Tuesday, September 25, 2018

A current AIM Program International Equity Holding: Enbridge, Inc. (ENB) by: Philip Suess. "Reverse Flow on Enbridge"


ENBRIDGE, Inc. (ENB, $34.61): “It Appears to be Time to Reverse Flow on Enbridge”
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