Canadian midstream and energy infrastructure giant Enbridge (TSX: ENB)(NYSE: ENB) has been attracting considerable negative attention for some time because of its bloated balance sheet, unwieldly corporate structure and weaker oil. That has garnered considerable attention from short-sellers, who view the company as the third-most shorted stock on the TSX Index.
Those fears have weighed on Enbridge’s stock, seeing it lose 10% over the last year despite oil making strong gains to see the North American benchmark West Texas Intermediate (WTI) up by 36%. This has created an opportunity for investors to cash in on the increased optimism surrounding the outlook for oil and acquire Enbridge at an attractive valuation.
Virtually guaranteed growth
Enbridge also allows investors seeking to bolster their exposure to crude to cash in on higher oil a lower risk opportunity than upstream explorers and producers, as the company is a provider of crucial infrastructure to the North American energy patch.
Demand for the utilization of that infrastructure continues to grow at a solid clip. A combination of prevailing transportation constraints in Canada’s oil patch combined with growing bitumen production and existing pent-up demand for access to oil pipelines supports substantially higher utilization rates.
Those characteristics along with a lack of significant competition means that Enbridge operates in an oligopolistic industry, allowing it to be a price maker rather than a piece taker and therefore further enhancing its growth potential.
This means that North America’s energy infrastructure industry — and hence Enbridge — possess wide almost insurmountable economic moats.
You see, a combination of strict regulatory requirements and high capital costs have created virtually impassable barriers to entry that prevent companies from entering the industry and creating competition. Significant consolidation over the last five years has further concentrated pricing power in the major energy infrastructure owners Enbridge, TC Energy and Pembina Pipeline.
That, along with Enbridge’s $16 billion portfolio of projects under development, enhances its moat and growth potential, supporting management’s projected 5% to 7% annual growth of distributable cash flow per share. It also supports further dividend hikes, with Enbridge already possessing an enviable history of boosting that payment, having increased it for the last 23.years straight to see the company yielding a juicy 6%. The attractiveness of that dividend is underscored by its 11% compound annual growth rate (CAGR) from 1996 to 2019.
Improved balance sheet
Enbridge has also gone a long way in reducing risk in its business through a strategy aimed at bolstering its balance sheet, reducing costs and simplifying its capital structure. By the end of 2018, it had committed to selling $7.8 billion of non-core assets, the proceeds of which will be directed toward reducing debt to a manageable level with management targeting net debt of around 4.5 times EBITDA. Enbridge has also completed the roll-up of four sponsored vehicles, which has simplified its capital structure, improved transparency and reduced costs.
Each of those measures has also enhanced the sustainability of the company’s regularly growing dividend.
Putting it together for investors
These attributes will go along way to supporting Enbridge’s forecast 2019 performance, including a 1% year-over-year increase in EBITDA and an up to 4% increase in distributable cash flow per share. That will allow Enbridge to further reward investors by making further dividend hikes, which includes a proposed 10% increase for 2020.
When those factors are considered in conjunction with Enbridge being attractively valued by virtue of its price being a mere 1.6 times its book value and a conservative 17-times forecast 2019 earnings, it’s clear that now is the time to acquire the energy giant.
