Monday, January 25, 2016

28th AIM Equity Update by Patrick Schulz: Enbridge (ENB): A Recognizable Name in Energy Pipelines

Enbridge Inc. (ENB, $33.45): “Bridging the Gap between Low Commodity Prices and Success”
By: Patrick Schulz, AIM student at Marquette University

Image result for enbridge logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Enbridge Inc. (NYSE:ENB) transports, generates and distributes energy throughout Canada and the United States operating through five business segments: Liquids Pipelines, Gas Distribution, Gas Pipelines, Processing and Energy Services, Sponsored Investments and Corporate.  

• Low commodity prices have caused Enbridge to struggle for the past few quarters.

• Prime Minister Justin Trudeau is expected to implement stricter environmental protection laws, creating a negative effect on some of Enbridge’s projects.

• The Northern Gateway pipeline project continues to suffer setbacks despite Enbridge’s optimistic outlook in the long-term.

• Management continues to show signs of confidence by raising 2016 guidance and increasing their quarterly dividend.

Key points: Enbridge Inc. continues to struggle in this low commodity price environment, as have almost all crude oil and natural gas transportation and storage stocks.  Enbridge Inc. runs the world’s longest crude oil and liquids transportation system and continues to develop projects to enhance their performance.  Along with these projects, Enbridge Inc. owns Enbridge Energy Partners (NYSE: EEP), Enbridge Energy Management (NYSE: EEQ) and Enbridge Income Fund (ENF).  Although the past 12 months have proven to be difficult for energy stocks, Enbridge Inc. was able to show strong signs of improvement in their 2015 Third Quarter Report.  Their most prominent project, the Northern Gateway pipeline, continues to face setbacks stemming from political decisions throughout Canada.

Prime Minister Justin Trudeau, elected into this position late in 2015, has continued to enforce his environmental changes, hoping to elevate the need for concern in this area.  Trudeau has a history of concern for the environment, including fighting against a proposed $100 million zinc mine, which stems from his master’s degree in Environmental Geography at McGill University.  In late November 2015, Alberta, Canada adopted new climate change policy goals for companies to reduce their methane emissions by 45%, adding costs “in the tens or hundreds of millions of dollars over the next five years”.   

The new Canadian government also recently announced an oil-tanker ban along British Columbia’s north coast, which will cause material damage to Enbridge’s Northern Gateway pipeline project.  These new environmental changes have slowed Enbridge’s growth and may continue to have negative effects in the near future.  With Canada appearing to transform into a more environmentally friendly country, alternative energy resources may play a bigger factor in the Canadian economy, edging out Enbridge’s operations.

If stricter environmental laws aren’t enough, Enbridge’s Northern Gateway pipeline project has faced several difficulties over the past several quarters.  Besides the recent oil-tanker ban along British Columbia’s north coast, the Northern Gateway pipeline project continues to face strong opposition from environmentalists and First Nations, an indigenous tribe in Canada.  To add more difficulties to this project, the B.C. Supreme Court ruled that the British Columbia’s government “failed to properly consult First Nations on Northern Gateway pipeline”.  Although this project will continue on its’ track, there may be more uprisings from First Nations if they continue to disapprove of this pipeline project.

In light of all of these setbacks and headwinds, Enbridge continued their financial success by increasing their quarterly dividend by 14%, to C$0.53/share, making it 21 consecutive annual increases.  In 2015, Enbridge increased their dividend by 33%, following a 5-year average of increases of 14% per year.  Management has suggested further dividend increases, around 14-16% through 2019.

What has the stock done lately?
With oil reaching new 10-year lows and remaining volatile, Enbridge’s stock has seen declines over the past few months.  However, despite all of difficulties with commodity prices and headwinds in Canada, Enbridge’s stock has remained flat over the past month and is starting to show signs of positive momentum.  YTD, Enbridge has turned positive, albeit only 1%, and during this past week when oil ended the week positive, so did Enbridge, returning over 10%.

Past Year Performance: ENB has decreased roughly 33% in value over the past year due to the significant decreases in oil related commodities. With management’s continued dividend increases, Enbridge still shows signs of a positive future.  A small rebound in oil prices will add positive momentum to a struggling energy sector.

1 Year Stock Chart vs. Benchmark from FactSet

Source: FactSet

My Takeaway
Enbridge has shown signs of strength during this difficult commodity price environment by continuing their dividend increases and raising expectations for 2016.  Despite the headwinds they face due to environmental concerns, Enbridge has placed themselves in prime position to reap the benefits of a more stable, and possibly higher, oil price environment.  Look for Enbridge to return more wealth to the shareholders and stock price appreciation throughout 2016.

1 Month Stock Chart from FactSet

Source: FactSet

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