customers in Ontario and Quebec. Also, the company has a Renewable Power Generation business, generating about 1,750 megawatts (MW) of net renewable power in North America and Europe.

Investment Rationale

• Enbridge has the best and largest customer base: So even when the North American oil and gas producers are going through a rough patch, most of its customers have rock-solid balance sheets. Here, we are talking about companies like Exxon, BP, Suncor, and Flint, to name a few. The majority of the company’s volumes come from these large companies which have stellar balance sheets. On the gas transmission side, Enbridge has Eversource, BP, Nextera, CFE, among others. In totality, Enbridge’s 94% of the customers have an investment-grade balance sheet. The number is higher in the case of liquids (about 97%). Notably, most of the producers also have integrated business, which means they are hedging with refining margin at the time of low prices. Further, the company’s liquids contracts are of long-term, typically of 10 to 20 years, which ensures stability. The company has successfully managed to drive EBITDA despite commodity price collapse in the past as well.

• Strong quarterly performance amid challenging time: While the second quarter was an abysmal one for the oil sector, it had a minimal effect on the Enbridge’s financial performance because of its strong fee-based business model. The Canadian mid-stream giant remains on track to achieve its full-year forecast. The company generated a Distributable Cash Flow (DCF) of CAD 2,437 million compared to CAD 2,310 million in the previous corresponding period and the company re-affirmed financial guidance range for 2020 of CAD 4.50 to CAD 4.80 DCF/share. 

• Income Investor Friendly: Enbridge is a cash cow and has consistently boosted its shareholders’ returns through higher dividends. The company has a long track record of paying dividends. The group announced a dividend of CAD 0.81 per share at a time when the sector is going through a steep pain. This shows the resilience of the company’s business model. At the last traded price, the stock was offering a dividend yield of ~7.5%, which is lucrative considering the current interest rate environment. Amid falling interest rate environment, high-yield dividend-paying stocks like Enbridge Inc tend to be popular among income investors. Investors should note that the current pay-out rate is sustainable despite near-term challenges, owing to the company’s low-risk and regulated business which ensures a steady flow of income. Barring short-term headwinds, we expect the company’s distributable cash flow to remain strong in the coming years.

• Strong Balance Sheet: The company took advantage of lower interest rate to raise CAD 6.9 billion of capital in the first half of 2020, which bolstered the group's liquidity to CAD 14 billion, which seems to be adequate to meet its obligations through this challenging times. Further, the long-term debt to total capital ratio of the company stood at 46.5%, which is quite manageable given the balance sheet strength of the company. With a strong balance sheet and relatively conservative payout ratio, Enbridge can be able to continue increasing its dividend, which it has done for the last 25 straight years.

• Relative strength against the sector peers: Over a month, shares of ENB shares added approximately 5% and outperformed the sector peers by ~ 2.5% in the same time and outperformed the benchmark index marginally. In the last 5-trading sessions its shares have bagged approximately 3.5% and outperformed the competition by 3.5% and benchmark index by 1.73% in the same times. Further, the relative outperformance of ENB shares against the sector peers over the past 3-Months stood at 2.47%; however, underperformed the benchmark by ~8%. However, on a YoY basis and YTD basis, its shares losses around 1% and 16%, but significantly outperformed its sector peers by 28% and 21% at the same time.

• Technical measures indicate a potential uptrend: The Moving Average Convergence Divergence (MACD)- a momentum oscillator is rising, and the difference between 12-day and the 26-day exponential moving average is positive, which is a positive price trend. Also, its shares have relatively outperformed the sector peers on a YOY basis, YTD basis, 3-Month, 1-Month and last 5 trading sessions, by approximately 28, 21%, 1.7%, 5% and 3.5% respectively, which shows the strong relative strength of ENB shares against the competition. Further, its shares have traded above the crucial short-term support levels of 30-day, and 50-day moving averages.

• Key Risk Associated to Investment: The group’s earnings and cash flows are exposed to movements in foreign exchange rates as it generates certain revenues, incur expenses, and hold a number of investments and subsidiaries that are denominated in currencies other than Canadian dollars. Any fluctuation in the exchange rate is likely to affect the group’s financials. Further, COVID-19 pandemic had reduced the crude oil demand. Consequently, the group might face lower oil volume flow in the near term.

 

2QFY20 Highlights

Source: Company filing.

The group’s earnings attributable to common shareholders declined by CAD 89 million to CAD 1,647 million from CAD 1,736 million reported a year ago. Adjusted EBITDA in the second quarter of 2020 increased by CAD 104 million to CAD 3,312 million compared to CAD 3,208 million reported in the previous corresponding period. The increase was driven by strong utilization in gas pipelines and utility, incremental earnings from positive rate settlements on Texas Eastern, contributions from new assets that were placed into service throughout 2019 and the first quarter of 2020 and Energy Services profit from favourable storage opportunities. These positive were partially offset by lower earnings from Liquids Pipelines due to lower Mainline throughput related to COVID-19 and the absence of contributions from the federally regulated Canadian natural gas gathering and processing business sold on December 31, 2019.

Adjusted earnings in the second quarter of 2020 decreased by CAD 216 million to CAD 1,133 million. The decrease was primarily driven by a reduction in capitalized interest and higher depreciation from new assets placed into service throughout 2019.

DCF for the second quarter stood at CAD 2,437 million, an increase of CAD 127 million over the second quarter of 2019 driven largely by the net impact of the operating factors mentioned above as well as lower maintenance capital due to the timing of spending in light of COVID-19.

Further, the company made excellent progress on its expansion program during the first half of 2020. It is currently working on CAD 11 billion of expansion projects that should start up through 2022. The company also took advantage of lower interest rate to raise CAD 6.9 billion of capital in the first half of 2020, which bolstered the group’s liquidity to CAD 14 billion, which seems to be adequate enough to meet its obligations through the challenging times.

Stock Performance

At the closing (on July 30, 2020), shares of ENB traded approximately 0.32% lower at CAD 43.38. In a year-over period, its shares have registered a 52W High of CAD 57.32 on 11-Feb-2020, and a tested a 52W Low of CAD 33.06 on 18-Mar-2020. At the last closing price of CAD 43.38, its shares traded approximately 24.3% below its 52W High and approximately 31% above its 52W Low price level.

1-Year Price Performance (on July 30^th, 2020, after the market close. Source: Refinitiv (Thomson Reuters).

Further, at the last closing price, its shares traded above the crucial short-term moving averages of 30-day, 50-day and 60-day, which is a positive indicator; however, traded below its long-term moving average of 200-day, which typically considered as strong support level in any stock. Though, the stock price is moving towards its 200-day long-term support level and trading above crucial short-term moving averages, another favourable trend. The 14-day and 9-day Relative Strength Index (RSI) oscillator hovering in neutral territory, though inclined more towards the overbought zone.

ENB shares have recorded positive price changes over the last 3-Months, 1-Months and 5-day trading sessions and up by 1.71%, 5.1% and 3.5% respectively. And relatively outperformed its sector peers at the same time. However, on a YoY basis and YTD basis, its shares losses around 1% and 16%, but significantly outperformed its sector peers by 28% and 21% at the same time.

Top-10 Share Holding

The top 10 shareholders have been highlighted in the table, which together form around 24.6% of the total shareholding. Capital International Investors and The Vanguard Group, Inc. hold the maximum interests in the company at 7.69% and 3.31%, respectively. Further, six out of top-10 shareholders have increased their stake in the company over the last three months, with Capital International Investors and Manulife Asset Management Limited are among the top investors in the company which have increased their stakes by +28.06 million and +10.69 million, respectively. The institutional ownership in the ENB stood at 60.17%, and ownership of the strategic entities stood at 0.21%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales Based Valuation

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Stock Recommendation: Despite the pandemic's impact, Enbridge delivered a solid Q2 result, with strong EBITDA and distributable cash flow. Further, the company made excellent progress on its expansion program during the first half of 2020. It is currently working on CAD 11 billion of expansion projects that should start up through 2022. During the quarter, the company secured four new gas utility projects and approved another European offshore wind farm. Further, the group stated that it could grow its distributable cash flow per share at a 5% to 7% annual rate through 2022. Further, the majority of the cash flows comes from reservation-based revenue contracts, and over 90% of the customers are investment grade. Further, the company's liquids contracts are of long-term, typically of 10 to 20 years, which ensure stability. With a strong balance sheet and relatively conservative payout ratio, Enbridge should be able to continue increasing its dividend, which it has done for the last 25 straight years.

Amid falling interest rate environment, high-yield dividend-paying stocks like Enbridge Inc tend to be popular among income investors. With Enbridge yielding 7.5% and having paid a dividend for the last 10-years, can attract many investors. The 7.5% dividend yield of Enbridge is approximately 16 times of the Canada 10 Year Benchmark Bond Yield is at 0.47%, and 2.1 times of the TSX 300 Composite Index.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 43.38 (as on July 30th, 2020, after the market close), based on the NTM Peer's Average EV/Sales multiple of 3.86x, on the FY20E Sales. We have considered Pembina Pipeline Corp, TC Energy Corp, and Canadian Natural Resources Ltd etc., as a peer group for comparison purpose.

 

*Recommendation is valid at July 31, 2020 price as well.

*Please be aware that dividend is variable and not guaranteed.

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