It is normal for investors to get nervous when bad news about one of their investments hits the press. Bad news like lawsuits or patchy quarterly earnings can lead to management distractions and can hurt shareholder value. However, there are times when there is a lot of noise masquerading as investor-worthy news, and this is when smart investors build up the ability to tune out noise and double down on conviction buys.
A lot has been written about the Line 3 replacement struggles of Enbridge (TSX:ENB)(NYSE:ENB). This is not surprising, because the company has run into significant regulatory and environmental hurdles in Minnesota. Casual investors could be forgiven for thinking that Line 3 represents the majority of Enbridge’s future cash flow stream, given how many newspaper columns have been devoted to it.
Everyone seems to be an Enbridge Line 3 expert these days, and the stock has been hammered because investors simply assume the worst-case scenario in things like this. The worst-case scenario would be that Minnesota does not allow Line 3 replacement to happen.
My regular readers know that I am a huge fan of Enbridge and its miles-wide financial and business moat. There is no energy infrastructure company that can replicate its business model, geographic reach, operating experience, and operations, at least for the next few decades.
I last wrote about Enbridge on August 27 when the stock was trading at $43.75 and urged readers to consider buying at those absurdly low levels. Those that nibbled at it would be happy because the stock has rallied to $47.40, which represents an 8% capital gain in two short months.
I feel compelled to write about Enbridge again to simply remind readers that the company is a lot more than Line 3.
$19 billion capital program up to 2022
Let’s get some facts straight first. The U.S. portion of Line 3’s replacement, which is the cause of so much negative press, represents only $2.9 billion of the company’s $19 billion “capital envelope,” amounting to only 15% of the company’s growth.
Granted, the U.S. portion of Line 3’s replacement would be wildly lucrative for decades to come, but there are other fish in the sea as well. For example, no one seems to be talking about the company’s Saint Nazaire Offshore Wind Farm project in France that is due to come online in 2022.
Many investors would be surprised to know that Enbridge is growing its renewables portfolio, with a specific focus on offshore wind. This is a smart move because research points to the fact that demand for fossil fuels and renewables will be neck and neck by 2040. Furthermore, offshore wind has one of the fastest-declining costs among all the various renewables alternatives.
The French connection
But Enbridge is going one step further and aligning itself with the French government on this project. It is not the only Canadian energy company to do so. I have written about Northland Power, another Canadian energy champion that has piled into France. The reason France is attractive for offshore wind is the significant government support that is provided to companies that make these investments, leading to high double-digit returns on investment.
To put everything in perspective, Enbridge has almost 1,700 megawatts of offshore wind energy either already operational or under construction, while Northland Power has 3,000 megawatts and offshore wind is the core business of Northland.
I have no doubt that Enbridge will look to add offshore wind capacity steadily in its portfolio over the next few years. And who knows? It may end up buying out another offshore wind operator, perhaps even Northland, in its bid to scale rapidly. Northland has an enterprise value of $13 billion and is certainly not out of the reach of a giant like Enbridge, which is on track to produce adjusted EBITDA of about $13 billion in 2019.
Foolish bottom line
The reality is that Enbridge may or may not want to acquire another offshore wind player, given it can easily build scale themselves without having to pay a premium to acquire someone else’s ready-made product.
My goal in this article was to take your mind away from the Line 3 replacement issue and get you excited about some of the other great stuff happening at Enbridge. So, smart investors, tune out the noise, focus on the holistic nature of Enbridge’s long-term business model and start accumulating stock now.
