Enbridge Inc. (NYSE: ENB) with a price target of $38. The company performed much better than we expected during the third quarter, despite the ongoing impact of COVID-19.
We believe that ENB is better equipped than most energy infrastructure companies to withstand the pandemic, as it has minimal commodity and volume exposure, a diverse set of crude oil and natural gas pipelines, and a modestly growing utility business.
Enbridge should also benefit from plans to increase capacity on its main shipping line and from synergies from its 2017 merger with Spectra Energy. Enbridge also generates stable cash flow, has the resources to buy back stock, and pays a strong dividend with a yield of about 8.4%. We view Enbridge as a top equity name for income-seeking investors.
(All financial figures in this report are in U.S. dollars unless otherwise stated).
On November 6, Enbridge reported adjusted 3Q20 earnings from continuing operations of $961 million. EPS beat our estimate of $0.29 but missed the consensus forecast of $0.40. The decline in earnings was mostly due to lower contributions from the Energy Services business. Third-quarter revenue fell 21% to $6.839 billion. The consensus estimate was $8.590 billion.
On a segment basis, Liquids Pipelines posted adjusted 3Q20 EBITDA of $1.732 billion, down from $1.826 billion a year earlier.
Gas Distribution and Storage reported adjusted EBITDA of $315 million, up from $255 million in 3Q19.
In Energy Services, the company reported an adjusted EBITDA loss of $110 million, compared to a profit of $27 million a year earlier.
As discussed previously, Enbridge and Spectra Energy completed their merger on February 27, 2017. Enbridge is now the largest North American global energy infrastructure company, with a diverse set of low-risk businesses. These include a network of crude oil, liquids and natural gas pipelines; a large portfolio of regulated gas distribution utilities; and a growing renewable power generation platform. The combined company is positioned to provide integrated services and first- and last-mile connectivity to virtually all liquids and gas supply basins and demand markets in North America.
EARNINGS & GROWTH ANALYSIS
Enbridge has reaffirmed its 2020 guidance despite the ongoing impact of the pandemic. The company expects 2020 EBITDA of CAN$13.7 billion and distributable cash flow of CAN$4.50-CAN$4.80 per share. It also plans to maintain the current dividend program. With respect to COVID-19, the company expects to reduce capex by approximately $1 billion in 2020, but to increase its 2021 budget by the same amount. Most of the impact is related to project delays, not terminations.
We believe that throughput volumes in most operations will continue to gradually improve. The consensus EPS forecast is $1.91.
We are also raising our 2021 EPS estimate to $2.13 from $2.09, which assumes further improvement in throughput volume along with higher commodity prices next year. The 2021 consensus is $2.07.
FINANCIAL STRENGTH & DIVIDEND
We rate ENB’s financial strength as Medium-High, the second-highest rating on our five-point scale. The company’s debt is rated BBB+/stable by Standard & Poor’s and Baa2/positive by Moody’s. Fitch rates the company’s debt at BBB+/stable.
At the end of 3Q20, ENB’s total debt/capitalization ratio was 49.7%.
The company has a credit line of $14.59 billion, of which $9.75 billion has been drawn.
The payment will be made on December 1, 2020 to holders of record as of November 13. Enbridge has paid a distribution to shareholders for almost 65 years, with average annual growth of nearly 12% over the past 20 years. We believe the current distribution is sustainable and that management’s target payout ratio of 65% is safe. Our distribution estimates (in U.S. dollars) are $2.45 for 2020 and $2.49 for 2021.
Enbridge is in the late stages of an $8 billion asset sale program, initially announced in mid-2018. In 1Q20.
MANAGEMENT & RISKS
Al Monaco has been the company’s president and CEO since 2012. Vern Yu has been the COO of the Liquids Pipelines segment since 2019. Gregory L. Ebel.
Enbridge faces risks related to commodity price fluctuations, adverse weather conditions, and environmental issues. Investment in pipelines also involves risks related to fires and explosions as well as regulatory decisions at the federal and state level. Due to its capital-intensive nature, and reliance on external funding, ENB also faces risks related to interest rate hikes.
Enbridge Inc. is North America’s largest energy infrastructure company. Enbridge has six operating segments: Liquids Pipelines, Gas Transmission & Midstream, Gas Distribution, Renewable Power Generation & Transmission, Energy Services, and Eliminations & Other. According to the company’s most recent 10-K, Enbridge delivers over three million barrels of crude oil per day, and transports 62% of all U.S.-bound Canadian crude exports. The company also transports 18% of the natural gas used in the U.S.
On November 18, BUY-rated ENB closed at $29.08, down $0.60.