Enbridge Inc (TSX: ENB) is an energy generation, distribution, and transportation company in the U.S. and Canada. Its pipeline network consists of the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada's largest natural gas distribution company. Additionally, Enbridge generates renewable and alternative energy with 2,000 megawatts of capacity.

Investment Rationale

• 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. In the gas division, the group has a 91% investment grade customer base; the group has a 100% investment grade customer base in gas distribution and storage and a 99% customer base in renewables. Overall, 95% of Enbridge's enterprise-wide customers base is investment grade. More importantly, the group's business has a strong commercial underpinning, the best customers, and a solid balance sheet. And all of that has allowed them to generate steadily increasing cash flows in all sites, commodity price downturns, the financial crisis, upstream disruptions, and now, COVID.

Source: Company Presentation

• 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.

• Positive Long-term Energy Outlook: The long-term energy demand outlook is quite promising, as global energy demand is likely to 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 the global market share of supply simply because they have the best resources, technology, infrastructure, and environmental standards.

Source: Company Presentation

• Balance Sheet Strength: The company maintains an investment-grade balance sheet with a manageable debt position. However, despite a marginal increase in debt position over 2020, the company still maintains a strong debt coverage ratio. The interest coverage ratio at the end of the December quarter stood at 3,.1x and the Debt to EBITDA ratio above 4.6x, which implies that the company would be able to meet if financial obligation easily. Further, the company is committed to maintaining a Debt/EBITDA ratio in the range of 4.5x to 5x in future as well.   

Source: Company Presentation

• A Friend of Income Investors: Despite Enbridge's shares have done well recently; still, its shares are offering a very lucrative dividend yield of 7.6%. More importantly, the company has a consistent track record of dividend payment and dividend growth over the past two decades, regardless of the economic cycle and commodity cycle. In the past 25-years, the company's dividend has increased with a CAGR of 11%. 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 ~6x of the Canada 10-Year Government Bond Yield of 1.26%, respectively.

Dividend Payment History. Source: Refinitiv (Thomson Reuters)

• ENB's Shares Entered in a Bullish Price Zone: Strong recovery in the oil demand has sent Enbridge stocks higher. Since the 5th of January 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, which implies that the stock has entered 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. Further, 14-day RSI is hovering in the neutral zone.

Technical Price Chart (as on February 25^th, 2021). Source: Refinitiv (Thomson Reuters)

• Improved Oil Sector Fundamentals: Oil Fundamentals continue to improve with strong global demand for North America supply. Further, 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 would be completely called off.

Source: Company Presentation

• Risk Associate to Investment: The outbreak of the new coronavirus (COVID-19) has added a significant layer of uncertainty to the oil market outlook. In 2020, global oil demand is expected to contract for the first time since the global recession of 2009. The situation remains very fluid, however, making it extremely difficult to assess the full impact of the virus. Also, demand from the aviation sector would continue to suffer from the contraction in global air travel. Therefore, lower demand would have an impact on the oil integrated companies across the world.  

Financial Highlight: FY20

Source: Company Filing

• Full-year revenue of the group impacted on YoY basis, because of lower commodity sales, gas distribution sales and transportation and other services, as oil industry went through large swing in FY20.
• Full year GAAP earnings of CAD 3.0 billion or CAD 1.48 per common share, compared with GAAP earnings of CAD 5.3 billion or CAD 2.64 per common share in 2019, all of which amounts include non-recurring and unrealized items.
• Adjusted earnings of CAD 4.9 billion or CAD 2.42 per common share, compared with CAD 5.3 billion or CAD 2.65 per common share in 2019.
• Cash Provided by Operating Activities of CAD 9.8 billion, compared with CAD 9.4 billion in 2019.
• Distributable Cash Flow (DCF) of CAD 9.4 billion, compared with CAD 9.2 billion in 2019, largely driven by the net impact of the operating factors and higher cash distributions in excess of equity earnings due to new assets placed into service.
• Enbridge has exited 2020 in a strong financial position with Debt to EBITDA of 4.6x and expects it to remain within the target range of 4.5 to 5.0x throughout 2021, inclusive of spending on its secured growth capital program.
• The Company continues to advance its approximately CAD 16 billion secured growth capital program. This diversified organic growth program is entirely consistent with their low-risk commercial model and would generate approximately CAD 2 billion of additional EBITDA between 2020 and 2023. This includes CAD 1.6 billion of growth projects, which were placed into service in 2020 and early 2021.
• Further, the company Increased the 2021 quarterly dividend by 3% to CAD 0.835 per share reflecting the 26th consecutive annual increase.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 21.48% of the total shareholding. Capital International Investors and RBC Wealth Management, International holds the maximum interests in the company at 3.79% and 3.25%, respectively. The institutional ownership in the ENB stood at 57.37%, and ownership of the strategic entities stood at 0.22% 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: Enbridge is the safest dividend play in midstream segment with robust dividend yield and the highest-quality pipeline across the world. The company has consistently paid dividend over the past 26-Years, and dividend has increased with a CAGR of 11% at the same time. Further, the company has maintained strong balance sheet, with 4.6x debt/EBITDA, well within the manageable range, with a CAD 10.4 billion in liquidity at one of the lowest costs in the industry.

Moreover, operationally Enbridge performed well in the fourth quarter of 2020, completing a strong year in the face of a very challenging energy and economic backdrop. ENB already had proven capable of delivering remarkable growth in the toughest time in midstream history.

Further, the Company continues to advance its approximately CAD 16 billion secured growth capital program. This diversified organic growth program is entirely consistent with the low-risk commercial model and would generate approximately CAD 2 billion of additional EBITDA between 2020 and 2023.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 44.16 on February 25, 2021

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 26, 2021 price as well.

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