Shares of oil and gas companies have taken a fair amount of beating in the recent past courtesy of lower oil prices. A significant decline in demand amid the coronavirus spread and increased supply dragged oil prices down. However, the sharp decline in the oil and gas stocks presents a good entry point to buy fundamentally strong companies like Enbridge (TSX:ENB)(NYSE:ENB) for the long term.
Enbridge transports about one-fourth of the crude oil produced in North America and 20% of the natural gas consumed in the United States. The company also has a renewable power generation business in North America and Europe. Besides, it is engaged in gas distribution and storage. Enbridge’s stable and predictable cash flows make it an attractive long-term investment.
Why Enbridge stock?
Enbridge stock has corrected more than 22% so far this year, which presents an excellent buying opportunity. Enbridge, being a transporter of fuel, has minimal exposure to the commodity, implying the volatility in the oil prices will not have a significant impact on it. Further, the company’s diversified portfolio, including the resilient utility business, ensures steady cash flows.
Enbridge remains well positioned to survive and thrive in the long run, despite near-term hiccups, thanks to its top-notch client base and strong liquidity position. Enbridge has ample liquidity to survive through 2020, even after accounting for dividends and maintenance capital. Investors should note that Enbridge’s 2020 capital needs are already funded, and the company has more than $12 billion in liquidity, which is more than enough to meet the capital needs and debt maturities till 2021.
Meanwhile, Enbridge’s majority of volumes come from large customers (like Exxon, BP, Suncor, and Duke, to name a few), which is comforting. These customers have integrated business and an investment-grade balance sheet, which mitigates credit risk.
Enbridge also has a utility business, which is resilient to economic cycles and acts as a hedge. The utility business is fully regulated and generates stable cash flows. The company’s utility assets have more than doubled in the recent past, thanks to the Spectra merger. Consistent demand and the utility base rate growth will continue to generate stable future cash flows.
Enbridge is also an ideal income stock, thanks to the long history of paying high dividends to its shareholders. Investors should note that Enbridge is a Dividend Aristocrat and has increased its dividends for 25 consecutive years. Moreover, in the last three years, Enbridge’s dividends have grown by nearly 10% annually. The company’s dividend yield stands at about 8%, which is lucrative. Further, the current payout ratio seems sustainable, thanks to the company’s strong liquidity position and diversified business.
Enbridge’s tightly structured business and consistent cash flow-generating capabilities enable it to weather any crisis. The company will see a strong resurgence in volume once the demand normalizes. Meanwhile, the company’s resilient utility business acts as a safety net. The recent pullback in Enbridge stock offers an excellent long-term investment opportunity for investors seeking growth and income.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool owns shares of and recommends Enbridge. Fool contributor Sneha Nahata has no position in any of the stocks mentioned.