Enbridge Inc (TSX: ENB) is a pipeline company, which simply means it transports fuel. 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

• Strong Third Quarter Results and Reaffirms 2020 Financial Guidance: During the third quarter of 2020, the company reported GAAP earnings of CAD 990 million or CAD 0.49 earnings per common share, compared with GAAP earnings of CAD 949 million or CAD 0.47 per common share in the previous corresponding period. Cash Provided by Operating Activities stood at CAD 2,302 million, compared with CAD 2,735 million in 2019. Distributable Cash Flow (DCF) came in at CAD 2,088 million, compared with CAD 2,105 million in 2019. The company reaffirmed 2020 financial guidance range of CAD 4.50 to CAD 4.80 DCF/share, and expect full year results to be near the mid-point of the range.

Source: Company Presentation

• Strong Balance Sheet and Credit Profile: The company maintains an investment grade balance sheet with manageable debt position. However, despite a marginal increase in debt position in 2020, the company still maintains a strong coverage ratio, with interest coverage ratio at the end of September quarter stood at 3x and Debt to EBITDA ratio above 4.5x, which implies negligible balance sheet risk for the company. Further, the company is committed to maintain a Debt/EBITDA ratio in the range of 4.5x to 5x in future as well.

Source: Company Presentation

• Resilient business model: The company’s business is resilient as it does not have any direct commodity exposure. The caveat to this is that the company does not benefit when crude prices go up. However, more importantly, no direct exposure to commodity caps the downside amid large swings. The company’s business is tightly structured thanks to the diverse set of businesses, including liquids, natural gas, utilities, and power. We see compelling value owing to the stability and predictability of the cash flows.

• 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 group has a resilient customer base, including refiners, utilities, integrated producers, etc. In the liquid division, around 97% of the customers are investment-grade, including big names like Imperial Oil, BP, Suncor etc. In the gas division, the group has 91% investment grade customer base, 100% investment grade customer base in gas distribution and storage and 99% investment grade customer base in renewables. Overall, 95% of Enbridge’s enterprise-wide customers base is investment grade.

Source: Company Presentation

• Enbridge is a Cash Cow: Enbridge is offering a gigantically high dividend yield of 7.86% amid lower interest rate environment. Further, the company has a track record of consistent dividend payment and consistently increased dividend over the past 25-years. And, from 1995 to 2020, the company’s dividend has increased with a CAGR of 11%. More importantly, a high yielding stock with a consistent track record of dividend payment tends to remain in the investor’s limelight.

Source: Company Presentation

• Stock Recorded a Positive Break-out on the Daily Price Chart: Enbridge’s shares registered a strong technical breakout on the daily price chart, with stock breached over the crucial short-term resistance level of 50-day SMA on November 24, and heading towards its long-term support level of 200-day SMA of CAD 42.14. ­Further, the Moving Average Convergence Divergence (MACD) is rising, with the difference between 12-day and 26-day EMA is positive, and MACD is hovering well above its 9-day SMA signal line, which is another bullish trend.

Technical Price Chart (as on November 26, 2020). Source: Refinitiv (Thomson Reuters)

• Risk Associated to the 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 breakout of COVID-19 might affect the crude oil demand. Consequently, the group might face lower oil volume flow.

Financial Highlight: Q3FY20

Source: Company Filing

• During the third quarter of 2020, the group’s GAAP earnings stood at CAD 990 million or CAD 0.49 earnings per common share, compared with GAAP earnings of CAD 949 million or CAD 0.47 per common share in the previous corresponding period.
• Adjusted earnings came in at CAD 961 million or CAD 0.48 per common share, compared with CAD 1,124 million or CAD 0.56 per common share in 2019. Further, adjusted earnings before interest, income tax and depreciation and amortization (EBITDA) stood at CAD 2,997 million, compared with CAD 3,108 million in 2019.
• The company reported cash provided by operating activities of CAD 2,302 million, compared with CAD 2,735 million in pcp.
• Distributable Cash Flow (DCF) stood at CAD 2,088 million, compared with CAD 2,105 million in 3Q2019.
• The company commenced construction of the 500 MW Fécamp offshore wind farm and 480 MW Saint Nazaire offshore wind farm construction, which remains on track for late 2022 in-service date.
• The group’s each of the core businesses performed well in the third quarter. Utilization levels in Enbridge’s Gas Transmission, Gas Distribution and Storage and Renewable Power businesses all remained strong, and their robust commercial underpinnings continue to deliver reliable cash flows which reflect the low-risk pipeline-utility business.
• In Liquids, mainline heavy capacity is now fully utilized and full-year volumes are tracking to the guidance range that the company provided in May for the remainder of 2020, and the group is on track to deliver CAD 300 million of cost reductions in 2020.
• Further, in the near term, completion of Enbridge’s secured capital program, and embedded growth within each business, is expected to generate 5% to 7% DCF per share through 2022, and support growing free cash flow, net of capital and dividend requirements. In the near-term, Enbridge’s capital allocation priorities remain centred on executing Enbridge’s secured growth and preserving balance sheet strength and flexibility.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 24.63% of the total shareholding. Capital International Investors and The Vanguard Group, Inc. holds the maximum interests in the company at 4.23% and 3.28%, respectively. Further, four out of the top ten shareholders have increased their stake in ENB, with Manulife Asset Management Limited and T. Rowe Price Associates increased their stakes by 7.22 million and 2.06 million, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Share of Enbridge registered a technical breakout on the daily price chart, with stock breached over its crucial short-term resistance level of 50-day SMA and heading towards its crucial long-term support level.

Also, the group's each of the core businesses performed well in the third quarter. Utilization levels in Enbridge's Gas Transmission, Gas Distribution and Storage and Renewable Power businesses all remained strong, and their robust commercial underpinnings continue to deliver reliable cash flows which reflect the low-risk pipeline-utility business.

The resilient business model positioning the group strongly to weather the current challenging time as 98% of the group's EBITDA is supported by cost of service, long-term take-or-pays or similar structures. Also, resilient, and diversified business model helps the group to generate predictable cash flows.  Distributable cash flow remained strong during the quarter under review. Further, the majority of the cash flows come 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 ensures stability. The company has successfully managed to drive EBITDA despite commodity price collapse in the past as well.

Besides, Enbridge is an excellent investment option for investors seeking steady income flow. Enbridge is a Dividend Aristocrat and has consistently raised its dividend in the last 25 years. Enbridge stock currently offers a dividend yield of 7.86%, which looks attractive.

Therefore, based on the above rationale and valuation, we have given a "Buy" recommendation at the closing price of CAD 41.22 on November 26, 2020.

One-year price chart. Source: Refinitiv (Thomson Reuters)

 

*Recommendation is valid at November 27, 2020 price as well.

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