Enbridge Inc. Will Be Just Fine Without Northern Gateway

Photo by Brett Gundlock

Last week the Canadian Federal Government made its final decision on three important oil sands pipelines. It approved both Kinder Morgan Inc.’s Trans Mountain Pipeline expansion and Enbridge Inc.’s (TSX:ENB)(NYSE:ENB) Line 3 Replacement and rejected Enbridge’s Northern Gateway project; the government also imposed a tanker ban on the northern coast of British Columbia.

While that rejection was a blow to Enbridge’s growth plans, the company will be just fine without the project.

A much-needed approval

In the near term, Canada’s decision to approve Enbridge’s Line 3 Replacement is much more important for the company. Not only is it the largest project in the company’s history at $7.5 billion, but that price tag represents a third of planned capex through 2019.

Further, it will save the company money in the long run given that Enbridge would have had to invest $1.1 billion in maintenance on the line through 2017 with mounting maintenance spending thereafter. Now the company can avoid that spending and instead invest in a project that not only improves the safety and reliability of Line 3, but increases its capacity from the current 390,000 barrels per day back up to its original capacity of 760,000 barrels per day.

This combination of increased throughput and reduced maintenance spending drives the compelling economics of the project. In fact, this project is a key piece supporting the company’s ability to grow its available cash flow from operations by 12% to 14% through 2019.

Soon to be a distant memory

Northern Gateway would have been a major project given its $7.9 billion price tag. If completed, the project would have also opened additional oil shipping capacity for oil sands producers while bolstering Enbridge’s future cash flow.

However, the company knew the project was a long shot, which is why it was not part of the current $26 billion project backlog, nor the $48 billion inventory of risked development projects. While a project of Northern Gateway’s size certainly would have been an excellent addition, the company already has a plethora of projects in development.

For example, its North American Liquids segment has slightly more than the equivalent of Northern Gateway’s investment opportunity given that it has roughly $9 billion of projects lined up to drive growth after the completion of the Line 3 Replacement. These include the $4 billion Line 61 Twin project as well as several regional oil sands projects, low-cost mainline and market access expansions, and U.S. Gulf Coast development opportunities.

Further, the company has double that investment potential in its North American gas pipeline business. Future projects could include northeast and southeast pipeline expansions in the U.S., power-generation connections, and Mexico and LNG connections in the U.S. and Canada.

In addition, the company has substantial renewable power projects in development. Currently, the company sees upwards of $9 billion of potential projects early in the next decade, including a French offshore wind project, the East-West Tie Line Transmission Project, and several other renewable power development projects both on shore and off.

Finally, the company has at least $11 billion of growth opportunities across its Canadian and U.S. midstream operations as well as in its utilities segment. These projects include an East Coast LNG project, West Coast LNG related expansions, and midstream expansion opportunities in the Permian and DJ Basins.

Investor takeaway

While the rejection of Northern Gateway is a disappointment to Enbridge, it did not come as a surprise, which is why the company did not include the project as part of the backlog. The company does not need the project given that it has such an enormous supply of projects already in the pipeline. Those projects position Enbridge to increase the dividend by 10-12% per year through 2024, which is a sector-leading growth outlook.

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Fool contributor Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of Kinder Morgan.

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