As Trans Mountain Losses Build, Enbridge Emerges a Winner

We’re looking at a $20 billion loss, maybe more, on the Trans Mountain Pipeline, and Enbridge’s Mainline system is the best alternative.

Ruth Saldanha 3 August, 2023 | 1:28AM
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Ruth Saldanha: The Trans Mountain Pipeline expansion, a crown jewel for Canadian oil that offered key export channel for Canadian producers to reach Asian markets, is now riddled with problems. Morningstar equity analyst, Stephen Ellis, expects a loss of between $15 billion and $20 billion on the project, which is actually good news for Enbridge (ENB). A vicious cycle of higher costs and higher tariffs for the Trans Mountain expansion serves as further fuel for shippers to commit to Enbridge's Mainline. Ellis is here today to tell us what he expects from our once top pick.

Stephen, thank you so much for being here today.

Stephen Ellis: Thank you so much for having me.

Why Does Enbridge Stock Have a Narrow Economic Moat?

Saldanha: So, Enbridge used to be a wide moat stock, and it was extremely undervalued, but now, it's a narrow moat stock that's fairly valued. Can you walk us through what's going on with the stock right now?

Ellis: Yes. So, I think the main thing we are really focused on is the Mainline and Trans Mountain. With Trans Mountain's struggles, I think as you've noted with over-runs, it is definitely becoming much harder for Trans Mountain to be competitive with Mainline. So, for Enbridge, this is a real opportunity for them to capture barrels from Trans Mountain and certainly offer a more attractive option for shippers looking to move barrels down to the Gulf Coast for export.

What Will Happen to the Enbridge Stock Going Ahead?

Saldanha: What are some trends that you're looking at whether they're headwinds or tailwinds for the Enbridge stock right now?

Ellis: Well, I think, the big thing we're looking at is, we've all been, I think, rather concerned about high carbon taxes in Canada. So, one of the things we're looking at, if we kind of figure out is, how these company evolves in the new fuel carrier and energy transition. So, one of the projects there they announced, I think recently, I think, was pretty exciting. They announced a level of intent to develop a low-carbon blue ammonia facility with Yara International. So, this is going to be 1.2 million to 1.4 million tons, with approximately 95% transported and carbon captured. So, it's very, very efficient, very green. And what's really nice is you can see it using all of the existing assets. For example, it is located next to the Texas Eastern Pipeline system which provides low-cost gas feedstock. It is clearing barrels at the Enbridge Ingleside Energy Center, the (old) center, and it is using a joint venture with Oxy for CO2 carbon capture. So, it's a really great opportunity of how Enbridge can position itself in the energy transition.

The Risks Associated with Enbridge Stock

Saldanha: While some of these Trans Mountain Pipeline wars are good for Enbridge, what are some of the risks that you're considering for the company and for the stock right now?

Ellis: Well, I think the biggest risk that we're concerned about, at least in the short run, is really the wildfires. And that is because, obviously the wildfires are very much a negative humanitarian and economic disaster. But for pipeline firms, what they means is the lower volumes. So, it's not necessarily that facilities are going to be shut down, but producers are not going to be able to produce enough of those volumes to really make those facilities run efficiently. So, that is the impact we're going to be looking for in the second and the third quarter earnings, is, what is the impact that those lower volumes are going to be on Enbridge's financials and what can they do to make it take that.

What Should Investors Do with Enbridge Stock Right Now?

Saldanha: Finally, from an investor's perspective, what should investors do right now? If they don't own Enbridge, should they buy some? And if they own Enbridge, what should they do?

Ellis: So, unfortunately, we see Enbridge as more fairly valued at the moment. So, this really means that this is more of a stock that investors should probably wait for it to get a little bit cheaper before buying or at least holding on to their existing stake. However, we do feel like it's a very high-quality company with a narrow moat, and it certainly has opportunities as I've touched on, with energy transition. So, we certainly think it is in a good place going forward, particularly, with the Mainline struggle, with the struggle for Trans Mountain as well, which is certainly a benefit for Mainline.

Saldanha: Great. Thank you so much for joining us today, Stephen.

Ellis: Yeah, thank you so much. I really appreciate it.

Saldanha: For Morningstar, I'm Ruth Saldanha.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc46.53 CAD-1.15Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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