MENU

Fool Canada’s first 1,000%+ winner?

Our Chief Investment Advisor, Iain Butler, and a team of The Motley Fool’s most talented investors from across the globe recently embarked on an unprecedented mission:

To identify the 20 Canadian small-cap companies they believe have the best shot at earning investors like you gains of 1,000%+ over the coming years.

For the next few days only, you can get the names and full details on these 20 potential “10-baggers” when you join Iain and his team in a first-of-its-kind project they have dubbed Discovery Canada 2017.

Should Investors Be Worried About Enbridge Inc.?

Photo by Brett Gundlock

Times have been very rough for the oil companies across Canada. However, as with any industry, the producer is only one of the many companies that touch the oil before it becomes a finished product that is actually used by consumers.

Enbridge Inc.  (TSX:ENB)(NYSE:ENB) is an oil pipeline company that is responsible for getting the oil from the fields to the refineries. Naturally, investors are concerned about whether or not Enbridge can handle oil prices as depressed as they currently are. The question is, Are those concerns valid or is Enbridge all right?

It was announced on Monday that in an effort to stay competitive and keep costs down, the company was letting go 5% of its workforce, which is approximately 500 people, along with 100 unfilled jobs. “While Enbridge is more resilient to commodity price downturns than others, we’re not immune,” said Graham White, manager of business communications, in a statement.

White is right about the company’s resiliency. Unlike oil companies, which see profits rise and fall depending on what the price of oil is, Enbridge has contracts that stipulate how much money per barrel of oil is transported in the pipelines. Therefore, if the price of oil is $100 a barrel or $40 a barrel, the contract stipulates the cost. This means that Enbridge is able to, more or less, predict how much money it will bring in.

The best way to think about the business model is to compare it to a toll booth. If I drive through a toll booth, I have to pay a flat fee. It’s the same way with Enbridge. If a barrel of oil goes through the pipeline, Enbridge doesn’t think about how much profit the oil company is making; it thinks about the flat fee.

The future could hurt

But that doesn’t mean that the company is immune forever. If oil prices stay low for long, there might come a point where oil companies are simply unable to afford the fees assessed by the pipelines. That would require the company to rethink its pricing, thus diminishing the margins that Enbridge has been able to generate.

Some investors have also grown concerned that the reduced margins could also result in the dividend being cut. And it’s a logical discussion; however, I don’t think that will happen. Consider that for the past 19 years, Enbridge has increased its dividend. Over the past decade, the dividend has increased by over 14% every year.

The good news for investors is that Enbridge is well run. The company has been in operation for decades, so it has experience dealing with the ebbs and flows of oil prices. I anticipate that the company will continue to make changes to ensure that it is able to keep investors satisfied and continue paying its dividend. Could the future hurt? Yes. But at the end of the day, companies still have to get oil from point A to point B.

Two energy plays for your watch list

Check out our special FREE report "2 Canadian Energy Stocks on the Cusp of a Powerful Long-Term Trend". In this report, you'll find that Canada is rich in other energy sources that are poised to take off. Click here now to get the full story.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.