Enbridge Inc (TSX: ENB) is an energy generation, distribution, and transportation company operating 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

• Resilient Business Model: The company has a resilient business model and a well-diversified source of generating cash flows, which reduces the concentration risk across commodity cycles. The company’s diversified pipeline-utility model drives predictable results in all market cycles. Around 98% of the company’s cash flow comes from long term contract, and the company has recorded consistent growth in its adjusted EBITDA since 2008, despite challenging operating conditions, including global financial crises, commodity price collapse etc. The company maintained its adjusted EBITDA in FY20 as well, despite the challenges presented by COVID-19. The management is optimistic about expanding adjusted EBITDA in 2021 as well.

Source: Company Presentation

• Solid Margin Profile: Over the past eight quarters, the company has consistently reported a decent margin profile except for the March quarter of 2020 because an abnormal situation arises. Otherwise, the company has consistently reported EBITDA margin above 20% over the past eight quarters and Net margin above 10% in the same period. A higher margin reflects the financial prudence of the company.

Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Best in class clientele: Even when the North American oil and gas producers are going through a rough patch, most of its customers have 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 investment-grade 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.

Source: Company Presentation

• Robust Capital Program: The company continue with the execution of its growth capital program and remain focused on the execution of a CAD 17 billion secured capital programme between 2021-23. The company has invested almost CAD 5 billion to date, and ~CAD 10 billion is likely to be spent in FY21. These investments are expected to drive the business growth over the near to medium term.

Source: Company Presentation

• Decent Financial Guidance: Despite the challenges presented by COVID 19, the management is optimistic about its FY21 financial performance. The management expects its adjusted EBITDA to improve and fall in the range of CAD 13.9 billion to CAD 14.3 billion and DCF per share fall in the range of CAD 4.7 to CAD 5.0.

Source: Company Presentation

• A Dividend Aristocrat: Enbridge shares are yielding significantly higher on TSX and offering a lucrative dividend yield for the investors of 7.15%. More importantly, the company has a consistent track record of dividend payment and dividend growth over the past 26-Year regardless of the economic cycle and commodity cycle. Moreover, the company is yielding high amid lower interest rates environment, which makes it an attractive bet. In the past 26-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.

• Line 5 Pipeline - Urgent Executive Action Going Well for Enbridge: Multi-party Canadian House of Commons Special Committee report released on April 15, 2021 affirms the economic importance of the Line 5 pipeline to both Canada and the U.S. and recommends urgent, bi-national executive action to resolve the dispute between the State of Michigan and Enbridge over the Straits of Mackinac crossing. Line 5 is a significant aspect of Canada's economic relationship with the United States and contributes to secure energy supplies in both countries," the report states. Its shutdown could have many implications, including reduced safety, shortages of various energy products on both sides of the Canada–U.S. border, transportation bottlenecks for Alberta's crude oil, and job losses for Canadian and American workers. In this context, the Special Committee believes that the Government of Canada's efforts designed to ensure that Line 5 remains in operation are vital. Further, citizens in Canada and the U.S. have been vocal in stressing the importance of keeping Line 5 operating without interruption until the company can complete the Great Lakes Tunnel Project. Enbridge concur fully with the findings of the report.

• Solid Balance Sheet: 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 debt coverage ratio, with interest coverage ratio at the end of December quarter stood at 3,.1x and Debt to EBITDA ratio above 4.6x. This implies negligible balance sheet risk for the company. Further, the company is committed to maintain Debt/EBITDA ratio in the range of 4.5x to 5x in future.

• Risk Associated with Investment: The outbreak of the new coronavirus (COVID-19) has added a major layer of uncertainty to the oil market outlook. In 2020, global oil demand was contracted 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, a lower demand may have an impact on the company’s pipeline business in terms of volume.

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 17 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 stock stood at 57.37%, and ownership of the strategic entities stood at 0.22% respectively.

Source: Refinitiv (Thomson Reuters)

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

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The group is the safest dividend play in the midstream arena. It is a high yielding dividend aristocrat and the highest-quality pipeline company across the world. The company has a track record of consistent dividend payment over the past 26-Years, and the dividend has increased with a CAGR of 11% at the same time. Moreover, regardless of a challenging 2020, the company has Increased the 2021 quarterly dividend by 3% to CAD 0.835 per share, reflecting the 26th consecutive annual increase.

Further, the company has maintained a strong balance sheet, with 4.6x debt/EBITDA, well within the manageable range, with CAD 10.4 billion in liquidity at some 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 very challenging energy and economic backdrop. ENB already had proven capability of delivering remarkable growth in the toughest time in midstream history.

Further, the company continues to advance its approximately CAD 17 billion secured growth capital program. This diversified organic growth program is entirely consistent with our low-risk commercial model and will 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.

Moreover, its shares are hovering in a steep bullish trend with stock traded well above the short-term as well as long-term support levels of 200-day, 50-day, and 30-day SMAs, which implies a bullish trend in the stock.

Also, the company has consistently reported EBITDA over 20% and Net Margin over 10% for the past eight quarters except for March 2020 quarter due to unprecedented situation arises.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 46.74 on April 15, 2021.   

1-Year Price Chart (as on April 15, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 16, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.