ENB - Enbridge

[Viking]

Anyone have thoughts on Enbridge? 5 years ago the stock was trading at CAN $ 47. Early in 2017 the stock traded as high as CAN $57. Today the stock is trading at CAN $42.65. The dividend is $2.68/share = yield of 6.55%. Management is guiding they will grow the dividend by 10% each year moving forward.

 

What is the issue? Their made a very large acquisition last year and it has not worked out as planned yet. Management has stated they will be selling off min $3 billion of none core assets.

 

Long term interest rates moving higher also is not good for utility stocks.

 

It looks to me like the company has some issues they need to clean up. However, they should be able to do so over the next 12-18 months. Stock looks pretty cheap today at CAN $42. Looks like a good candidate to hold in place of a bond.

 

Thoughts?

 

Summary article: https://www.fool.ca/2018/02/05/is-enbridge-inc-s-dividend-safe/

[Spekulatius]

I have been buying quite a bit of it recently. That’s my thought. I also own SEP in my taxable account and a bit of EEQ. They are all cheap, IMO.

[rb]

I haven't done a deep dive so I can't say for sure but at current levels it still doesn't look cheap. It's 1.25 book and their ROE wasn't very impressive. A lot of the assets are regulated so they can't charge through the skies for them. KMI is about 1.1.

 

I don't think the dividend is a good measure. They've been issuing stock to maintain the dividend. That's neither a good strategy nor a good position to be in.

 

All that being said I like the assets they have. I just think think they're bad (mainstream?) capital allocators. You could probably make ok money from here if you assume that they won't do more stupid shit. I'm just not convinced it's worth it for me here. More research needed for sure.

 

 

[gokou3]

I haven't done a deep dive so I can't say for sure but at current levels it still doesn't look cheap. It's 1.25 book and their ROE wasn't very impressive. A lot of the assets are regulated so they can't charge through the skies for them. KMI is about 1.1.

 

I don't think the dividend is a good measure. They've been issuing stock to maintain the dividend. That's neither a good strategy nor a good position to be in.

 

All that being said I like the assets they have. I just think think they're bad (mainstream?) capital allocators. You could probably make ok money from here if you assume that they won't do more stupid shit. I'm just not convinced it's worth it for me here. More research needed for sure.

 

I am not so sure if P/B and ROE are the important metrics to look at given they have long-life assets acquired from long ago.  That said, it trades at 12x EV/2018e EBITDA which isn't cheap either.  I have long ENF which is at a more reasonable 10.3 EV/2018e EBITDA.  Management expects 10% annual dividend growth for each of the next 2 years while maintaining a payout ratio ~80%.

 

 

 

[rb]

Enbridge is an asset heavy company. If P/B is not relevant for whom is it relevant?

[LC]

Enbridge is an asset heavy company. If P/B is not relevant for whom is it relevant?

Financials perhaps?

 

I was looking at ENB a month or so ago but they seem poorly managed and also the share issuance as you mentioned both turned me off.

[Spekulatius]

They issued some stock to pay for ~12B in Capex this year. Most of the equity raises came from sponsored vehicles. THey have an enormous Capex program that this year will result in ~2B in incremental EBITDA, which will make the EV/EBITDA ratio look much better. The cash flows from these expansion projects will flow for decades. This is like an utility but with better regulation (FERC) and better growth prospects.

 

Their plan is to raise the dividend by 10% for a couple of years (which is possible based on current projects completed or in the works) from a almost 7% starting yield.

[Uccmal]

I have a large position and took the low price opportunity to buy more and reduce my ACB by quite alot. 

 

The issues:

 

1) Rising interest rates.  This is an unknown quantity.  There are several moving parts here.  Right now the market is punishing utilities in general due perception that interest rates are going to keep going up.  We dont know what is going to happen on this front.  I dont believe that interest rates are going to get very much higher before we see a pause or even a retrace due to a recession.  If you believe interest rates are going to go up faster than utlities can raise their rates then its probably a mediocre deal at these prices.

 

2) Stock dilution.  This was done to finance the Spectra takeover, and several other projects including the Line 3 replacement.  Spectra came with a large backlog of projects.  The equity issuance was not done to finance the dividend.  However, since the money comes from the same pile it could look that way. 

 

3) Line 3 replacement.  This is under construction and will double the thru put to 700000 bpd.  Right now Minnesota is the hold out.  They are expected to decide on the status of the application in June.  Until is is affirmed the stock will trade lower.  Once it is given the go ahead the pipe will be put in the ground quickly.  The Canadian section and the Wisconsin sections are under construction.  I dont see Minnesota turning down the pipe if it meets their Env. standards.  It is more or less following the route of the old pipe which is still moving barrels.  Shuttering the old pipe and getting the fees for the new larger pipe has both a positive environmental and economic impact. 

 

4) The dividend payout ratio is supposedly -70% based on the Cash Flow from operations.  It exceeds 100% by quite a bit when looking at EPS.  This is right now without the additional projects online.  Enbridge has been taking steps to reduce Spectras overpriced debt, amd rationalize Spectra. 

 

Upside:

1) Largest pipeline provider in North America by a substantial margin before the added projects.  This gives them some pricing power.  It is readily apparent that having pipe is very different these days from trying to build pipe from scratch.  These guys have decades of dealing with governments, land claims proponents, and the public.  Someone else trying to build a competitive pipe from scratch is at a supreme disadvantage.

 

2) Size and cash flow allows them access to cheaper capital than smaller players. 

 

3) A large amount of projects will come on line over the next 3 to 4 years.  They are even building a gas pipe from Texas into Mexico.  These projects should support cash flow and bring the payout ratio lower. 

 

The finances are a dogs breakfast with all the subs and sponsored vehicles.  That said they have the pipe, obviously have the customers (more than they can handle right now), and the scale. 

 

 

 

 

[KCLarkin]

Enbridge is an asset heavy company. If P/B is not relevant for whom is it relevant?

 

This is actually a very interesting case study. The book value is likely understated, since the replacement cost would be much higher than the cost on the books. But if the book value is understated, that means ROE is overstated. So these should net each other out. At first glance, ROE seems to be ~10%. Now, the key variable is the cost of equity. Given the utility-like nature of pipelines, they should have a very low cost of equity. Maybe 6-8%. Depending on your growth assumptions, you could easily justify a P/B of >2 for Enbridge.

 

Now, ROE and P/B are probably temporarily distorted due to the capital raise and merger. And subs and sponsored vehicles add complexity. So, I would be cautious using P/B for the valuation. But the median historical P/B for Enbridge (according to Gurufocus) is 3.1. So it certainly looks cheap compared to historical and theoretical valuations. Whether that cheapness is justified, I don't know. The fiasco at KMI et al probably raised cost of equity for all pipelines, so historic P/B may not be a reliable benchmark going forward.

 

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What is very clear, is that the ROE is not high enough to support both the dividend and the growth of the company. So it will be a serial share issuer. But this might be value creating, since the higher dividend lowers the cost of equity (since certain investors have a preference for dividends).

 

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Anyway, this stock could certainly provide 15%+ returns over the next few years. But I'm reluctant to purchase since I don't why it continues to sell-off.

 

 

[JRM]

Enbridge is an asset heavy company. If P/B is not relevant for whom is it relevant?

 

This is like saying price to book matters for Burlington Northern.  Much of the pipe in the ground was fully depreciated years ago.  The current book value also includes goodwill and intangibles from buying out smaller pipeline companies above book value.  Long term distributable cash flow matters.  Long term contracts, hedged positions, and exposure to natural gas/oil/other liquids matters.

 

I think Kinder Morgan offers similar downside with much more potential upside, for whatever its worth.

[rb]

Enbridge is an asset heavy company. If P/B is not relevant for whom is it relevant?

 

This is like saying price to book matters for Burlington Northern.  Much of the pipe in the ground was fully depreciated years ago.  The current book value also includes goodwill and intangibles from buying out smaller pipeline companies above book value.  Long term distributable cash flow matters.  Long term contracts, hedged positions, and exposure to natural gas/oil/other liquids matters.

 

I think Kinder Morgan offers similar downside with much more potential upside, for whatever its worth.

If that were true, fully depreciated pipe still earning, etc that means that their ROE should be large. That hasn't been the case with ENB. To use your railway example,  if you look at UNP it's ROE is much larger.

[KCLarkin]

If that were true, fully depreciated pipe still earning, etc that means that their ROE should be large. That hasn't been the case with ENB. To use your railway example,  if you look at UNP it's ROE is much larger.

 

Worth noting that ENB is a serial issuer of shares and UNP buys back shares. So that would distort both ROE and Book Value.

[JRM]

I guess my point was that book value is understated in some cases and overstated in other cases.  These pipelines can easily last 50+ years with proper maintenance.  Meanwhile, mergers and acquisitions overstate the value of assets acquired.

[rb]

M&A should not overstate the value of the assets. Goodwill exists because those purchased assets are supposedly worth more than book. Goodwill is very much an asset. After all, shareholders paid for it. Even if the company overpaid it doesn't change the fact that it paid. Think of it this way... It doesn't matter what coupon a bond pays. What matters is what yield you get.

[JRM]

M&A should not overstate the value of the assets. Goodwill exists because those purchased assets are supposedly worth more than book. Goodwill is very much an asset. After all, shareholders paid for it. Even if the company overpaid it doesn't change the fact that it paid. Think of it this way... It doesn't matter what coupon a bond pays. What matters is what yield you get.

 

I don't disagree with you in general terms, but accounting for a utility such as a pipeline company is different than for something like an E&P company.  An E&P continually calculates book value based on estimated NPV of proven and probable reserves.  The asset value for a new pipeline is the total cost of installation less depreciation. In many cases the assets may be fully depreciated while the asset is still in production for many years. When the pipelines are sold they are valued based on DCF, which supports my original point.

 

Back to the original point, I think valuation should be based on DCF rather than book value.

[KCLarkin]

M&A should not overstate the value of the assets. Goodwill exists because those purchased assets are supposedly worth more than book. Goodwill is very much an asset. After all, shareholders paid for it. Even if the company overpaid it doesn't change the fact that it paid. Think of it this way... It doesn't matter what coupon a bond pays. What matters is what yield you get.

 

The problem is that it makes comparability between firms impossible.

[Gilp]

Interesting idea.

Did you compare to Kinder Morgan (KMI)? After cutting down the dividend the stock went down, and they also have more free capital to play with.

It can be better opportunity.

[alpha]

 

Market didn't like today's tax news regarding ENB and other pipeline operators:

 

Pipeline owners slide after FERC reverses course on tax allowance cost recovery Shares of a number of companies that own oil and gas pipelines, including Enbridge (ENB), TransCanada (TRP), Williams (WMB), Energy Transfer Partners (ETP), Plains All American (PAA) and Kinder Morgan (KMI), are sliding following an announcement from an energy industry regulator. Earlier, the Federal Energy Regulatory Commission, or FERC, responded to a federal court remand by stating it no longer will allow master limited partnership, or MLP, interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates. FERC said its revised policy statement explains that, while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the application of the United Airlines court case to non-MLP partnerships will be addressed as those issues arise in subsequent proceedings.

[JRM]

I guess it took Mr. Market a little bit of time to realize that Kinder Morgan isn't an MLP anymore.

[Spekulatius]

I guess it took Mr. Market a little bit of time to realize that Kinder Morgan isn't an MLP anymore.

 

But KMI still competes with MLPs. How can they charge more for regulated assets just because they have to pay tax and other entities don’t. This does not make sense.

[JRM]

I guess it took Mr. Market a little bit of time to realize that Kinder Morgan isn't an MLP anymore.

 

But KMI still competes with MLPs. How can they charge more for regulated assets just because they have to pay tax and other entities don’t. This does not make sense.

 

The advantage is how they are allowed to spend their DCF.  They are able to more optimally allocate capital compared to an MLP like Enbridge. 

[Spekulatius]

I guess it took Mr. Market a little bit of time to realize that Kinder Morgan isn't an MLP anymore.

 

But KMI still competes with MLPs. How can they charge more for regulated assets just because they have to pay tax and other entities don’t. This does not make sense.

 

The advantage is how they are allowed to spend their DCF.  They are able to more optimally allocate capital compared to an MLP like Enbridge.

 

ENB is not an MLP either - they own and sponsor MLPs. They can and do allocate their capital either in an MLP umbrella or with the C-Corp mothership.

 

KMI and other C-Corp directly compete with MLPs for new projects. My guess is that this decision to adjust pricing for new projects based on taxes (which are often theoretical and non- cash anyways) has so many unintended and negative consequences, they it will not stand, or that the incorporation will change. Theoretically and MLP example could run a C-Corp sub to new projects to house, so they can charge more, since taxes are paid for by the customer. If this makes any sense, I will rest may case.

[Uccmal]

Enbridge Statement:

 

Enbridge Inc. does not expect a material consolidated financial impact as a result of FERC Revised Policy Statements

 

 

 

https://www.enbridge.com/media-center/news/details?id=123500

[Viking]

Very interesting to see the reaction in ENB stock today to the press release. The stock started higher and then sold off later in the day to end roughly flat to yesterday’s closing price.

 

Does Mr Market not believe management? (That the recent FERC ruling will not be material)

Or is the issue rising interest rates? The utility sector is under pressure and this may continue if rates continue higher. ENB also carries a very large debt load.

[gokou3]

Very interesting to see the reaction in ENB stock today to the press release. The stock started higher and then sold off later in the day to end roughly flat to yesterday’s closing price.

 

Does Mr Market not believe management? (That the recent FERC ruling will not be material)

Or is the issue rising interest rates? The utility sector is under pressure and this may continue if rates continue higher. ENB also carries a very large debt load.

I think ENB is helped by this news:

 

Minnesota regulators OK environmental review for Enbridge pipeline

https://seekingalpha.com/news/3339981-minnesota-regulators-ok-environmental-review-enbridge-pipeline

 

 

Not an approval per se, but it gives a more certain timeline on the final approval decision.  Note also ENF in which the Line 3 business is housed rose even more.