Things have been going very well for Enbridge (TSX:ENB)(NYSE:ENB). While many Canadian oil and gas companies have seen their shares fall by up to 50% in 2018, Enbridge stock is down just 20% — an impressive feat amid a pervasive market rout.
Despite the dip, its fundamentals look solid. On December 11, Enbridge’s management team announced that 2018 result will come in at the top half of its guidance. Distributable cash flow for the year is expected to be between $4.15 and $4.45 per share — more than 10% of the company’s current market cap. It also anticipates $4.45 per share in distributable cash flow for 2019, $5.00 per share in 2020, and a long-term growth target between 5% and 7%.
Solid results created a ripple effect. Management hiked the dividend for next year by 10%, and it announced $1.8 billion in new projects. But in late December, some of Enbridge’s prospects were thrown into question following a surprise action from the state of Minnesota.
A pipeline replacement faces new uncertainties
Enbridge’s Line 3 pipeline was built in the 1960s and is in desperate need of replacement. According to Enbridge, the pipeline is suffering from corrosion and cracking. Today, it can only handle half the capacity it was initially designed for. Beginning in Edmonton, it transfers oil to Wisconsin, but crosses through Minnesota en route.
The pipeline’s replacement seemed inevitable after Minnesota regulators reaffirmed their approval for the replacement project in November. But on December 21, Minnesota’s Department of Commerce asserted that the project hadn’t fulfilled certain requirements that the law necessitates, including a long-range oil demand forecast. The current process “failed to demonstrate that Minnesota needs this pipeline to meet our future oil demand,” Governor Mark Dayton recently said. “In fact, most of the product would flow through our state to supply other states and countries.”
Originally, Enbridge wanted to replace the pipeline entirely and put it into service by the end of 2019. Recent events threaten that timeline. Should investors worry?
At worst, expect the project to be delayed
Importantly, Governor Mark Dayton is finishing his term this year. The true future of the project will be in the hands of incoming Governor Tim Waltz. But even if Waltz is against the project, it’s likely to continue eventually.
An aged and cracking pipeline is more of an environmental risk than a new build. Additionally, the company believes that the Commerce Department’s claims “are not supported by evidence or Minnesota law.” The delay isn’t a result of anything major, but an issue with documentation and process. Once the company provides a more detailed forecast showing long-term demand for the pipeline, expect the courts to uphold the original approval decision.
Meanwhile, other pipeline initiatives are moving forward briskly. On December 19, Michigan approved the replacement of a 65-year-old segment of Enbridge’s Line 5 pipeline. The company also expects to expand one of its biggest projects, the Mainline pipeline, by up to 100,000 barrels per day in 2019. These replacements and upgrades should more than overshadow temporary issues on the Line 3 pipeline.
