Oil and gas producers have taken a hard hit amid lower crude prices recently. Downstream companies have been no different as they could not make money on the lower oil prices given the decline in demand caused by the pandemic.
However, there are energy infrastructure companies like Enbridge (TSX:ENB)(NYSE:ENB) that have stood fairly well during this double whammy. Importantly, Enbridge’s first-quarter earnings underline that it is a compelling investment for long-term investors.
Enbridge: Solid Q1 earnings
On May 7, Enbridge reported higher earnings for the first quarter and exceeded expectations. What’s important to note here is that Enbridge has maintained its earnings outlook for the fiscal year 2020.
While many energy companies are expecting lower earnings and are not too hopeful for the rest of 2020, Enbridge’s upbeat commentary is indeed soothing for investors.
Many oil-producing companies are standing on the verge of bankruptcy this year amid their huge debt piles and lower production. However, Enbridge stands solid on this front too with 95% of its clients having an investment-grade credit rating.
A $37 billion pipeline company has an unparalleled network of pipelines that generates stable cash flows. These are mostly fixed-fee long-term contracts that generate a steady cash stream irrespective of crude oil prices.
It carries 25% of the oil and 20% of the total natural gas needs of North America. Its pipeline network is difficult to replicate and acts as a high barrier for new entrants.
Enbridge’s stable earnings outlook indicates that the company is well placed to pay dividends in 2020. Canadian energy giant Suncor Energy announced a steep dividend cut this week in order to retain cash. The oil major Shell also cut its dividends for the first time in 75 years. That’s mainly because these two have significant direct exposure to crude oil prices, unlike Enbridge.
ENB stock currently offers a dividend yield of 7.5%, notably higher than TSX stocks in general. Apart from a juicy yield, its dividend growth also significantly contributes to investors’ long-term returns. It managed to increase dividends by 16% compounded annually in the last five years, largely due to consistent earnings growth.
Enbridge stock was trading at $44.6 at the time of writing, almost 22% lower than its 52-week high. The stock does not look too stretched compared to its historical average valuation. This indicates that it might have more room for growth going forward with a limited downside.
Also, more investors could turn to this dividend giant as it has maintained its payouts for 2020, in contrast to industry trends.
At the end of the first quarter of 2020, Enbridge reported available liquidity of $14 billion. This cash and favourable leverage place it in a much stronger position to weather the crisis.
Oil and gas prices could remain weak as long as the COVID-19 pandemic suppresses energy demand. While the outlook for the energy sector remains bleak, pipeline companies like Enbridge look to stand tall. Its cash flow stability along with balance sheet strength will most likely help it emerge stronger after the crisis. Enbridge’s dividends and fair valuation further add to an attractive investment proposition for long-term investors.
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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.