Last month, Enbridge (TSX:ENB) announced that it has signed three separate agreements to acquire three natural gas utility assets in the United States from Dominion Energy for US$14 billion. The deal includes US$9.4 billion in cash and US$4.6 billion of assumed debt. It has raised around $4.6 billion through secondary offerings to fund a part of the cash consideration.
However, investors are worried that these acquisitions could substantially increase the company’s debt levels, weakening its balance sheet in this high interest rate environment. Along with these concerns, the weakness in the broader equity markets has led the company to lose 7.8% of its stock value last month. Amid the correction, let’s assess whether the selloff could continue or investors should start accumulating the stock.
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These acquisitions could lower Enbridge’s business risks
Acquiring these three natural gas utility assets could double Enbridge’s gas utility business, making it North America’s largest natural gas utility platform. The company would deliver around 9.3 billion cubic feet of natural gas daily and serve approximately seven million customers across multiple markets. Besides, the acquisitions could increase the contribution from its natural gas utility business to 22% of its total adjusted EBITDA and also balance its asset mix with 50% of natural gas and renewables and 50% of liquids.
These acquisitions will add $1.7 billion of annual, low-risk rate base investments to the company’s secured growth backlog. Also, the deals are accretive to the company’s distributable cash flow per share and adjusted earnings per share from the first full year after closing these deals. So, these acquisitions could lower Enbridge’s business risks while creating long-term value for its shareholders. Also, the purchase price looks attractive at 16.5 times the projected earnings for this year.
Enbridge’s medium-term outlook
Apart from these acquisitions, Enbridge is progressing with its $19 billion secure capital program, expecting to put around $3 billion worth of projects into service this year and $3 billion in the next year. It is also expanding its presence in high-growth renewable energy space. Supported by these investments, operational optimizations, favourable rate revisions, and secured organic growth, the company’s management hopes to grow its EBITDA (earnings before interest, tax, deprecation, and amortization) and EPS (earnings per share) at a CAGR (compound annual growth rate) of 4-6% through 2025. Meanwhile, its DCF (discounted cash flows) per share could grow at 3%.
Further, Enbridge’s management projects its EBITDA, EPS, and DCF to grow around 5% after 2025. Meanwhile, the company currently operates a solid midstream energy business, with approximately 98% of its adjusted EBITDA generated from long-term take-or-pay contracts and regulated assets. So, its cash flows are largely stable and predictable, allowing it to raise its dividend consistently. The company has increased its dividends for the previous 28 years at a CAGR of 10%. Besides, the recent pullback has increased its dividend yield to 8.07%. Also, the company’s financial position looks solid, with its liquidity at $12.4 billion as of June 30. So, the company is well equipped to continue its dividend growth.
Considering all these factors, I believe Enbridge, which trades 15.7 times analysts’ projected earnings for the next four quarters, would be an excellent buy for income-seeking investors.
