Enbridge (TSX: ENB) and Pembina Pipeline (TSX: PPL) are two very well-known pipeline and energy infrastructure businesses in Canada. While there is some cross-over in their asset base, they do operate unique businesses with very different exposures.
Below we’ll answer what makes these stocks unique, and which stock is the better buy right now.
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Enbridge: A massive energy behemoth with a massive debt load
With a market cap of $148 billion, Enbridge is one of the largest energy infrastructure stocks in North America. It is by far the larger and more diversified of the two stocks.
It has over 18,000 kms of liquids pipelines and 18,900 kms of natural gas pipelines. These assets span across Canada and the United States. It just announced the U.S. $2.5 billion acquisition of an Oklahoma pipeline and storage network.
While it is known as a pipeline stock, it has large gas transmission, distribution, and storage businesses. Also, with 4.1 gigawatts of renewable power projects, it is a substantial green energy player as well.
Ninety-eight percent of Enbridge’s income is contracted or regulated to very high-quality counterparties. This simply means that its income is very reliable.
Enbridge has a $37 billion capital plan that it believes will drive 5% annualized earnings before interest, tax, depreciation, and amortization (EBITDA) in the years ahead.
However, this growth does come at a cost. Enbridge has a substantial debt burden. It has $112 billion of debt! Its net-debt-to-EBITDA ratio is over five right now. With interest rates set to rise, interest expenses could start to eat into earnings.
Enbridge pays a substantial 5.8% dividend yield. It has a strong dividend growth record with 31 consecutive dividend increases. However, its earnings payout ratio is 148%! If rates go up, that payout ratio could become even more bloated and the dividend could be at risk.
Pembina Pipeline: Smaller, but more sustainable growth
With a market cap of $40 billion, Pembina Pipeline is considerably smaller than Enbridge. Its geographic footprint is largely contained to Western Canada.
It operates 18,000km of conventional and transmission pipelines, fractionation facilities, gas processing plants, storage terminals, and liquified petroleum gas (LPG) export facilities. The company is looking to diversify its operations by adding liquified natural gas (LNG) export capacity, data centre power, ethane extraction, and even a transmission pipeline to the B.C. West Coast.
Pembina is a little more exposed to commodities, as only ~85% of its business is contracted. As a result, its earnings can fluctuate a little more from quarter to quarter than Enbridge’s.
Right now, Pembina has a $7.3 billion capital plan to fund the growth initiatives above. It believes this will result in 5–7% annualized fee-based adjusted EBITDA growth for the coming four years.
Pembina only has $13.8 billion of debt. Its debt-to-EBITDA ratio sits around 3.5, which is considerably more modest than Enbridge. Strong cash generation is largely supporting its capital plan, although it will add around $3 billion of debt over the next 4-5 years.
Pembina stock yields 4.3% today, which is lower than Enbridge. It has steadily been increasing its dividend every year since 2022. Pembina’s earnings payout ratio is around 97%, but its cash flow payout ratio is 83%. Pembina still generates excess cash flows after paying its dividend, which shows both its dividend and growth plan are sustainable.
The Foolish takeaway on Enbridge vs. Pembina
Despite Enbridge’s scale, my bet would have to be with Pembina Pipeline. Its debt burden is much more moderate, giving it more flexibility in a rising rate environment. It is smaller, meaning its growth plans can have a larger long-term impact on the stock price.
