Tuesday, December 3, 2019

A Current AIM International Equity Holding: Enbridge Inc. (ENB, $38.20): “Don’t Burn this Bridge”

Enbridge Inc. (ENB, $38.20): “Don’t Burn this Bridge”
By: Max Rothweiler, 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.


·         Enbridge Inc. (NYSE:ENB) is a Canadian multinational energy transportation company engaged in the transportation, distribution, and generation of energy in North America. The company is North America’s third largest gas utility by consumer count and transports around 20% of U.S. consumed natural gas.
·         ENB doubled its EPS from 2018 to 2019 for the six months ended June 30 in each of these years. This was largely attributed to the company’s near 10% increase in operating revenues.
·         In liquids, ENB delivered a record 2.785 million barrels per day on their Mainline System in 2018.
·         As a natural gas provider, ENB delivers energy to approximately 3.7 million homes and businesses.
·         ENB has a $19 billion inventory of secured projects which are projected to be running between 2019 – 2023. Management considers these as “growth projects” which will build on several key business segments.

Key Points:

Enbridge has a low risk business model that enables steady and predictable cash flows – the firm estimates $3.5 billion per year in positive free cash flow by 2020. In 2018, Enbridge sold off $7.8 billion in non-core assets. These assets were gathering and processing businesses, and management believes they are more equipped to handle a pure utility and pipeline business. The profits from these divestments were used to strengthen the balance sheet by repaying debt. This helped bring down the debt to EBITDA metric to 4.7x which was below the target of 5.0x.

 According to the International Energy Agency, global energy demand will increase 25% by 2040. This increase is greatly driven by greater urbanization and population growth. As demand for energy continues to grow, demand for energy transportation and distribution will also grow.

Enbridge has the largest organic capital growth program across its industry. Since 2009, the firm has brought around $50 billion worth of projects into service which strengthened the firm’s strategic position and core asset base. Management projects that organic growth opportunities will cause annual distributable cash flow per share growth between 5-7% past 2020.

What has the stock done lately?

ENB is trading near its 52-week high, and the stock has experienced mild volatility as oil prices fluctuated. When oil prices dropped in late September 2019 (WTI and Brent were down around 15%), ENB dropped about 5%. Since then, the company has recovered and is up about 8%. Most recently, ENB met earnings estimates for Q3. The firm reported EPS at $.42.

Past Year Performance:

Over the past year, ENB’s stock price is up 19.38% from $32 to $38.20. The 52-week high and low are $38.34 and $29.21 respectively. In January 2019, ENB experienced a significant rise in stock price. ENB rose 17.8% during this month mostly due to a bounce back in the oil market and performance upgrades from analysts.

Source: FactSet
My Takeaway:

As 2020 approaches, ENB is positioned well for growth. Management is confident that their low risk business model combined with nearly $20 billion worth of new projects beginning operations in 2020 – 2023 will help drive free cash flow. Additionally, ENB has industry leading organic growth and disciplined capital allocation. The U.S. Energy Information Administration projects U.S. crude oil production to increase .9 million to 13.2 million barrels per day in 2020. This will further increase the demand for ENB’s crude oil and liquids transportation system which is the longest in the world. ENB has proven to be a strong performing company that should continue to grow.

Source: FactSet