Enbridge Inc.

Enbridge Inc. (TSX: ENB) is an energy generation, distribution, and transportation company in the U.S. and Canada. The company’s pipeline network consists of the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines.

Key Updates:

• Weak margin profile: The group posted lower profitability margin in Q3FY21, as compared to the industry median, which indicates poor operational efficiency and remains a major concern for the company. Notably, ENB reported its gross margin and operating margin 34.5% and 11.1%, respectively, significantly lower than the industry median of 55.9% and 24.5%, respectively. Notably, the company reported its net margin of 7.1%, lower than the industry median of 8.9%.
  

• Rising debt levels remains a key concern: The company reported a constant increase in its total debt in the recent quarters, which is dampening the company’s overall financial flexibility. Notably, the group reported its total debt of CAD 70,934 million in Q3FY21, which is the highest in the last five quarters. Moreover, debt to equity ratio stood at 1.31x, as compared to the industry median of 0.74.                

Analysis by Kalkine Group

• Poor working capital management: The company is struggling to meet its short-term liabilities with its current assets and posted quick ratio and current ratio of 0.46x and 0.55x, respectively, lower than the industry median of 0.81x and 0.94x, respectively.

• EBITDA on a downtrend: In the recent quarters, the company reported a slide in its profitability which remains a major concern for the company. Notably, EBITDA stood at CAD 3,269 million in Q3FY21, which is the lowest in the last three quarters. The decline was primarily due to the sluggish performance from liquids pipeline segment, which is the major contributor to the company’s EBITDA.

• Hovering near the upper band of Bollinger band indicator: At the daily price chart, the stock of ENB closed near the upper range of its 20-days Bollinger band, indicting a possible correction from the recent level.       

Technical Price Chart (as on November 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

Risks:  The majority of the company’s relies upon the existing crude oil prices, and a volatility in the commodity prices would dampen the company’s earnings and cashflows.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

In Q3FY21, the group reported its net debt to EBITDA of 29.97x, which is considerably higher than the industry median of 5.62x. A higher net debt to EBITDA ratio indicates a weak debt protection ability of the firm. We have valued the stock using the price to P/CF based relative valuation method and have arrived at a lower double-digit downside (in percentage terms). For the said purposes, we have considered peers like Inter Keyera Corp, Pembina Pipeline Corp etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of ENB at the last traded price of CAD 52.69 on November 08, 2021.

One-Year Technical Price Chart (as on November 08, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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