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
