North American midstream giant Enbridge Inc. (TSX:ENB)(NYSE:NEB) continues to garner considerable scrutiny from short sellers as the third most shorted stock on the TSX. Much of this negative attention can be attributed to weaker oil prices, higher interest rates and the company’s massive pile of debt, which has led some pundits to believe that it is vulnerable to external shocks, such as another rate increase.
Nonetheless, while Enbridge’s business may not be as sound as some pundits believe that it should be, there are signs the company is focused on improving its position and is poised to unlock considerable value for investors over coming months.
Despite the notions of those traders seeking to profit by shorting Enbridge the company delivered some strong third quarter 2018 results. Adjusted earnings soared by an impressive 48% year over year to $933 million, while distributable cash flow was up by almost 19% to $1.6 billion. This notable financial performance was underpinned by a robust performance from its liquids pipeline business which reported a notable 10% year over year increase in EBITDA to almost $1.9 billion driven by increased throughput.
EBITDA, from Enbridge’s natural gas distribution business, climbed by a healthy 7% to $256 million on the back of higher distribution charges and the expansion of its capacity.
Those results saw Enbridge reiterate its 2018 financial guidance where it has projected full-year EBITDA of $12.5 billion, which represents a 21% increase over 2017.
A combination of growing oil and natural gas production, which will drive greater demand for the utilization of Enbridge’s pipeline infrastructure, as well as a range of projects being completed between the end of 2018 and 2020 will boost earnings further.
Wide moat and improved balance sheet
Most of Enbridge’s earnings are contractually locked in, which, along with its pipeline network and energy infrastructure being the largest in North America virtually assures its earnings growth. This is increased by the ongoing demand for energy, particularly when economic growth picks up as it is doing now. Those characteristics coupled with the industry’s steep barriers to entry, including significant regulatory hurdles and the considerable capital required to buy or build the required infrastructure, endow Enbridge with an almost insurmountable economic moat which further serves to protect its earnings and growth.
Meanwhile, the impact of higher interest rates will be negligible. Not only are the headline rates in Canada and the U.S. still well-below the long-term average, but Enbridge is in the process of deleveraging using a combination of cash flow and asset sales to reduce debt.
Already, the company has completed $7.5 billion of non-core asset sales in 2018, which will reduce its finance costs while reducing exposure to higher interest rates; it has also embarked on a program aimed at simplifying its corporate structure. On completion, the program will reduce costs, increase ownership of core strategic assets and enhance Enbridge’s credit profile, making it cheaper and easier to obtain further funding.
Why buy Enbridge?
For these reasons, it is difficult to see Enbridge’s market value falling sharply and over the long-term it will grow at a solid clip. The strength of its results for the nine months to 30 September 2018 allowed Enbridge to reward investors with yet another dividend hike. Earlier this month, it announced a 10% increase to its annual dividend commencing in 2019. If investors acquire Enbridge now, they can lock in a very attractive yield of just over 6%.