If you’re an energy investor or simply like to keep an eye on pipeline news, you’ll know that Enbridge (TSX:ENB)(NYSE:ENB) has been having a tough time of it lately. While it’s certainly a stock with a lot going for it, from a broad economic moat to stable dividends and decent value for money, the latest news, namely that Bank of America Merrill Lynch has downgraded the midstream giant from a buy to neutral is only the latest in a string of worrisome developments.
Watch out, because extra risk is coming down the pipeline
Regulatory and project hold-ups are adding to the risk incurred by holding Enbridge stock at the moment, with two developments causing headaches for both its Line 3 and Line 5. It’s likely that its status was downgraded at least in part due to these risks.
The first regulatory stumbling block facing Enbridge’s currently came in the form of a halted environmental review of its Texas Crude Offshore Loading Terminal (COLT) off the Gulf Coast. The project would establish an efficient means of exporting large volumes of crude to international markets. However, regulators are seeking more information about an air pollution control system.
Second, and perhaps even more serious is that Michigan’s attorney general l has filed a lawsuit with the intention of impeding Enbridge’s Line 5 oil pipeline bisecting the Straits of Mackinac. As the pipeline constitutes a key part of Enbridge’s Mainline network to the U.S., the lawsuit could tie up Line 5 in legal wrangling for the foreseeable future. It also serves as a reminder that Enbridge stock is trade-heavy — and therefore a risky play at the moment.
While the environmental review of Enbridge’s offshore loading terminal is temporary and the lawsuit to close Line 5 may not succeed, the fact remains that Enbridge has it detractors, which may make a long-range investor seeking only low-risk positions nervous. Add to this the trade-heavy nature of Enbridge’s business and you have a somewhat nerve-wracking stock in a space that ought to be defensive.
Making a case to replace Enbridge shares
Let’s take a quick look at Fortis (TSX:FTS)(NYSE:FTS). The first thing that jumps out about this popular utilities stock is the fact that it does its business outside Canada through subsidiaries, rather than through tariff-vulnerable trade, which makes exposure to foreign markets less risky than an investment in a heavily traded commodity.
Committing itself to growing its dividend by 6% annually until 2022, Fortis is the right stock to choose for a low-maintenance, low-risk income portfolio. A rock-solid track record is on display, with 44 years’ worth of consecutive growth in payments. Its current yield of 3.38% is adequate for a long-term play, and while it doesn’t touch Enbridge’s 6.24% yield, it’s the more stable investment in the energy space right now.
The bottom line
The main reason to pick Fortis ahead of Enbridge would be its trade-free nature. The fact that Fortis operates through subsidiaries present in other countries of operations makes it a safer play than Enbridge, which relies on trade. Indeed, if protectionism and trade tensions prevail in the coming months, it may be time to swap out the midstream giant in favour of Fortis altogether.
