Enbridge: The More It Drops, The More I Buy (NYSE:ENB) - Seeking Alpha

Enbridge: The More It Drops, The More I Buy (NYSE:ENB) | Seeking Alpha

Enbridge: The More It Drops, The More I Buy

Enbridge Inc. (ENB),
ENB:CA 9 Comments

Summary

- Enbridge is a durable energy midstream stock with a strong track record of growing a sustainable dividend.
- The company has contracted and regulated cash flows, renewable energy investments, and a strong gas distribution segment with growth prospects.
- It also carries a strong balance sheet with leverage at the low end of its targeted range, and the stock currently trades at a very low valuation.
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Investors are often faced with the dilemma of having to sacrifice yield for quality. For some, that may include even buying the S&P 500 ( SPY) for a paltry 1.45% in order to achieve diversification and to be able to sleep well at night. While there’s nothing wrong with having SPY in a portfolio, making that one’s only holding simply isn’t going to cut it as far as meeting everyday financial needs.

This brings me to Enbridge (NYSE: ENB), which I last covered here back in May, discussing why it’s a low-risk energy stock for high yield. Enbridge is now trading close to its 52-week low of $35 and in this article, I discuss why that opens up a terrific buying opportunity, so let’s get started!

Why ENB?

Enbridge is a North American midstream and utility giant, with natural gas, oil, and renewable power networks. It’s recognized as being ahead of its midstream peers with its renewable energy investments, a segment in which it has 20 years of experience.

What sets ENB apart from upstream energy companies is its durable cash flows that include take-or pay contracts and regulated payments from its gas distribution utility, representing 98% of ENB’s cash flows. Plus, less than 2% of ENB’s EBITDA is subject to commodity risk, over 95% of its customers are investment grade, and 80% of EBITDA has inflation protections.

Investor Presentation

ENB recently closed out a strong second quarter, with adjusted EBITDA growing by 8% YoY to $4.0 billion, and operating cash flow grew by $0.9 billion to $3.4 billion. Distributable cash flow also grew, but at a slower pace of 1% YoY to $2.8 billion.

Importantly, ENB’s management does not see value in splitting the company, as what peer TC Energy ( TRP) is doing by its planned spin-off of its liquids business. That’s because unlike TRP, ENB sees synergies in its business lines, which makes a split uneconomical to the company and shareholders. This is supported by comments by the CEO during the Q&A session of the recent earnings call:

Q: So just to be clear, no split in the outlook going forward here?

A: Look, we're always looking at that. That seems to be a dis-synergy for a company like Enbridge, which has complementary aspects of multiple parts of the business. So again, the Liquids business has elements that are actually connected to things like ammonia and CCS and the gas business. And the distribution business has connections to new energy technologies.

So I do not see that. Of course, we're always looking at making sure that we've got things structured to get premium valuation. But I think the market has recognized we deserve a premium valuation because of that vertical and horizontal integration that goes on today. That change, we'd look at it. But I just don't see that today for a company of our breadth size and diversity and frankly, low-risk diversification as well.

Meanwhile, ENB is seeing high utilization across its assets, and this includes record first half Gray Oak (liquids) volumes and export volumes across its Permian infrastructure of over 900K bpd. ENB’s gas distribution segment also continues to shine with predictable rate base growth.

This is supported by the Ontario population anticipated to grow by 2.5 million people over the next 10 years as well as industrial demand being reliant on natura gas. Natural gas connected customers has grown every year, with the expectation of achieving over 3.9 million connections by the year end, and ENB continues to realize a solid ROE on this business of around 10%.

Investor Presentation

Notably, ENB’s renewable portfolio continues to grow with over 4.5 GW of projects currently under development in North America, and offshore wind projects in France that’s expected to add 969 MW of electric generating capacity over the next 2 years.

Looking, ENB is expected to delivery respectable 5% EBITDA CAGR, driven by 1-2% toll escalators, 1-2% organic growth, and ~2% from tuck-in and share repurchases. This is supported by ENB’s self-sustaining cash flows without the need to raise equity, including CA$11 billion in DCF per year against CA$7 billion of dividend payments, leaving ~$4 billion in remaining capital for investment. It’s also worth mentioning that ENB is a dividend aristocrat by Canadian standards, having increased its dividend for 28 consecutive years.

Importantly, ENB’s balance sheet remains it solid shape, with a debt to EBITDA ratio of 4.5x, sitting at the low end of its targeted 4.5-5x range. While ENB is more levered than peer Enterprise Products Partners ( EPD), I believe the utility-nature of ENB’s gas distribution systems warrants the higher leverage, and S&P assigns ENB a BBB+ credit rating.

Risks to ENB include uncertainties around its Line 5 pipeline, as a judge ruled that it needs to find a workaround by June of 2026 due to a portion of it being on Native American land. In addition, cost overruns on renewable energy projects could impact the bottom line and higher than expected interest rate hikes would result in higher debt refinancing cost.

Lastly, ENB represents solid value at the present price of $35.94, sitting just shy of its 52-week low of $35. The equates to a price to cash flow of 7.4, which as shown below, sits at the low end of its 5-year range. This valuation is generally reserved for riskier deals from unproven companies (think Shark Tank valuations) and appears to be too cheap for a company of ENB’s size and caliber.

Investor Takeaway

Enbridge is a high quality midstream and utility stock with attractive growth prospects backed by durable cash flow streams. It's also ahead of its peers in its renewable assets and developments, while its gas distribution segment continues to benefit from population growth in Ontario and industrial demand for natural gas. With the stock trading near its 52-week low and an appealing 7.3% yield, I'm taking advantage of the sell-off by adding more shares at these discounted prices.

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This article was written by
Hoya Capital Income Builder

I'm a U.S. based financial writer with an MBA in Finance. I have over 14 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ENB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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