Enbridge (TSX:ENB) has gotten a lot of flack over the years. From the company’s impact on the environment to the footprint of its pipeline, many had a real problem with the company. As a result, Enbridge stock’s valuation suffered.
Trading at roughly the same level as it was 10 years ago, is Enbridge stock worth buying today?
The business is booming … and changing
First, let’s review the business. Enbridge is one of North America’s leading energy infrastructure companies. The company currently moves about 30% of the crude oil produced in North America and nearly 20% of the natural gas consumed in the United States. In addition to this, Enbridge also operates the largest natural gas utility franchise in North America.
Also, the company is actively positioning itself for the future through investments in renewables and liquified natural gas (LNG). These areas are the future of energy, and Enbridge is moving quickly to get its share. For example, Enbridge has 23 wind farms (4,870 megawatts, or MW, of capacity) that are either in operation, pre-construction, or under construction. It also has 16 solar energy operations (254 MW of capacity), five waste heat recovery facilities, one geothermal project, and one power transmission project. Together, these sources can meet the electricity needs of 966,000 homes.
In its latest quarter (Q2/2023), results reflect a healthy, predictable, and resilient business. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 8% to $4 billion, and distributable cash flow came in at $2.8 billion. As a matter of fact, Enbridge’s results for the last 10 years have reflected the same resiliency. In 2012, Enbridge reported revenue of $25 billion and earnings per share (EPS) of $0.78. This compares to 2022 revenue of $53.3 billion and EPS of $2.81.
Simply put, Enbridge has and continues to benefit from its scale, diversification, and its low-risk business model.
Enbridge is undervalued
So, given this reliable and predictable business model that the company enjoys, it strikes me as a real disconnect to see Enbridge’s stock price trading at a mere 15 times this year’s estimated earnings. On the positive side, this undervaluation has given rise to Enbridge stock’s 8.28% dividend yield — and a nice entry point for interested investors.
A valid concern that has also weighed on Enbridge’s valuation is the company’s debt level. With rising interest rates, this risk has to be considered in any analysis of the company. As a counter to this, however, I would like to draw your attention to the company’s cash flow profile. It’s diversified, with 98% of the company’s EBITDA underpinned by long-term contracts or “take-or-pay” contracts (with the added feature of inflation protection and cost-sharing provisions).
Also, the company’s recent acquisition of three U.S. natural gas utilities will provide additional low-risk, regulated revenue. This will help to strengthen the balance sheet and to further position Enbridge for the energy transition.
Bottom line
Enbridge is in the business of energy — supplying energy to power our lives. This business is defensive, essential, and predictable. Today, Enbridge’s stock price is depressed, in my view, despite underlying strength in the business and an increasingly predictable profile. I think that you’ll very likely do well if you buy this stock in October.
