Enbridge (TSX:ENB) is a diversified energy company that transports around 30% of North America’s crude oil and 20% of the United States’s natural gas. Also, it is the third-largest natural gas utility company in the United States and has a strong presence in the renewable energy sector. The company operates a highly regulated business, delivering stable financials irrespective of the economic outlook.
However, the company recently announced that it has signed an agreement to acquire three utility businesses in the United States for US$14 billion. Meanwhile, investors are worried that the acquisitions could substantially raise its debt levels, impacting its margins in this high interest rate environment, thus leading to a pullback in the company’s stock price. The midstream energy company has lost around 4% of its stock value this month and is down 9.4% this year. So, let’s assess whether investors should utilize the correction to acquire the stock to earn superior returns by looking at its financials and growth prospects.
Enbridge’s second-quarter performance
Last month, Enbridge reported an impressive second-quarter performance, with an adjusted net income of $1.40 billion, or $1.68 per share. It also generated an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $4 billion, representing an 8% increase from the previous year’s quarter. Strong performance from its liquid pipeline segment drove its adjusted EBITDA. However, the declines in gas transmission & midstream and gas distribution & storage segments offset some of the growth.
Also, the midstream energy company generated $3.4 billion of cash from its operating activities compared to $2.5 billion in the previous year’s quarter. Meanwhile, its distributable cash flows stood at $2.8 billion, a 1% year-over-year increase. The company’s financials position also looks healthy, with its liquidity at $12.4 billion as of June 30. Now, let’s look at its growth prospects.
Enbridge’s management expects substantial capacity utilization and strong operating performance for the rest of this year. However, it expects the strong performance in the first half of this year to be offset by increased financing expenses amid higher interest rates, thus maintaining its 2023 guidance.
Meanwhile, the company is progressing with its $19 billion secured growth projects and expects to put around $3 billion of projects into service this year. Supported by asset optimization, favourable rate revisions, secured organic growth, and deployment of investment capital, the company’s management expects its adjusted EBITDA and EPS (earnings per share) to grow at an annualized rate of 4-6% through 2025. The management also hopes to increase these metrics at an annualized rate of 5% after 2025.
Further, Enbridge is working on acquiring three natural gas utility companies in the United States. The acquisition can increase the company’s adjusted EBITDA from gas utilities to 22%, thus lowering its business risks and delivering long-term value for its shareholders. So, the company’s near- to medium-term growth prospects look healthy.
Dividends and valuation
With Enbridge generating stable and predictable cash flows from regulated businesses, its management has raised its quarterly dividend at a compound annual growth rate of 10% over the last 28 years. Meanwhile, it currently offers a quarterly dividend of $0.8875/share, with its yield at 7.79%.
The selloff has dragged its valuation down to attractive levels, with its next 12-month price-to-sales multiple standing at 1.8. Also, its price-to-book multiple stands at 1.7, which looks attractive. Considering its stable financials, high dividend yield, and healthy growth prospects, I believe Enbridge would be an excellent buy at these levels.