Enbridge (NYSE:ENB)(TSX:ENB:CA) is a large Canadian midstream company with a market capitalization of almost $80 billion USD. The company saw a late April dip to more than 10% below the current price at less than $33 / share. As we'll see throughout this article, despite the recovery from that dip, the company still remains a valuable investment opportunity.
Enbridge Q1 2024 Results
Enbridge managed to achieve strong results in the quarter, with a double-digit YoY increase in adjusted EBITDA.
The company is focused on its new acquisitions and continued growth. The company recently closed the acquisition of Enbridge Gas Ohio, which is already supporting results, and its gas utility acquisitions are more than 85% funded. The company has also achieved a new mainline tolling agreement to increase returns.
The company has formed the new Whistler JV and has continued to acquire new assets. The company remains punished for massively increasing its debt in a high interest rate environment, however, overall, it maintains a strong portfolio of assets.
Enbridge Project Breakdown
The company has a number of new projects it's chasing as it focuses on incremental growth of its assets and a massive number of new opportunities.
The company's Mainline pipeline system remains one of the most important in the world, with 3.1 million barrels / day in average utilization for the most recent quarter. The company has also had its next tolling settlement approved. The company is advancing a new US Gulf Coast strategy connected to the pipelines, with new docks acquired and Gray Oak expansions.
The company is rapidly expanding its storage capacity, and recently sanctioned 2.5 million barrels / day of extra storage. That enables the company to have a fully independent start to finish Gulf Coast system, acting as a toll operator for the entire process.
The company's gas transmission & midstream business continues to grow. The company is building a massive Woodfibre LNG plant expected to be worth more than $5 billion and produce more than 2 million tonnes / year of LNG. The LNG plant is expected to see 60% engineering milestones completed by the end of the year, with additional pipelines added on.
The company has also built up a massive gas transmission network near the Gulf Coast. The company has agreed to acquire a 19% interest in Whistler JV for its Rio Bravo pipeline and $500 million in total cash ($150 million to finish the Whistler JV). The company has also sanctioned more than $1 billion of projects, including the Tennessee Ridgeline Expansion.
The company is continuing to grow its projects in the Permian Basin, one of the fastest growing oil fields in the world and the largest oil field in the world, with more than 6 million barrels / day in production.
The company's Whistler JV spotlight is incredibly impressive as the company works to find opportunities to expand through the Gulf Coast. The JV currently delivers ~2.5 billion cubic feet / day of natural gas to key markets. It has 4 assets, including the Rio Bravo pipeline and the $150 million for completion that Enbridge is providing.
The asset is well integrated and has 90% contracted cash flows. It's a low-risk commercial model with growth opportunities, and it's a unique way for the company to improve its Permian Basin positioning.
Among the company's most impressive assets is its recent acquisition of U.S. gas utilities, which closed on early-March 2024. The fully regulated gas utility has >1.2 million customers with a rate structure that will provide double-digit authorized ROE. The company is working on another potential rate increase here, with a decision expected next year.
The company runs Enbridge Gas Ontario as well, a major asset, with 40k+ new customer additions expected this year. The asset has a massive ~290 BCF in net working storage, of which 1/3 is non-regulated. The company is building up a valuable asset here, that integrates well with the company's other assets.
Enbridge Investment Breakdown
Enbridge is continuing to invest heavily overall in future growth.
The company has an $18 billion USD secured capital program expected to help the company through 2028. The company expects to see 3% annual growth from this backlog, along with 1-2% annual growth from optimizations / cost savings. The company expects to have mid-single digit overall growth, helping to support EBITDA growth and cash flow.
Enbridge Shareholder Returns
The core of Enbridge's portfolio continues to be returning cash to shareholders, as the company maintains a dividend yield of more than 7%.
The company's balance sheet is centered around maintaining leverage of 4.5-5.0x. That's respectable, but it's a tough level in a high-interest rate environment, a 7% yield on debt if the debt stays higher for longer, could use up ~1/3 of the company's EBITDA. That could make it harder for the company to drive other shareholder returns.
The company expects to use both FCF and annual EBITDA growth to cover its secured growth program. It sees total spending power as an additional ~$2 billion / year supported by debt capacity, ($6.2 billion USD in total), however, it's clear that to maintain the company's capital program the company needs to grow its EBITDA and maintain debt.
The company plans to use ~65% of its DCF for dividend, which will support a dividend yield of almost 7.3%. The company has returned $10s of billions to shareholders, and maintaining a high dividend yield along with mid-single digit EBITDA growth, should support strong shareholder returns. We'd like to see the company ramp up buybacks at its current yield.
However, the company taking advantage of growth opportunities also shows it's a valuable investment.
Thesis Risk
The largest risk to our thesis is Enbridge's substantial debt load of just under $60 billion USD, or 75% of its market capitalization, and the company's plan to continue increasing it in dollar terms to maintain its growth program. There are advantages to debt, but in a higher for longer interest rate environment, it's risky. That's worth paying close attention to.
Conclusion
Enbridge has an impressive portfolio of assets. In an environment where numerous companies are not chasing growth or looking to shed assets, Enbridge has been taking advantage. At the same time, the company is looking to continue its growth in growth basins such as the Permian Basin. It's spending billions for this growth.
The company is focused on growing its overall shareholder returns. The company has a dividend yield of more than 7% that it can comfortably afford, and it plans to continue expanding that. At the same time, the company is using that cash flow for growth with a double-digit yield. Overall, the company is a valuable investment despite its recent strength.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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