Saturday, May 11, 2019

A Current AIM Small Cap Equity Holding: Enbridge, Inc. (ENB, $36.65): “Crossing the Bridge to Long-Term Value” By: Connor Jones, AIM Student at Marquette University


Enbridge, Inc. (ENB, $36.65): “Crossing the Bridge to Long-Term Value”
By: Connor Jones, 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) provides energy transportation services in the oil and gas industry. They operate in five business segments: Liquids Pipelines, Gas Transmission and Midstream, Gas Distribution, Green Power and Transmission, and Energy Services.

• ENB shifted their business model in FY18 to a pure pipeline-utility business, driven by management’s belief that is their niche. This led to them selling off non-core assets and accelerating their deleveraging process.

• Management announced $1.8 billion in new projects for both Liquids and Gas Transmission throughout 2019. They believe the key project will be the Gray Oak Pipeline in the Permian Basin due to their strategy to build a network in the Gulf Coast.  

• ENB has added $460,000 barrels per day of capacity since 2015 and saw a record throughput in 4Q18 that has continued into 1Q19.  

• The Gas Transmission segment reached peak deliveries on almost all of their systems in FY18 and management was able to re-contract over 98% of the revenue that was up for renewal on the major pipes.  

Key points:

After realigning the company’s focus to become a pure pipeline-utility business, management has put new strategic priorities in place. ENB is committed to continue generating reliable, increasing cash flow generation and dividends in FY19 to create shareholder value. They are also focused on streamlining their business to maintain a strong, investment grade balance sheet and to continue developing their low risk pipeline-utility model.

ENB sold off $8 billion of their non-core assets to narrow the firms focus. In 2019, management’s areas of emphasis include enhancing their core business returns. To accomplish this, ENB intends to expand and extend their existing footprint as seen by the $2 billion sanctioned for new extension/expansion projects in the next year. Management is also targeting $5-6 billion in annual self-funded organic growth opportunities to enable them to prioritize capital allocation to drive shareholder value.

These organic growth opportunities have led management to guide a 10% dividend per share growth rate through 2020 followed by 5-7% DCF per share growth rate expected after 2020. This guidance follows ENB’s previous 24 years of sustained dividend increases with a target payout ratio of below 65% of DCF.

With environmental concerns and regulations increasing in the oil and gas industry, management’s disciplined approach to realigning the company’s focus has enabled them to maintain their performance throughout market cycles. ENB has achieved leading safety performance with the highest total inspection miles and lowest release rates per volume of liquids transported in the industry. With many of their upcoming projects being tied to projected increases in demand for LNG, this safety track record will allow ENB to continue to grow market share and expand their long-term customer contracts.

What has the stock done lately?

Since bottoming at $29.22 in December 2018 due to an earnings miss driven by the costs of ENB’s shift in their corporate structure and narrowing the focus of their business model the stock has rebounded to $36.65. ENB has completed their restructuring and have provided positive outlook guidance for their remaining segments giving investors more confidence which has led to the subsequent rise in share price.

Past Year Performance:

In the past year, ENB’s stock price has increased 16.13% to $36.65. The stock remained steady through August 2018, then began to decline as the company began realigning their strategic focus. Investor concern on the transition weighed on the stock causing it to drop through FY18, even with strong company performance. After the transition was successful, the overhang on the stock has cleared up and the price has begun to rebound in 1Q19.



Source: FactSet
My Takeaway:

After successfully redefining the strategic priorities of the company, I believe ENB is trading at a discount to its intrinsic value. The investor fear over the transition period has subsided and the stock is beginning to appreciate again. This trend should continue as ENB has invested heavily in LNG and renewable power to meet changing industry demands. As one of the safest and well-known energy transportation service providers in the industry, ENB is well-positioned to take advantage of the increasing demand for LNG and renewables. With low commodity rate fluctuation risk, long-term customer contracts, and protection from interest rate changes, ENB should provide sustainable, steady growth moving forward.


Source: FactSet


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