ENB - Enbridge

[Uccmal]

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.

 

As a shareholder in Enbridge my major concern is the dividend being maintained and increased at the promised rate of 10%.  Same applies to ENF which I have recently bought. 

 

Therefore I want to see the following:

 

1) The debt come down.  There is no need to rush.  I would like to see the floating rate debt reduced and the nearest term maturities pushed out further.  The debt is manageable today but may not be manageable in a significantly higher rate environment.

 

2) All permitting and construction started on Line 3.  The faster they get shovels in the ground the less likely it is that they can be sued out of operation. 

 

3) A continuation of their buildout program without incurring too much additional debt (most of these projects are within the Spectra portfolio). 

 

A comment on higher interest rates.  We are all assuming interest rates will go higher and higher to some mythical number, perhaps 4 to 6% on ten year treasuries.  Personally, I think these worries are overblown.  I dont think rates can go much higher without tipping everything into a recession.  I think worry about rates is the primary reason why the utilities, in general, are selling off.  There is also a lag time.  Rates could go way up and come all the way back down before Enbridge and others use up their interest rate hedges and have to issue more debt. 

 

I think my concerns are the same concerns that the 'market' has about the stock.  The interest rate concern is affecting the entire utility sector. 

 

As an aside.  1/3 of Enbridge investors are enrolled in the DRIP.  The actual divdends payed out are 3.0 B. not 4.5 B which is what is used to calculate the payout ratio.  i.e. the cash payout ratio is lower than the accounting payout ratio. 

 

If we can stand to wait for the debt to be reduced and Line 3 to be permitted and begin construction in Minnesota then the stock should reward us.  In the meantime a 6% return on my purchase price, or 8.3 %  in the case of ENF is bearable.

 

 

[Spekulatius]

The EBITDA/EV ratio is going to come down (and has already come down) when all these assets that they have been building start to flow product and cash.  It is pretty much a given that their debt ratios will improve. Most of their fees are index to inflation as well. There will be some lag, but I think they are well covered when inflation (and interest rates) rise. Same with utilities.

 

I also think they will fold back EEP into ENB with an exchange in units for stock. EEP after the last tax ruling from the FERC cannot play their role as a funding vehicle any more and folding it back in a C-Corp would be directly acreditive. This would also serve the simplification narrative.

[Ghost]

https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-enbridges-proposed-line-3-pipeline-route-through-minnesota-rejected/

[Uccmal]

https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-enbridges-proposed-line-3-pipeline-route-through-minnesota-rejected/

 

A bit misleading.  The alternate route was rejected.  The judge favoured the route that Line 3 presently goes through.  This may present some obstacles in terms of downtime but these guys have been building pipe for generations.  I am sure they will find a way to minimize downtime.  This sort of solidifies the final acceptance from Minnesota.  The Minnesota Public Utilities Commission will approve one route or other in June and construction will begin.  It will require Enbridge to negotiate a payoff to two native groups for the timespan beyond 2029. 

[Ghost]

http://www.cbc.ca/news/business/enbridge-minnesota-line-3-1.4726894

 

[Uccmal]

http://www.cbc.ca/news/business/enbridge-minnesota-line-3-1.4726894

 

Yes, Huge gains this week.  Sold a bit of my position off.  It was far and away my largest holding by repeatedly buying on the dips.  Slept better last night. 

[sarganaga]

Sold all of mine Friday.

[Spekulatius]

Owning ENB has been a bit trying recently, but I never lost sleep owning it and it is one of my largest positions for me.

[Ghost]

 

Enbridge to sell natural gas business to Brookfield for $4.3B

 

http://www.cbc.ca/news/canada/calgary/enbridge-brookfield-1.4733055

 

Interesting move.

[Spekulatius]

 

Enbridge to sell natural gas business to Brookfield for $4.3B

 

http://www.cbc.ca/news/canada/calgary/enbridge-brookfield-1.4733055

 

Interesting move.

 

ENB is concentrating on long haul NG and crude pipes as well as utility ops. Basically, they are getting rid of assets with volatile cash flow or where they are sub scale.

I think the proceeds from this sale basically pay for the remainder of line 3 capex.

 

I like the move, and would like it even more, if I knew they got a decent price for their sale. One thing is clear- the short thesis that ENB is leveraged too high , leading to rating downgrades is quickly becoming unhinged.

[benhacker]

Spek, do you see any risk in EEP/EEQ deal break and/or ratio re-negotiation (in a downward direction for EEP/EEQ holders)?

 

I agree with you generally that ENB is attractive, and stepping in via EEP/EEQ seems like the best way to own.

[Spekulatius]

Spek, do you see any risk in EEP/EEQ deal break and/or ratio re-negotiation (in a downward direction for EEP/EEQ holders)?

 

I agree with you generally that ENB is attractive, and stepping in via EEP/EEQ seems like the best way to own.

 

I think ENB is not very likely to break the deal. I think there is some likelihood that the exchange ratio gets sweetened, in particular for EEQ.

[benhacker]

Thanks Spek, my view is the same.

[Spekulatius]

I swapped some ENB into EEQ yesterday as the price ratio seems favorable. I think EEQ is most likely to receive a bump in exchange rates because EEQ has the same economic rights than EEP, yet received a lower exchange rate, due to the quote being lower than EEP at the time the deal was announced. From a fair value principle, this does not make sense.

[ValueMaven]

Does ENB issue a K1?  Can anyone explain this to me in simplistic terms? 

[Spekulatius]

Does ENB issue a K1?  Can anyone explain this to me in simplistic terms?

 

ENB is a C-Corp and does not issue a K-1. Neither does EEQ. EEP and SEP are MLPs and do issue K-1’s. Tax wise, ENB is treated like any other Canadian stock. For US shareholders, there is a 15% withholding tax in a taxable account, but nothing in an IRA account. That’s why I like holding it in IRA’s.

[ValueMaven]

Very interesting.  Thank you! 

[saltybit]

https://www.ctvnews.ca/business/environmentalists-ask-u-s-regulators-to-reconsider-enbridge-pipeline-project-1.4109746

 

[Spekulatius]

I also think that ENB is very cheap here , with a 6% dividend, growing by 10% and a derisked balance sheet ( due to asset sales).

[alpha]

 

Enbridge gas pipeline exploded in BC:

 

https://www.ctvnews.ca/canada/pipeline-explodes-near-prince-george-b-c-rcmp-1.4127634

[LC]

I also think that ENB is very cheap here , with a 6% dividend, growing by 10% and a derisked balance sheet ( due to asset sales).

Thanks for your comments on this one. Has been on my watch list for a while but had nothing liquid, that is changing. Cheers.

[Uccmal]

I also think that ENB is very cheap here , with a 6% dividend, growing by 10% and a derisked balance sheet ( due to asset sales).

Thanks for your comments on this one. Has been on my watch list for a while but had nothing liquid, that is changing. Cheers.

 

Still my largest holding (If I count the Brookfield holdings as a group then ENB is #2).  I have seen a couple of writeups on seeking alpha that try to get at the proforma earnings after the consolidation.  As far as I can tell they will likely be able to meet their payout and buildout obligations out of cash flow for some time.  I cant think of a safer moat in the present economy than an existing pipeline system in North America. 

[frommi]

I like KMI a lot more because the leverage is so much lower. When you factor in minorities and preferred shares for ENB it has leverage of 6.4 x EBITDA and the stock trades at 12xEV/EBITDA.

KMI trades at 10.4xEV/EBITDA with a leverage of 4.9 x EBITDA (2019: 9.7 EV/EBITDA, 4.6xEBITDA). But i don`t have a clue how much ENB will make in EBITDA next year, it looks like there comes a lot of growth online next year. Has anyone EBITDA estimates for 2019?

[Uccmal]

I like KMI a lot more because the leverage is so much lower. When you factor in minorities and preferred shares for ENB it has leverage of 6.4 x EBITDA and the stock trades at 12xEV/EBITDA.

KMI trades at 10.4xEV/EBITDA with a leverage of 4.9 x EBITDA (2019: 9.7 EV/EBITDA, 4.6xEBITDA). But i don`t have a clue how much ENB will make in EBITDA next year, it looks like there comes a lot of growth online next year. Has anyone EBITDA estimates for 2019?

 

To your last line.  I generally dont attempt that sort of thing.  Enbridge bit off alot when they bought Spectra.  The high leverage and possible interest rate increases is leaning heavy on the stock.

 

I had Enbridge as a holding for quite a while but only made it a really big holding when the stock went below 40 CDN.  My buy in is around 43 average - CDN. 

 

Here is what I see:

1) A huge company with a lock on big parts of the movement of NA Energy.  It seems that building pipe is getting harder, not easier.  And there is really no other option.  Try working out how many railcars you need to make much difference to transport volumes.  The same would apply to KMI of course. 

2) Pays a dividend north of 6% right now and has promised to increase it by 10% per year for the next two years.  Now they haven't raised it yet and I have seen companies reverse course so....

3) Is buying in its subs.  By doing this they can right size the payouts from the MLPs leaving more at the parentco to pay to shareholders via debt reduction, continued dividend increase and further pipe building. 

4) Have a large backlog of permitted pipe projects from the acqusition of Spectra. 

 

The bogeyman seems to be interest rates and debt load.  I think this is a bit of an overreaction.  Enbridge was issuing extreme long term bonds right up until now at some pretty low rates.  Then there is the dividend payout versus interest rates.  The assumption is that rates will continue to be lifted.  This may be true but at the first sign of a recession they will come right back down. 

 

So, in short.  Who knows?  Meanwhile I get paid alot to wait.

 

[Spekulatius]

I like KMI a lot more because the leverage is so much lower. When you factor in minorities and preferred shares for ENB it has leverage of 6.4 x EBITDA and the stock trades at 12xEV/EBITDA.

KMI trades at 10.4xEV/EBITDA with a leverage of 4.9 x EBITDA (2019: 9.7 EV/EBITDA, 4.6xEBITDA). But i don`t have a clue how much ENB will make in EBITDA next year, it looks like there comes a lot of growth online next year. Has anyone EBITDA estimates for 2019?

 

I think your numbers are a bit off. I do not believe that ENB leverage is 6.4x EBITDA. n their investor presentation is is noted as being 5x, which does not include the preferred , which I think are roughly $7B CAD, so they would make around 5.6x all inclusive. Also note they ENB recently sold assets for 7B CAD. I think the picture gets clearer once the assets sales and the retructuring of the MLP subs is complete. Right now, at current prices  ENB DCF is around 4.35 CAD/ share, which translates into a 10%+ cash yield. ENB is also on track to increase  their DCF by 20% YoY.

 

KMI has a bit lower leverage, but I think their assets overall are of somewhat lower quality. For example about 15% of KMI cash flows are from the CO2 segment, which is an E&P in disguise and really deserves a 5x multiple only.

 

I own both KMI and ENB, but own more ENB. At current valuations, I prefer ENB over KMI. In fact, I added a few shares today.