Enbridge Inc. (TSX:ENB)(NYSE:ENB), Canada’s largest pipeline company, announced recently that it will defer $5 billion in spending until 2018, delaying multiple projects that would have commenced over 2016 and 2017.
“Given a higher cost of capital today that we are seeing, we will be lowering the microscope even further to make sure that we are deploying the most optimal projects,” the CEO said.
What makes this interesting is that the company has traditionally pitched itself as having a low-risk business model designed to withstand volatile commodity prices. In terms of financing, the company’s presentations have repeatedly championed its “strong financial position and access to capital.”
Is the recent spending deferment anything to worry about?
Still plenty of spending to go around
While $5 billion in deferred spending seems meaningful, Enbridge had originally planned on spending $17 billion on projects through 2018. In 2017 alone, it had projected to spend roughly $14.2 billion. Spreading that massive hit over the next year or two isn’t necessarily indicative of weakening fundamentals. As of last quarter, Enbridge still had $9 billion in liquidity, and with investment-grade credit ratings, it shouldn’t have any issues raising further capital.
Digging into the performance of its existing projects, there’s little reason for concern. The company’s claim that it is largely insulated from direct commodity price exposure is holding up very well. The IJT Benchmark Toll (which tracks the prices that pipelines charge) has fluctuated less than 1% for over five years at roughly $4 a barrel. Enbridge’s business is indeed driven by volumes, not commodity prices.
If the business is stable, why did it post a loss last quarter?
If you’re worried about the company posting a loss in the third quarter, your fears may be misguided. A big reason for the loss was an increase in interest expenses, hitting $541 million from $230 million the quarter before. Given the company’s massive spending backlog, it’s not surprising to see debt levels starting to take a toll until those projects are brought online.
As of this quarter Enbridge has a $26 billion commercially secured capital program through 2019, of which about $8 billion has already been funded and brought into service.
On February 19 the company released its fourth-quarter earnings, which should quell any remaining concerns over the previous quarter’s results.
Its Mainline system, a major pipeline moving crude oil to the U.S., shipped an average of 2.2 million barrels per day in the fourth quarter compared with 2.1 million a year earlier. It clearly looks like lower oil prices aren’t hurting volumes. Last month the project hit a record high of 2.6 million barrels per day. Strong underlying fundamentals helped pushed net income for the quarter to $378 million.
With a proven, sustainable business model alongside a multi-year plan that should see both cash flows and dividends grow by 14-16% annually, income investors should take a look at Enbridge’s 4.9% yield.
