Enbridge: Stock of the Week

How to dole out 7% dividends and earn a 7% boost to fair value.

Andrew Willis 4 March, 2024 | 4:28AM
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Key Takeaways for Enbridge Stock:

  • Enbridge (ENB) has been locking in distribution contracts while the competing Trans Mountain Expansion pipe faced delays, and the company contends overall Canadian oil supply is set to increase in the short term.
  • Enbridge has been pressing its cost advantage by lowering tariffs and providing more options and capacity for shippers to move barrels down to the Gulf Coast.
  • With future projects the size of Line 3 unlikely for years, Enbridge's 5% growth profile will be supported by other businesses like gas distribution and a small renewables segment.

 

Andrew Willis: A great way for energy companies to benefit from pipeline delays is by already having a pipeline.

While the Trans Mountain Expansion pipeline faces potential delays from permitting to most recently, construction challenges, Enbridge’s Mainline looks pretty full and the company’s been locking in volumes.

A rising tide of oil supply is great news for Enbridge, while it still controls around 70% of Canada’s takeaway capacity. Sector strategist Stephen Ellis thinks Enbridge is increasingly in the driver’s seat ahead of the competing Trans Mountain expansion entering service early this year. When that pipeline opens, it will have to begin covering the 30 billion dollars in costs it took to get there, which Ellis says puts the idea of a cheaper and more efficient pathway under siege. And Enbridge is pressing its advantage.

Enbridge is Locking Down Competitive Risks – But ESG Risks Continue

Last year’s tolling agreement lowered Mainline tariffs and extended contract terms to the end of 2028. The company is also investing in projects like the Houston oil terminal, providing more options and capacity for shippers to move barrels down to the Gulf Coast along the full pathway of the mainline. Like the contracts, however, the good times can still come to an end. We’re far more uncertain about long-term demand for oil given the emissions intensity – especially with the oil sands. Enbridge isn’t sitting still on this threat however, having recently entered a $1 billion sustainability-linked credit facility and $1 billion bond, which links its ESG performance to borrowing costs.

And it may be necessary as with new pipeline projects the size of Line 3 unlikely for years, Enbridge’s 5% growth profile – and great dividends – will need to come from other businesses like gas distribution, and perhaps eventually, renewables.

For Morningstar, I’m Andrew Willis.

 

bulls Enbridge Bulls Say

  • Enbridge is the liquids-focused version of gas-oriented Williams in terms of an attractive, highly regulated, utilitylike earnings profile.
  • Enbridge offers a highly secure dividend that can increase 3% annually for the foreseeable future.
  • The cancellation of Keystone XL puts Enbridge in a leading position to capture new organic pipeline expansions to serve the unmet needs of producers.

bears Enbridge Bears Say

  • Due to its size and profile, Enbridge is a lightning rod for ESG-related legal and stakeholder challenges across its assets, including Lines 3 and 5 and its small stake in the troubled Dakota Access pipeline.
  • Enbridge's pipelines carry substantial amounts of oil produced in the Canadian oil sands, one of the least environmentally friendly sources of production.
  • Enbridge has yet to build a moaty renewables business, risking its capital investment here over the next few years.

 

The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc49.01 CAD0.41Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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