Enbridge’s 2023 Outlook Is a Modest Negative; Lowering Fair Value Estimates

Business Strategy & Outlook:

Enbridge’s 2023 outlook was more mixed than anything else. 2023 EBITDA guidance of a midpoint of CAD 16.2 billion is close to the unchanged expectations of CAD 16.3 billion. However, interest expense is expected to increase to CAD 3.9 billion, materially above earlier forecast, and capital spending of CAD 6 billion is CAD 1 billion above the estimates. The higher spending is reducing near-term cash flows and thus caused us to modestly reduce the fair value estimates. The estimated value is now CAD 52 ($38) per share, down from CAD 53 ($39). The narrow moat rating is unchanged. Enbridge also increased the dividend 3% as expected. While Enbridge highlighted plans to buy back stock potentially, one doesn’t expect excess cash flow from the firm until 2026, implying buybacks are likely to increase debt levels. Growth in 2023 across the business is weighted heavily toward liquids pipelines, gas transmission, and gas distribution. The growth should allow Enbridge to come close to meeting its leverage guidance of below 4.75 times in 2023, as the model is about 4.8 times. Enbridge also announced that it is working toward developing a carbon dioxide sequestration hub in Corpus Christi with Oxy Low Carbon Ventures, which adds to its energy transition credentials.

Financial Strengths:

Enbridge carries higher levels of leverage, at levels between 4.5 to 5 times, than most high-quality North American midstream firms, which are typically below 4 times. However, this higher degree of leverage is supported by the protected nature of its earnings stream. Further, it should also decline over the next few years and Enbridge’s core capital spending profile shifts to CAD 3 billion to CAD 4 billion in spending compared with prior years of CAD 6 billion-plus. Notably, Enbridge has outlined plans to spend up to an incremental CAD 2 billion annually on debt reduction or share buybacks. Enbridge’s dividend is prized by both investors and the management team. After averaging 14% annual growth from 2013-20, one only expects growth to be about 3% annually for the foreseeable future. The shift reflects a recognition of the slower growth across Enbridge’s business but also a preference by investors toward generating free cash flow after capital spending and dividends. Enbridge’s outlined capital spending plans already reflect substantial free cash flows available for higher capital returns to shareholders via buybacks or debt reduction with CAD 2 billion earmarked for this effort annually. This profile is markedly better than most U.S. midstream peers, which in many cases are still struggling to balance a large committed dividend or distribution payouts to shareholders alongside reasonable levels of capital spending.

Bulls Say:

Enbridge is the liquids-focused version of gas-oriented Williams in terms of an attractive, highly regulated utility like earnings profile.
Enbridge offers a highly secure dividend that can increase 3% annually for the foreseeable future.
The cancellation of Keystone XL puts Enbridge in a leading position to capture new organic pipeline expansions to serve the unmet need from producers.

Company Description:

Enbridge owns extensive midstream assets that transport hydrocarbons across the U.S. and Canada. Its pipeline network consists of the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada’s largest natural gas distribution company. Finally, the firm has a small renewables portfolio primarily focused on onshore and offshore wind projects.

(Source: Morningstar)

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