ENBRIDGE INC. $46 (Toronto symbol ENB; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 806.5 million; Market cap: $37.1 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.7%; TSINetwork Rating: Above Average; www.enbridge.com) operates pipelines that pump crude oil and natural gas from western Canada to customers in eastern Canada and the U.S. The company’s pipelines handle around 65% of all western Canadian crude oil exports.
Pipelines supply 90% of Enbridge’s revenue. The remaining 10% mainly comes from distributing gas to 2 million consumers in Ontario, Quebec, New Brunswick and New York State.
Enbridge’s revenue fell 22.7%, from $16.1 billion in 2008 to $12.5 billion in 2009, as the recession cut gas sales and prices. In 2010, the company started up the $3.5-billion Alberta Clipper pipeline, which pumps oil from Alberta to refineries in Illinois. That helped push up Enbridge’s revenue by 103.0% in 2012, to $25.3 billion.
Even with lower revenue during the recession, Enbridge’s earnings rose 62.0%, from $771.7 million in 2008 to $1.25 billion in 2012. Due to more shares outstanding, earnings per share rose 52.8%, from $1.06 to $1.62 (adjusted for a 2-for-1 split in May 2011).
The company spent $5.5 billion on new pipelines and other projects in 2012. That’s up 55.9% from $3.5 billion in 2011.
These investments are part of Enbridge’s larger plan to invest $27 billion in new projects. It aims to complete these investments by 2016.
This estimate excludes projects that Enbridge is considering but has not yet committed to, such as Northern Gateway. If you include these potential projects, the total cost of this expansion would rise to $35 billion. That’s equal to 94% of Enbridge’s market cap.
Tapping into shale oil
The biggest of the company’s confirmed projects is a $6.2-billion plan to build new pipelines and rail links that will transport light oil from the Bakken region of North Dakota and Saskatchewan to refineries in the U.S. Midwest. This new system will also pump Bakken oil to refineries in Montreal and Sarnia, Ontario.
Enbridge is also spending $5.8 billion on its Gulf Coast Access Program, which will pump more crude oil from western Canada through a major oil storage facility in Patoka, Illinois, to refineries on the U.S. Gulf Coast.
As part of this plan, in February 2013, Enbridge formed a 50/50 joint venture with Energy Transfer Partners L.P. (New York symbol ETP). The two companies will convert Energy Transfer’s existing gas pipeline between the Patoka hub and the Gulf Coast to oil. They will also reverse the line’s direction, so oil flows south instead of north. This new line should begin operating in 2015.
The Gulf Coast Access Program also includes the company’s 50% stake in the Seaway pipeline, which it bought for $1.15 billion U.S. in 2011. The company then reversed Seaway’s flow: it now pumps crude oil from storage terminals in Cushing, Oklahoma, to Houston, Texas. Enterprise Product Partners LP (New York symbol EPD) owns the other half and operates the pipeline.
In addition, Enbridge is spending $2.7 billion to expand its existing pipelines in eastern Canada and parts of the U.S. These upgrades will help the company take advantage of rising production from Alberta’s oil sands and the Bakken area.
Political upside in renewable energy
The company continues to invest in projects that use wind, solar and geothermal power to generate electricity. It now has interests in 1,300 megawatts of renewable power generation. These businesses account for a tiny fraction of Enbridge’s operations, but they should help it improve its relationships with regulators and environmentalists. To further cut the risk of investing in renewable energy, Enbridge has signed long-term deals to sell power from these projects at fixed rates.
The company will borrow most of the money it needs for its expansion. That will push up its long-term debt of $20.2 billion, which is already a high 54% of its market cap. However, high debt levels are normal for pipeline operators, which must spend heavily to expand their operations but get steady cash flows from their regulated businesses. Regulators set tolls for most of Enbridge’s pipelines.
Enbridge has paid dividends since it became a public company in 1953 and has raised its payout each year since 1996. The current annual rate of $1.26 a share yields 2.7%. The company aims to pay out 60% to 70% of its earnings before unusual items as dividends.
Growth potential justifies high p/e
The stock now trades at 25.3 times Enbridge’s likely 2013 earnings of $1.82 a share. The company’s new projects should increase its earnings to $2.10 a share in 2014. The shares trade at 21.9 times that forecast. These are high multiples, but they are still acceptable in light of Enbridge’s strong growth prospects and high-quality assets.
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