Enbridge: High Rates Are Squeezing The Stock (NYSE:ENB) - Seeking Alpha

Enbridge: High Rates Are Squeezing The Stock (NYSE:ENB) | Seeking Alpha

Enbridge: High Rates Are Squeezing The Stock (Rating Downgrade)

Enbridge Inc. (ENB),
ENB:CA 8 Comments

Summary

- The geopolitical reaction to the Ukraine conflict is causing a realignment of global energy supply chains.
- Enbridge has solid plans to increase capacity and volumes in the coming years.
- High interest rates and elevated debt levels may be an obstacle to these plans.

onurdongel

The last year has not been a good one for the price of Enbridge (NYSE: ENB) stock. Granted, the dividend has held up, and the 7.6% yield will undoubtedly go a long way in comforting patient long-term investors. But the almost 20% year-over-year decline in the share price may be enough to cause some investors to question the company’s longer-term prospects.

Lower commodities prices as well as higher financing costs resulting from higher interest rates are headwinds. And Enbridge also continues to face resistance in some jurisdictions; in June, a judge gave it three years to shut down a pipeline that runs through tribal land in Wisconsin. In response, the company is considering rerouting a 41-mile stretch of the pipeline but is still hoping to strike a deal with the tribe.

I had previously covered ENB in January 2022, assigning the stock a Buy rating based on its solid yield in a low rate environment. But much has changed since then, the Ukrainian conflict has shaken up the oil and gas industries and rising rates are impacting many sectors of the economy. These developments caused the price of ENB to fall since then, and it has also resulted in a ratings downgrade for the stock. In this article, we'll review some of the company’s challenges and discuss the reasons for ENB’s Hold rating.

Industry

The prices of the commodities which Enbridge transports have certainly been on a roller coaster ride over the last few years. That’s true for the price of crude oil but it is especially true for the price of natural gas. As most readers are probably well aware, the Russian invasion of Ukraine sent the price of natty soaring to over $9/MMBTU before crashing back down to settle in a range in the mid-2s. And as illustrated in the graph below, the impact was felt even more acutely in the Asian and European markets.
imf.org

After seeing this information, most Enbridge investors will probably shrug their shoulders and point out that it is fairly well insulated from commodity price volatility. And that’s correct. The company has a diversified asset base and most of its contracts are take-or-pay or fall under a regulated rate structure.
Investor Presentation

However, the geopolitical reaction to the Ukrainian conflict is bringing about a realignment of global energy supply chains. And central to the shift is the addition of a substantial amount of global LNG export capacity. Projects underway in the US and elsewhere will increase global export capacity by 14% by the end of next year, and other planned additions may eventually increase capacity to about 1 trillion cubic meters, roughly 25% of last year’s global consumption.

imf.org

Granted, not all of these planned projects may eventually see the light of day, but a sufficient number of them are far enough along in the planning stage, or even under construction, to be able to provide Enbridge with some genuine expansion opportunities. In July, NextDecade’s ( NEXT) Rio Grande LNG export facility got the green light which paved the way for Enbridge to proceed with its previously announced Rio Bravo Pipeline project, once it gets the necessary regulatory approvals. Phase 1 of the pipeline will transport 2.6 bcf/day of natural gas feedstock to NextDecade’s LNG export terminal in Brownsville, Texas. The company expects the project to achieve commercial operation in 2026. That’s just one example of the growth plans that Enbridge has for the coming years. As can be seen in the exhibit below, the company has a capital program that totals over $19 billion.

Investor Presentation

So, given its ambitious plans and the fact that Enbridge is not dependent on the price of the commodities that it transports but rather makes its money off volume, the company looks like it has a lot of growth potential in the coming years.

Company Performance

Enbridge’s recent performance has also been solid. Its Q2 Adjusted EBITDA topped that of the corresponding quarter last year, coming in at $4 billion compared to 2022’s $3.7 billion. Its Distributable Cash Flow was also on par with that of last year, $2.7 billion in Q2/23 which was the same as that in Q2/22, while adjusted earnings per share came in a penny above that of the corresponding period in the previous year, hitting 68c/share this year versus last year’s 67c/share. During the Q2 call, management reaffirmed guidance and intends on continuing to return capital to shareholders through dividends and opportunistic share repurchases. The company foresees being able to grow both EBITDA and EPS at a CAGR of 4%-6% into 2025.

ENB currently trades at a PE of 16 which is comparable to peers such as Kinder Morgan ( KMI) and The Williams Companies ( WMB). But it is somewhat higher than other players in the space such as Enterprise Products Partners ( EPD) and Energy Transfer ( ET), which both trade at FWD PEs ~10.5. Some investors may point to ENB’s growth prospects as a reason why the stock is still a buy at these higher valuations. However, one has to factor in the its debt levels and the current interest rate environment.

Debt Levels

Enbridge appears to be well positioned to take advantage of the opportunities being provided by the shifting global energy supply chain. However, its expansion is leading it to take on additional debt in a time of rising rates. As can be seen in the exhibit below, its FY22 year-end long-term debt levels were $5 billion higher than the corresponding amount at the end of FY21.
Enbridge Outstanding Long-Term Debt (sedar.com)

The company is also constantly forced to roll over existing debt which had originally been taken on in times of much lower rates. The debt table above shows substantial amounts of debt with weighted average interest rates in the 3% and 4% range. Given that the risk-free rate for all maturities currently ranges between the 4.5% to 5.5% range, it is highly likely that Enbridge will have to roll its maturing debt at substantially higher levels. However, it must also be noted that rolling over the company's entire debt stack will be a slow multi-year process.

Takeaway

Given that the Federal Reserve is likely to hold rates at elevated levels for at least several quarters to come, potential new investors must decide whether or not they wish to take on that interest rate risk. The stock does have many growth factors, as outlined in the article, but the added interest rate risk balances those out. Making its current Enterprise Value of $135.24 billion appear to be about right. For those reasons I rate the stock a Hold for now.

This article was written by

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