ENB - Enbridge

[frommi]

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.

 

They even took action on this and stopped the drip program, that was the key for me to make this a larger position. The whole midstream sector looks like a good bet right now, i have ~25% of my portfolio now in this sector. (KMI, ENB, TRP, MMP and D)

[peterHK]

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.

 

That's the wrong way to look at it. Just because the cash outflow of CFO - capex - dividend = share issuance doesn't mean they're funding the dividend with shares. It can also mean that they're funding capex with shares.

 

They were issuing shares to fund their capex program. If you issue shares at a 7% ke and that funds investment into assets with a 15% ROE then that is a good use of shares as it is accretive to the value of the company. Might it have been better to not pay a dividend and reinvest their own internal cash flows? Tough to say because you'd likely be issuing them at a lower multiple as the yield folks will reward the stock if you pay a dividend.

 

 

 

 

[no_free_lunch]

Anyone looked at IPL.to (inter-pipeline)?  Pipeline company with operations in Alberta.  Has an excellent track record  of growing distributions (according to their IR site).  Actually has lower debt levels than enbridge by most metrics.  Also a higher yield at 8.5%.  Haven't really done the work on it but hoping someone can give an opinion.

[peterHK]

Anyone looked at IPL.to (inter-pipeline)?  Pipeline company with operations in Alberta.  Has an excellent track record  of growing distributions (according to their IR site).  Actually has lower debt levels than enbridge by most metrics.  Also a higher yield at 8.5%.  Haven't really done the work on it but hoping someone can give an opinion.

 

Their Nat gas segment is overearning right now, makes leverage artificially low. They are also building a plastics facility that will raise leverage for the next 3 years, but will ultimately add ~$3/share in intrinsic value to the company and I think they're doing it at ~17%+ ROE's, so it's a smart use of capital. Long term they're going to do fine (other thing to note is optionality as they've overbuilt their network; they could increase volumes 50% today if there were buyers for it), but near term as the cycle wanes they are increasing leverage and therefore risk into an environment where the market may not want to.

 

I prefer ENB here as it's a deleveraging story with growth rather than a leveraging story with growth. I'd be a buyer of ENB with a 7 handle on the dividend or ~13.5x EV/EBITDA which I think is a level it'll be hard to go wrong at.

[khturbo]

I prefer ENB here as it's a deleveraging story with growth rather than a leveraging story with growth. I'd be a buyer of ENB with a 7 handle on the dividend or ~13.5x EV/EBITDA which I think is a level it'll be hard to go wrong at.

 

I haven't updated my ENB model in a while, but I'm curious as to why you'd like ENB at 13.5x if KMI trades at 9.5x? I get that KMI has some assets that aren't the best, but they have plenty of super accretive growth projects and are self-funding.

[peterHK]

I prefer ENB here as it's a deleveraging story with growth rather than a leveraging story with growth. I'd be a buyer of ENB with a 7 handle on the dividend or ~13.5x EV/EBITDA which I think is a level it'll be hard to go wrong at.

 

I haven't updated my ENB model in a while, but I'm curious as to why you'd like ENB at 13.5x if KMI trades at 9.5x? I get that KMI has some assets that aren't the best, but they have plenty of super accretive growth projects and are self-funding.

 

ENB has better assets, bigger growth ahead of it into 2020. I think the jewel is going to be their nat gas business going forward. I think there's a lot of room for accretion in FCF conversion, and I'm getting a 7% dividend vs. 5% for KMI. ENB will be basically self funding as well going forward.

[Uccmal]

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.

 

That's the wrong way to look at it. Just because the cash outflow of CFO - capex - dividend = share issuance doesn't mean they're funding the dividend with shares. It can also mean that they're funding capex with shares.

 

They were issuing shares to fund their capex program. If you issue shares at a 7% ke and that funds investment into assets with a 15% ROE then that is a good use of shares as it is accretive to the value of the company. Might it have been better to not pay a dividend and reinvest their own internal cash flows? Tough to say because you'd likely be issuing them at a lower multiple as the yield folks will reward the stock if you pay a dividend.

 

Quite right.  If they reduced the dividend the stock may go way lower, at least for a long while.  They are in most every dividend growth etf or fund in existence and will be an Aristocat next year. 

 

If they fund growth without further shares being issued and FFO grows, and the dividend grows, then the stock will rise.  Paradoxically, they could then issue shares at 60 rather than 42 Cdn., if need be.  I dont see Enbridge as being a ponzi scheme.  The biggest share issuance allowed them to buy a huge asset in Spectra.  The shares being issued to bring the babies in house are getting compensated by greater total cash flow. 

 

I agree with peterHK that their future growth, after line 3, is going to come from gas, and I expect eventually storage and renewables.  The runway for these other sectors is far greater.  The will to do any more pipelines for oil is basically at an end for every one.  The politics, permitting, and antipipe groups have made it unworkable in NA, at least.  This of course makes existing arrangements all the more valauable. 

[Spekulatius]

Their plan is to operate with a coverage ratio of 1.6, meaning that they will distribute  ~62.5% of their distributable cash flow. That seems to be sustainable to me. This also ranks that the day of 10% growth are over, Growthin the future will be more like 5% annually. This actually a very similar to the metrics that WMB is working with (which I also own in size) and reflects the new reality in the pipeline business.

 

FWIW, ENB’s  EV/EBITDA for 2019 is estimated as 11.9x per Research from Wells Fargo, which dona good job covering the space.

[Uccmal]

FWIW, I have seen several analyst estimates ranging from a low price target of 53/54 to a high of 62.

 

As it rises into that range I will incrementally reduce the size of my position.  The speed of growth will slow down after line 3 is built. 

 

The low stock price is likely a combination of tax loss selling, waiting to see if the alleged cash flows materialize from the consolidation, and waiting for Line 3 to get underway.  The debt has been brought down and the credit ratings are stable.  The infrastructure is there.  If future dividend growh, without share dilution, is in the suggested range after 2021, it is still as good as neary every other company in the space. 

 

 

[saltybit]

https://www.mlive.com/news/2019/01/attorney-general-nessel-soliciting-legal-briefs-on-enbridge-line-5-issue.html

[Viking]

ENB is getting interesting again. Yes, there is alot of negativity right now and the shares are falling fast. Time to do some due dilligence. If interest rates contunue to zero over the next couple of years, utility assets should do well.

[Spekulatius]

ENB is getting interesting again. Yes, there is alot of negativity right now and the shares are falling fast. Time to do some due dilligence. If interest rates contunue to zero over the next couple of years, utility assets should do well.

 

Both line 3 and line 5 have issues and my main concern is that they do get shut down without any replacement ever turned on. FEIW, bought back some WMB today (which fell too, over concern with respect to NE G&P assets, I assume). while WMB has some hair too, I like the risk reward better than for ENB right now.

 

I complete sold out of ENB a short while ago.

[JRM]

https://www.cnn.com/2019/08/01/us/kentucky-gas-explosion/index.html

 

...and the stock is up 1% on the day.  Not even a speed bump.  New PHMSA safety regulations coming around October, btw.  I'm guessing we're going to see more of these until transmission line operators are forced to replace pipe.  The assessment methods don't appear to be completely effective.

[gokou3]

Minnesota regulator approves certificate of need for Enbridge Line 3 project

https://finance.yahoo.com/news/minnesota-regulator-approves-certificate-enbridge-212208135.html

 

 

So is this it?  Any more obstacles before a route permit is issued and ENB gets shovels into the ground?

[gokou3]

Looks like they are 99.9999% there:

https://money.tmx.com/en/quote/ENB/news/7561139922577963/Line_3_Moves_Forward_to_Construction

 

The Line 3 Replacement Project has received approval to begin construction.  Today the Minnesota Public Utilities Commission issued their authorization to construct.  The one remaining permit is a storm water permit which is provided by the Minnesota Pollution Control Agency.

[LearningMachine]

To protect against unforeseen interest-rate increases, I'm trying to compare the long term debt maturity profile between the pipeline operators, e.g. what percentage of the debt is due in 10+ years, 20+ years, 30+ years, etc.

 

I'm finding that Enbridge is obfuscating the exact maturity years of their notes, e.g. in the quarterly decks and 10Qs, they just say "medium-term" notes.  In the annual report Note 18, for each note, they just give a range, e.g. 2022-2049. 

 

It seems to me that they are taking risks for investors by choosing shorter-term loans with lower-interest rates so that they can have higher DCF while exposing investors to higher risk from interest rates shooting up, but don't want to be fully transparent about that risk.

 

Has anyone looked into it?

 

 

[longlake95]

I haven't looked that close. But I'm gob-smacked as to how much debt ENB (and the other pipelines) has...something like $60B last time I checked...that's over 10 X their net income... yes I understand they can handle more debt due to the "earnings stability", but those interest costs are a big headwind going forward for a low growth capital hungry business. It's a pass for me.

[gokou3]

I think ENB is one of those cases where net income is not a true indicator of earnings.  Their 2021E forecast is $14B EBITDA, $900M sustaining capex (could be low-balled), and $5-6B capex.  A debt/EBITDA of 4.8x, which is still a bit high but has been trending down over the past couple of years.  They are nearing the end of their large capex projects (Line 3, etc.) which will boost EBITDA by $2B by 2023 and it looks like going forward their capital program will be more selective.

 

Their Investor Day presentation this week shows they have $2B of excess capital for share buyback and debt paydown, so they could do the latter if interest rate turns up.  I guess one is right that to invest in a utility (or utility-like company) one needs to have some conviction in the future direction of interest rate.  I don't expect it to jump up in the near term, but this is just a guess more than anything.

 

At this price, looks like there will be a safe 10% annual total return in the medium term.

 

Disc: long, looking to buy more upon correction

 

 

[LearningMachine]

I think ENB is one of those cases where net income is not a true indicator of earnings.  Their 2021E forecast is $14B EBITDA, $900M sustaining capex (could be low-balled), and $5-6B capex.  A debt/EBITDA of 4.8x, which is still a bit high but has been trending down over the past couple of years.  They are nearing the end of their large capex projects (Line 3, etc.) which will boost EBITDA by $2B by 2023 and it looks like going forward their capital program will be more selective.

 

Their Investor Day presentation this week shows they have $2B of excess capital for share buyback and debt paydown, so they could do the latter if interest rate turns up.  I guess one is right that to invest in a utility (or utility-like company) one needs to have some conviction in the future direction of interest rate.  I don't expect it to jump up in the near term, but this is just a guess more than anything.

 

At this price, looks like there will be a safe 10% annual total return in the medium term.

 

Disc: long, looking to buy more upon correction

 

My apologies if my comments made it appear that net income is a true indicator of earnings.  On the contrary, my point was that I would take lower net income for having more protection from interest rates going up.

 

We shouldn't have to make convictions without protection - as investors, it is ok to expect to not be at the mercy of the others, i.e. hoping that interest rates won't go up.  I think it is ok to expect that management should take its fudiciary responsibility to investors so seriously that they protect them from interest rate risk by taking 30+ year loans while making it clear to investors that they are doing this to protect them at the cost of some income.

 

Unfortunately, it doesn't seem to be the case with Enbridge.

[LearningMachine]

Can someone help me reconcile the following quotes, that is, help me understand how the following debt issuance is supposedly a good deal for Enbridge to protect against interest rate increases when they are claiming that they can get 30-year loans under 3.5%?

 

On July 8, 2020, Enbridge Inc. issued US$1.0 billion of 60-year hybrid subordinated notes payable semiannually in arrears. For the initial 10 years, the notes carry a fixed interest rate of 5.75%. Subsequently, the interest rate per annum will be reset to equal the 5-year United States Treasury rate plus 5.31% every five years from years 10 to 30 and the 5-year United States Treasury rate plus 6.06% every five years from years 30 to 60. The notes mature on July 15, 2080 and are redeemable on year 10 and every five years thereafter.  Source: Page 21 of https://www.enbridge.com/~/media/Enb/Documents/Investor%20Relations/2020/2020_Q2_ENB_MDA_Financial_Statements.pdf

 

And, finally, in July, we opportunistically tapped the Hybrid debt market, providing some extra equity balance sheet bolstering, which we viewed as another non-regret action. Source: Page 21 of https://www.enbridge.com/~/media/Enb/Documents/Investor%20Relations/2020/2020_ENB_DAY_Transcript.pdf

 

To give you a sense of our financing costs, we’re excited to lock in 10 year debt at 2 and a half percent coupon area or 30 year money under 3 and a half percent pre-tax and our A rated subsidiaries can issue even more favorably.  Source: Page 28 of https://www.enbridge.com/~/media/Enb/Documents/Investor%20Relations/2020/2020_ENB_DAY_Transcript.pdf

 

 

[kab60]

I believe rating agencies consider hybrid 50/50 equity and debt. So possibly to raise more long term debt while putting less strain on rating.

[LearningMachine]

I believe rating equities consider hybrid 50/50 equity and debt. So possibly to raise more long term debt while petting less strain on rating.

 

Thanks kab60.  I was thinking along those lines, but they are not declaring that it is convertible debt.  Maybe the fact that it is "subordinate", lets senior note holder treat it as similar to equity cushion. 

 

When Enbridge says they are "self-funding equity", it implies they are funding equity out of cash flow, but looks like that is not the case.

 

Looks like such high-yielding subordinate debt is what they mean when they say "equity self-funding" and "lower cost of equity".

 

 

[kab60]

I don't think it is convertible. The long duration, and being just senior to the equity, makes rating agencies consider only half of the raised amount debt. Some of these hybrid instruments have durations of 1000 years. IMO it is mostly BS, since it's basically debt. Sometimes there's also a step up in rates if it's not called on the first call date.

[LearningMachine]

I don't think it is convertible. The long duration, and being just senior to the equity, makes rating agencies consider only half of the raised amount debt. Some of these hybrid instruments have durations of 1000 years. IMO it is mostly BS, since it's basically debt. Sometimes there's also a step up in rates if it's not called on the first call date.

 

Thanks kab60, makes sense why they are willing to pay such high interest rates in that case. 

 

I agree it is BS, and is a terrible thing to do for shareholders from interest rate risk and disruption risk perspective.  When one of those risks materialize, they will be just like, oops, sorry, we need to issue shares to cover the unforeseen disruption/interest-rates. 

 

A better thing to do would be to cut the dividend and fund equity out of the cashflow, but that will make shareholders realize right away that they are not generating enough cashflow to self-fund equity :-).