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Energy infrastructure company Enbridge Inc. (TSX: ENB)(NYSE: ENB) remains a favourite among short sellers as the second most shorted stock on the TSX after Toronto-Dominion Bank. While higher interest rates, fears about its mammoth pile of debt and recent changes relating to how certain corporate vehicles are taxed in the U.S. are all weighing on its outlook, the fears relating to Enbridge appear overblown. The sharp pullback of its stock, which sees it down by 7% since the start of 2018 has created an opportunity for investors.
Now what?
The needle-moving US$28 billion takeover of Spectra Energy Corp. in late 2016 created North America’s largest energy infrastructure company. This particular attribute gives Enbridge a unique place in the North American energy patch.
You see, by virtue of its sheer size, it has become a critical player in the energy patch, providing crucial pipeline, storage, processing and other midstream services to upstream oil and gas producers on the continent. Without Enbridge and its infrastructure energy, producers would struggle to get their product to the key markets where oil and gas is refined, distributed, and consumed.
That means the demand for its assets and services is relatively inelastic, virtually guaranteeing its earnings. The stability of Enbridge’s earnings is enhanced by the fact that it operates in an oligopolistic industry, which allows the company to be a price maker rather than a price taker.
Further, a large proportion of Enbridge’s revenues are underpinned by inflation linked take and pay agreements further enhancing the security of its earnings.
In order to manage the issues relating to its corporate structure, debt and U.S. tax rulings, Enbridge is in the midst of a restructure, in which it plans to roll up a number of its listed vehicles into a single listed corporate entity. This will simplify Enbridge’s corporate structure, reduce costs, improve its credit profile, enhance liquidity, and bolster dividend sustainability.
Enbridge is also selling its non-core assets, the proceeds of which will be used to strengthen its balance sheet. In early May 2018, Enbridge entered into an agreement to sell its 49% interest in all of its Canadian renewable energy assets as well as two large U.S. renewable assets and the German Hohe See Offshore Wind Farm for $1.75 billion. In a separate transition, Enbridge also agreed to sell Midcoast Operating, L.P., its U.S. natural gas gathering, processing, transportation and marketing business, for US$1.1 billion.
That capital will be directed to reducing debt and funding Enbridge’s considerable portfolio of projects under development, which are commercially secured. One key project, the Line 3 replacement program, which is forecast to cost $5.3 billion was recently approved by Minnesota regulators despite community objections.
More important for Enbridge, the price of crude continues to rise, which means that production in the energy patch will continue to grow at steady clip.
Many oil companies have already expanded their capital expenditures so as to boost exploration and well development activities, which will cause their oil and natural gas output to grow. Because of existing system constraints, there is already considerable demand for existing pipeline capacity, which will only be bolstered by growing production.
These endeavours will serve a powerful tailwind for earnings, thereby more than offsetting any increased financing costs triggered by interest rate hikes.
So what?
By virtue of the depth and breadth of its operations, Enbridge is focused on simplifying its business as well as reducing debt and large portfolio of projects is poised to unlock considerable value giving its stock a solid boost. While they wait for this to occur, patient investors will be rewarded by its sustainable steadily growing dividend that’s yielding an impressive 6%.
