ENB - Enbridge

[frommi]

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.

 

It is even worth than previously calculated: (All numbers in CAD)

 

Long Term Debt: 59940

Short Term Debt: 1014+4779

Preferred: 7747

Redeemable noncontrolling interests: 4433

Minorities: 6100

-Cash: 622

Shares out: 1715

 

EV: 83391  + 1715*41.49 = 154546

EBITDA: 11476 (last 6 months annualized, added back Asset impairment)

 

EV/EBITDA: 13.46

Debt/EBITDA: 7.3

 

With the latest deal to take over the partnerships they will reduce my calculated leverage, but of course you have more shares outstanding after that deal. So its probably a wash for EV/EBITDA, because the partnerships also trade around 12x/EV/EBITDA right now. I can`t really see how they can afford to sustainable raise the dividend by 10% each year going forward. They were able to do so in the past because they increased the leverage each and every year. I wouldn`t be surprised if they have to slash the dividend if we get a tight credit market. KMI on the other hand has already gone through this and is able to fund its cashflow need internally. Please find my mistake, because i really want to invest here but the numbers don`t allow me to do it right now.

[frommi]

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.

 

Looks like you are right, over the past 20 years ENB traded on average at 14x EV/EBITDA (KMI only at 12x, so it looks like the market gets the higher asset quality) and after they buy out the MLPs my calculated leverage is more normal again. Started a small position. Thanks!

[Spekulatius]

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.

 

It is even worth than previously calculated: (All numbers in CAD)

 

Long Term Debt: 59940

Short Term Debt: 1014+4779

Preferred: 7747

Redeemable noncontrolling interests: 4433

Minorities: 6100

-Cash: 622

Shares out: 1715

 

EV: 83391  + 1715*41.49 = 154546

EBITDA: 11476 (last 6 months annualized, added back Asset impairment)

 

EV/EBITDA: 13.46

Debt/EBITDA: 7.3

 

With the latest deal to take over the partnerships they will reduce my calculated leverage, but of course you have more shares outstanding after that deal. So its probably a wash for EV/EBITDA, because the partnerships also trade around 12x/EV/EBITDA right now. I can`t really see how they can afford to sustainable raise the dividend by 10% each year going forward. They were able to do so in the past because they increased the leverage each and every year. I wouldn`t be surprised if they have to slash the dividend if we get a tight credit market. KMI on the other hand has already gone through this and is able to fund its cashflow need internally. Please find my mistake, because i really want to invest here but the numbers don`t allow me to do it right now.

 

Two errors- you added in the current portion of the long term debt, but it is included in the LT debt already. So you are double counting the $4.8 CAD in debt. Y2018 cash flow is $12.5 not $11.5B CAD.

 

 

Edit, just noticed that above is incorrect and the $4.8B CAD “current portion of LT debt“ needs to be added to the debt

[Uccmal]

Frommi, .for what its worth your concerns are totally legit.  I have similar concerns and suspect concerns around liquidity are the reasons the stock is so cheap right now.  For me its a show me stock.  The other side of the coin is that it likely wont trade real low.  It has a huge moat of profitable transportation. 

[gokou3]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

[Spekulatius]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

 

1) I have read it and I think the author has been mostly proven wrong. there was a detailed comment regarding that Adresse the ma8n thesis, that maintenance Capex is underreported. one can conclude from this that the author does not really understand the accounting and the balance sheet.

 

2) ENB was able to monetize assets for $7B CAD releaving pressure on thr balance sheet

3) ENB beat DCF projections

4) Line 3 replacement appears on track.

 

Nothing came to pass as predicted by the author.

[Uccmal]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

 

1) I have read it and I think the author has been mostly proven wrong. there was a detailed comment regarding that Adresse the ma8n thesis, that maintenance Capex is underreported. one can conclude from this that the author does not really understand the accounting and the balance sheet.

 

2) ENB was able to monetize assets for $7B CAD releaving pressure on thr balance sheet

3) ENB beat DCF projections

4) Line 3 replacement appears on track.

 

Nothing came to pass as predicted by the author.

 

Its number 4 that worries me most.  I will feel better about this once they get the Minnesota portion in the ground. 

[peterHK]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

 

Lots of people have made this thesis before, saying the assets aren't maintained well because MCX is too low, but I think they forget there are maintenance expenses that are expensed on the income statement. If you look at what is expensed and capitalized, they clearly spend a lot caring for and maintaining the assets.

[JRM]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

 

Lots of people have made this thesis before, saying the assets aren't maintained well because MCX is too low, but I think they forget there are maintenance expenses that are expensed on the income statement. If you look at what is expensed and capitalized, they clearly spend a lot caring for and maintaining the assets.

 

I don't know how things work in Canada, but in the U.S. some states allow certain expenses incurred in order to comply with 49 CFR 192 and/or 195 to be passed onto the rate payer.  This constitutes the largest expense for maintaining a transmission pipeline.  If the Direct Assessments determine that a section of the pipeline isn't fit for operation, then in most cases the section of pipeline can be replaced under the capital budget.  Many of these pipelines were built in the 1960's or earlier and have been completely depreciated.

[Spekulatius]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

 

Lots of people have made this thesis before, saying the assets aren't maintained well because MCX is too low, but I think they forget there are maintenance expenses that are expensed on the income statement. If you look at what is expensed and capitalized, they clearly spend a lot caring for and maintaining the assets.

 

I don't know how things work in Canada, but in the U.S. some states allow certain expenses incurred in order to comply with 49 CFR 192 and/or 195 to be passed onto the rate payer.  This constitutes the largest expense for maintaining a transmission pipeline.  If the Direct Assessments determine that a section of the pipeline isn't fit for operation, then in most cases the section of pipeline can be replaced under the capital budget.  Many of these pipelines were built in the 1960's or earlier and have been completely depreciated.

 

The above was something they the author of the short thesis in VIC was totally missing and it was clear from that point thet he didn’t understand the financials of the pipeline business.

 

As was pointed out by UCCMAL, the Achims heel of ENB is the cst of debt. ENB needs to stay investment grade and that is why they have done sales of noncore assets for $7.5B CAD, which IMO go their leverage in control. In addition, the restructuring of the MLP subs is credit positve as well, as indicated in Moody’s rating notes.

[Uccmal]

Has anyone read the VIC write-up back in May 2018?  It was a short idea, and the main premise of the author is that ENB has underreported its maintenance capex and that the company would have negative FCF after dividends if they used the true maintenance capex instead.  He has been rebutted within that forum but I'd just like to know what others here think.

 

Lots of people have made this thesis before, saying the assets aren't maintained well because MCX is too low, but I think they forget there are maintenance expenses that are expensed on the income statement. If you look at what is expensed and capitalized, they clearly spend a lot caring for and maintaining the assets.

 

I don't know how things work in Canada, but in the U.S. some states allow certain expenses incurred in order to comply with 49 CFR 192 and/or 195 to be passed onto the rate payer.  This constitutes the largest expense for maintaining a transmission pipeline.  If the Direct Assessments determine that a section of the pipeline isn't fit for operation, then in most cases the section of pipeline can be replaced under the capital budget.  Many of these pipelines were built in the 1960's or earlier and have been completely depreciated.

 

The above was something they the author of the short thesis in VIC was totally missing and it was clear from that point thet he didn’t understand the financials of the pipeline business.

 

As was pointed out by UCCMAL, the Achims heel of ENB is the cst of debt. ENB needs to stay investment grade and that is why they have done sales of noncore assets for $7.5B CAD, which IMO go their leverage in control. In addition, the restructuring of the MLP subs is credit positve as well, as indicated in Moody’s rating notes.

 

Spek, I think your dictation was acting up :-). 

 

Anyway, this article and dozens of others seem to indicate that Pipelines in general are perpetually full. 

Since Enbridge and its competitors make their money on a fixed spread then the cash keeps coming through the door. 

https://www.cbc.ca/news/business/wcs-wti-alberta-oilsands-1.4865198

 

 

[petec]

I used to know this fairly well 12 years ago and then it dropped off my radar. Recently bought some KMI and it reminded me, so I've read back over this discussion and looked at the company's most recent presentation. Based on this limited research my first take is as follows.

 

The DistCF yield is 10% going to 12% in 2020 ($5 per share). That ought to be inflation-linked so you can probably equate it to a 15% nominal return. Assuming some of it is retained and reinvested in projects at a decent return, your nominal return might be a little above 15%, with low intrinsic business risk.

 

That's attractive until you consider:

- debt/ebitda is 5x and leverage is higher once you consider prefs and minorities.

- regulation/pricing is simple at a high level but pretty complex if you want to get into the weeds. Changes probably won't be huge at the enterprise level but there's a lot of leverage, so it might take a lot of work to get comfortable with the risk to equity.

- management aren't great capital allocators.

 

Then, a 15% nominal return suddenly doesn't look so compelling.

 

Am I framing this right? What am I missing?

 

Many thanks.

 

[frommi]

It would be great if they can deliver on the 10% DCF yield, but i doubt that they had the dilution for the simplification in mind when they gave the guidance. By my math the DCF/share will be 20% lower after the deals are done. At the current share price it will be still a 8.5% DCF yield which is not bad, but the leverage is still high and that leaves only 2% for additional reinvestment. The major unknown for me is how much growth is already paid for that comes online over the next year. And the leverage at that point including preferred is still at 5.8xEBITDA.

KMI on the other hand trades at a "true" DCF yield of 11.5% with a leverage of 4.5x and they have growth of 500 million coming online over the next year which means leverage goes to 4x next year. KMI wins on every metric and clearly has the better capital allocator at the helm. I still think that ENB is not a bad deal here, but KMI is so much better right now that i will only invest more money into ENB if my position size for KMI is maxed out. Earnings for ENB come on friday, i am curious if that includes a new guidance for DCF/share. Maybe we get a sell off and a more attractive entry point after that.

[petec]

The presentation I used contained both the $5/share dcf guide for 2020 and the simplification deals, so I assumed the one included the other. Otherwise I tend to agree, although I haven’t done any maths myself. Still trying to figure out how much time to invest.

[frommi]

Thanks for the reminder to look at the presentations. I looked at their latest presentation and you are right, the current guidance of 4.3$ already includes the lower DCF/share for the next 2-3 quarters, since they have already delivered 2.47$ this year. So the current 2018 run rate after the dilution is 3.66$/share ((4.3-2.47)*2). According to their graph in 2019 the guidance is a marginal higher DCF and only in 2020 the DCF/share will go up a lot. The 22B in growth that they mentioned will probably be enough to reach the 5$/share target in 2020, but that assumes that everything goes perfectly well into 2020.

[petec]

Good point about the run rate. I think I will focus elsewhere for now.

[Spekulatius]

It would be great if they can deliver on the 10% DCF yield, but i doubt that they had the dilution for the simplification in mind when they gave the guidance. By my math the DCF/share will be 20% lower after the deals are done. At the current share price it will be still a 8.5% DCF yield which is not bad, but the leverage is still high and that leaves only 2% for additional reinvestment. The major unknown for me is how much growth is already paid for that comes online over the next year. And the leverage at that point including preferred is still at 5.8xEBITDA.

KMI on the other hand trades at a "true" DCF yield of 11.5% with a leverage of 4.5x and they have growth of 500 million coming online over the next year which means leverage goes to 4x next year. KMI wins on every metric and clearly has the better capital allocator at the helm. I still think that ENB is not a bad deal here, but KMI is so much better right now that i will only invest more money into ENB if my position size for KMI is maxed out. Earnings for ENB come on friday, i am curious if that includes a new guidance for DCF/share. Maybe we get a sell off and a more attractive entry point after that.

 

There is no dilution from simplification, because the cash yield from EEP and SEP is about equal than the cash yield from ENB

 

Cash yield for SEP ($1.65B DCF) ~10%

Cash yield for EEP ($1.35-1.4$/unit) ~13.5%

Cash yield for ENF ( 7.5% yield /0.85 coverage ~8.8% DCF yield

 

Currently ENB yields 11% on DCF, so if you add it up, it should be about DCF neutral, not counting any cos savings from the consolidation. the biggest advantage is that ENB after the merger will have access to all the DCF from the dormer subs, not just that from their partial ownership and the EBITDA/EV ratio should look better. Also, ENB retains ~40% of its DCF which is much more than the subs did, so with increasing retention, the ability to self finance will get better too.

[petec]

The presentation states that the simplification will be accretive from 2020, which implies some dilution in 2019.

[Spekulatius]

The presentation states that the simplification will be accretive from 2020, which implies some dilution in 2019.

 

Based on my math, and the size of the takeover relative to ENB, the dilution can’t be substantial. I expect the $7.5B CAD in asset sales to have a larger impact, but then again, it reduces dilution too.

[frommi]

The presentation states that the simplification will be accretive from 2020, which implies some dilution in 2019.

 

Based on my math, and the size of the takeover relative to ENB, the dilution can’t be substantial. I expect the $7.5B CAD in asset sales to have a larger impact, but then again, it reduces dilution too.

 

My fault, sorry. I thought that the cashflows are already consolidated, but they subtract the distributions to minorities to calculate DCF/share so it should not be impacted.

[sarganaga]

ENB raised their dividend by 10% for 2019. Other info http://www.enbridge.com/~/media/Enb/Documents/Investor%20Relations/2018/ENBDay/ENBDay2018_COMBINEDPRESENTATION.pdf from their 2018 ANNUAL INVESTOR DAY

[JRM]

shares outstanding up 14.3% and total debt up 23% annualized over the past 5 years.  not a fan of the mlp growth model.

[Spekulatius]

shares outstanding up 14.3% and total debt up 23% annualized over the past 5 years.  not a fan of the mlp growth model.

 

The better metric would be to look at distributable cash flow /share, which has been increasing. however, Generaly, I agree with you that the MLP business model is broken, it had been broken since the end of 2015, when the energy market collapsed due to low crude prices and a credit crunch developed in this sector. Since then however, the pipeline cos have been deleveraging and ENB is no exception.

 

FWIW, the debt and sharedoint is up in large part due the merger with Spectra energy and the huge investment program, it will go up again, because the remaining MLP units I’ll be exchanged for shares, so there is no MLP model any more for ENB. ENB in the future will issue far less equity , be less leveraged and will retain a significant amount of cash flow to reinvest in new projects. It’s a great holding in an IRA, where the dividend is tax free.

[rb]

If memory serves me correctly, ENB has been systematically issuing shares in order to fund dividends. It's one of the reasons I'm not too hot on the company.

 

The system works better if you issue overvalued shares to pay for fair market dividends. But it sucks when you issue undervalued shares to pay for fair market dividends. It never ends well though.

[sarganaga]

If memory serves me correctly, ENB has been systematically issuing shares in order to fund dividends. It's one of the reasons I'm not too hot on the company.

 

The system works better if you issue overvalued shares to pay for fair market dividends. But it sucks when you issue undervalued shares to pay for fair market dividends. It never ends well though.

 

On page 10 of their annual investor day notes http://www.enbridge.com/~/media/Enb/Documents/Investor%20Relations/2018/ENBDay/ENBDay2018_COMBINEDPRESENTATION.pdf, they claim that they will be self funding going forward & will not need to issue any further equity. This was a key point in pulling the trigger on this. I was never a fan of their serial issuance of shares. We'll see. 2 1/2% position for me.