Enbridge Inc. (ENB) is a Calgary, Canada-based energy infrastructure company with business platforms that include a network of crude oil, liquids, and natural gas pipelines, regulated natural gas distribution utilities and renewable power generation. 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.

Investment Rationale

• A Consistent Dividend Payer with a Dividend Growth: Enbridge has a consistent track record of dividend payment over the past 10-Year regardless of the commodity cycle. Moreover, the company is yielding higher on the stock exchange and offering a gigantically high dividend yield of ~7.4% amid lower interest rates environment. Moreover, in the past 25-years, the company’s dividend has increased with a CAGR of 11%. Also, a high yielding stock with a consistent track record of dividend payment tends to remain in the investor’s limelight. Also, the company dividend yield is approximately 1.36x of the TSX Composite Dividend yield of 3.3% and ~8x of the Canada 10-Year Government Bond Yield of 0.85%, respectively.

• ENB Shares Entered into a Bullish Price Zone: For the longest time, it seemed that Enbridge stock was stuck below its simple moving averages (SMAs). Since the pandemic led market crash in March 2020, it has been below its 50-day and 200-day SMAs for most of the time. However, since January 5, 2021, Enbridge’s shares traded above the crucial long-term as well as short-term support levels of 200-day, 50-day and 30-day SMAs, and managed to trade above the new crucial support levels of 50-day and 200-day SMA. This implies that the stock has entered into a bullish price zone. Further, the difference between 21-day EMA and 50-day EMA is also positive, which is another bullish indicator. 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. Since technical strength has appeared on the daily price chart of the stock, ENB shares are up for the potential upside movement from the current trading levels.

Technical Price Chart (as on January 14, 2021). Source: Refinitiv (Thomson Reuters)

• Improved Oil Demand: Gradual recovery in the global economic activities has improved energy demand; however, still the demand is lower against the Pre-COVID level. But the vaccine rollout and potential curb in the coronavirus cases would lead to oil demand improvement in the next few quarters. Also, gasoline and jet fuel demand expected to recover once travel restrictions are completely called off. Consequently, the volume is expected to increase for the pipeline business.

• Diversified Revenue Stream: Over the past few years, the company has diversified its revenue streams beyond oil pipeline and earns more than 40% of its revenue through natural gas transmission and storage and renewable energy generation. Therefore, when oil demand (gasoline, diesel, and jet fuel) plunged during the pandemic, the decline was more than offset by an increase in natural gas demand.

• Enbridge Reports Strong Third Quarter 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 2019. The company recorded Cash Provided by Operating Activities of CAD 2,302 million, compared with CAD 2,735 million in 2019. Distributable Cash Flow (DCF) stood at CAD 2,088 million, compared with CAD 2,105 million in 2019. The company reaffirmed 2020 financial guidance range for 2020 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 over 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. Further, the company is committed to maintaining a Debt/EBITDA ratio in the range of 4.5x to 5x in future.

• CAD 10 billion growth capital program execution in the next 3-years (2020-22): The group remain focused on the execution of its CAD 10 billion secured capital programme between 2020-22. The company has invested almost half of the planned expenditure, and ~CAD 5.5bn is still remained to be spent. These investments are expected to drive business growth over the near to medium term.

Source: Company Presentation

• Investment Grade Clientele: 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 is having a 91% investment grade customer base and 100% investment grade customer base in gas distribution and storage. Also, 99% customer base in renewables is also investment grade. Overall, 95% of Enbridge’s enterprise-wide customers base is investment grade. This has allowed the group to generate steadily increasing cash flows in all sites, commodity price downturns, the financial crisis, upstream disruptions, and during COVID-19.

Source: Company Presentation

• Positive Long-term Energy Outlook: The long-term energy demand outlook is quite promising, as global energy demand would rise in the next 2 decades, driven by population growth, an increase in middle class and urbanization. Developing countries by themselves would need at least 35% more energy. And North America has a great opportunity to increase global market share of supply simply because they have the best resources, technology, infrastructure and environmental standards.

Source: Company Presentation

• Risk Associated with 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, the group 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 2019.
• Adjusted earnings stood 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.
• Further, Cash Provided by Operating Activities came in at CAD 2,302 million, compared with CAD 2,735 million in 2019.
• Distributable Cash Flow (DCF) stood at CAD 2,088 million, compared with CAD 2,105 million in the same period of 2019.
• Also, the company commenced construction of the 500 MW Fécamp offshore wind farm and 480 MW Saint Nazaire offshore wind farm construction and it 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 group provided in May for the remainder of 2020, and it 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 centered on executing Enbridge’s secured growth and preserving balance sheet strength and flexibility. Upon completion of the secured growth, the company would maintain its prudent approach to low risk, low capital intensity utility-like growth and disciplined capital allocation including return of capital to shareholders.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 21.68% 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. The institutional ownership in the group stood at 57.37%, and ownership of the strategic entities stood at 0.22%.

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: The sole reason for buying Enbridge stock can be its juicy dividend yield. The company has the ability to maintain its dividend rate and increase it frequently in the foreseeable future. Moreover, after months of weakness in the ENB stock, since January 5, 2021, Enbridge's shares traded above its crucial long-term as well as short-term support levels, which implies that the stocks have entered a bullish price zone.

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.  Further, the group has a resilient customer base with an overall 95% of enterprise-wide customers base as investment grade. Also, the company has diversified its revenue streams beyond oil pipeline and earns more than 40% of its revenue through natural gas transmission and storage and renewable energy generation. Also, the company maintains an investment-grade balance sheet with manageable debt position.

Therefore, based on the above rationale and valuation, we recommend a "Buy" recommendation at the closing price of CAD 45.02 on January 14, 2021.

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 15, 2021 price as well.

Disclaimer

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