By:
Philip Suess, AIM student at Marquette University
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.
Summary
• Enbridge, INC. (NYSE:ENB) operates in the natural gas and petroleum
product industries in North America. They provide gathering, processing,
transmission, and distribution of natural gas, transportation of crude oil, and
marketing of petroleum products.
• Enbridge has undergone
significant changes in corporate structure as the board is attempting to bring
their four affiliated businesses back under one entity. This restructuring is projected
to result in the consolidation of $11.4 billion in assets.
• Over the past year,
natural gas prices have struggled declining 5.18% from one year ago. The
decline in price has harmed operations and is reflected in recent margin
declines.
• Enbridge operates in a
capital intensive industry and has struggled to generate free cash flow due to
significant spending on capital expenditures. This has made the company very
dependent upon cash flow from financing activities.
• Enbridge struggles are
expected to continue through the rest of 2018 as the EIA only projects the
price of natural gas to rise slightly to $3.05 in 2019. Additionally, natural
gas production has jumped 10% this year according to the Department of Energy.
Key
points:
On May 17, 2018, Enbridge announced plans to bring
their four related businesses under one entity in an effort to simplify their
corporate structure and adjust to changes in the US tax code. Enbridge is still
in the process of this simplification but has acquired the outstanding shares
for Enbridge Income Fund Holdings Inc. for $3.6 billion and Enbridge Energy
Partners LP and Enbridge Management Energy Management LLC for $3.5 billion.
Enbridge most recent offer for the final related business, Spectra Energy
Partners was rejected. Ultimately, Enbridge is expected to acquire the remaining
shares outstanding for Spectra Energy Partners but the price is still unclear.
The potential cost of this final acquisition and the unfavorable outlook for
the natural gas market create a negative future outlook for Enbridge.
.What has the stock done lately?
Enbridge’s share price
bottomed in May before rallying in July following the announcement of a
divestiture in their natural gas segment. This announcement gave the stock
momentum heading into the end of summer, but it has struggled recently. In the
past month, the share price has fallen 4.65%.
Past
Year Performance:
Enbridge’s 1 year total return is -11.12%.
The stock declined consistently following the announcement of the consolidation
of assets until July, when their divestiture was announced. During the year, Enbridge’s
relative valuation metrics have declined with the share price making the stock appear
cheaper by historical comparison.
1
Year Stock Chart relative to Russell Global x US
Source: FactSet
My
Takeaway:
Enbridge is currently undergoing
significant restructuring with the consolidation of assets and the $3.28
billion divestiture in July. Since the restructurings, Enbridge’s operating
margins have declined and their total debt/ebitda (ttm) has risen from 10.3x to
11.5x. Looking forward, there is significant uncertainty surrounding Enbridge given
their recent restructurings, free cash flow issues, and the unfavorable outlook
for the natural gas industry. Given this uncertainty, it recommended investors
reverse flow on Enbridge.
1
Month Stock Chart
Source: FactSet
