Enbridge (TSX:ENB)(NYSE:ENB) has been an incredible investment. In 1995, shares were priced at just $4. Today, they’re above $50. And that return doesn’t factor in dividends, which have often exceeded 5% per year.
Over the most recent decade, the performance was downright spectacular.
In 2009, oil prices hovered around US$100 per barrel. In 2011, they surpassed US$130 per barrel. By 2016, however, crude price plummeted below US$40 per barrel. Over the last five years, they’ve averaged roughly US$50 per barrel.
Pricing pressures have caused nearly every oil stock to struggle this decade, with some falling more than 80% in value. As a pipeline company, Enbridge was directly exposed to the energy industry. How did it perform?
This is outrageous
In December of 2009, Enbridge stock traded at $22. Today, it’s priced at $51 — good for a 130% return. If you had reinvested dividends along the way, your return would have been closer to 200%.
Let’s put those returns into context. Over the same period, the S&P/TSX Composite Index returned roughly 50%. Therefore, Enbridge delivered four times the performance of the market overall. This is simply incredible, given oil prices were cut in half and the more specific S&P/TSX Equal Weight Oil & Gas Index fell by one-third.
It’s rare to find a company deliver 200% returns while, over the same period, its industry delivered a 35% loss. Enbridge is simply a phenomenal company, and, luckily for new investors, all of its advantages remain intact.
Nothing has changed
What makes Enbridge so successful? It’s all about the underlying business model: pipelines.
Enbridge is the largest pipeline owner and operator in North America. Its market cap exceeds $100 billion. If you know anything about pipelines, this is a terrific business to be in.
Let’s say you’re an oil exploration company in Alberta and strike it rich. How do you get your product to market? You can send it via truck, but this is extremely costly, and the odds that there’s road infrastructure directly to your project are low. What about by boat? Not if you’re in landlocked Alberta. Rail is a viable option, but it has the same issues as truck: it can be inefficient, costly, and dangerous.
The best option, by far, is to use a pipeline. Pipelines can ship oil on a second-by-second basis. They are easily the safest, cheapest, and most reliable option. These advantages make pipelines pseudo-monopolies. If there’s a pipeline nearby, it soaks up all of the regions oil transportation needs. And because pipelines can take years to build and can cost more than $1 billion, competition is limited.
This monopoly-like position allows pipelines to charge customers based on volumes, not commodity pricing. As oil prices fluctuate, Enbridge’s profits remain steady. That’s a big reason for its outperformance this decade. Through 2030, Canada’s energy sector is expected to grow oil and gas production, so Enbridge should increase earnings no matter where commodity prices head.
Over the next five years, analysts expect the company to grow earnings by 5% per year. That combined with its 5.8% should generate double-digit returns for shareholders.
