This article was coproduced with Wolf Report.
Amid a historic surge in demand for infrastructure investments, listed infrastructure products have flown to new heights, topping $111 billion globally. This compelling trend mirrors a clamor for the historically appealing features offered by infrastructure investments. These benefits include the promise of robust total returns, curtailed volatility, and protection against inflation.
Obscured from our radar previously, energy companies – midstream, upstream, or downstream, held little allure. Such was the case until Enbridge Inc. (NYSE:ENB) descended below $32 USD for the NYSE ticker. Retorting to this opportunity, we swiftly amassed stakes in the company. Our modus operandi involves investing in firms like Enbridge through common shares that appear enticing. Alternatively, we remain receptive to stacking our portfolio with the income-rich debt/preferred shares (“prefs”).
Enbridge’s Financial Landscape
Fundamentals for Enbridge speak for themselves.
The company boasts a market cap exceeding $72 billion and a commendable BBB+ credit rating. Operating as a multinational pipeline and energy firm, Enbridge’s core operations revolve around the transportation of varied inputs and commodities via pipelines entrenched in Canadian and U.S. swathes, facilitating the conveyance of natural gas, crude oil, and natural gas liquids. Additionally, it has a burgeoning presence in renewable energy operations.
Backtracking, the prospects of Enbridge’s common shares hardly beckoned us. Instead, the prefs beckoned with their potent income perks. Hence, the main impetus behind cementing our investment in Enbridge is income generation, which lays the bedrock for the diverse potential the company expounds.
Shrouded in historical achievements, Enbridge’s remarkable trajectory from its inception in 1949 as the Interprovincial Pipe Line Company, has been one of relentless expansion. The company’s proactive foray into renewables, marked by the acquisition of wind farms in 2002, underscores its ambition to assert itself as a vanguard of renewable energy in Canada.
Today, Enbridge stands as a testament to meticulous operational finesse, tethered to the burgeoning global energy demand, an incontrovertible and substantiated phenomenon.
Moreover, following the Spectra merger, a feat few companies have rivalled, Enbridge reigns supreme with its sweeping business mix, fortified cash flow resilience, and geographical diversification.
While auguries of a higher renewable energy yield, cresting at 8-10%, would align more aptly with the current anemone, Enbridge is poised to augment its renewables portfolio over time. The company is already staking a prime claim in the European arena through strategic assets.
Aptly befitting its stature, the company can be heralded as:
- The preeminent liquids pipeline franchise in North America.
- Possessor of a peerless gas transmission network.
- North America’s largest natural gas utility.
- Bolstered by a formidable renewable platform with…
- ….continual opportunities in carbon capture/lower carbon endeavors.
Bolstered by an ironclad commitment to conservative leverage and a 60-70% payout range, Enbridge augurs billion-dollar revenues and sustained growth across all business segments, supplemented by an annual $1 billion upside from new energy prospects.
The third quarter of 2023, the most recent financial update at our disposal, corroborated this optimistic outlook. Enbridge’s performance remains on course with reaffirmed overall guidance, emblematic of its commitment to its objectives and an anticipated 8% CAGR growth for the Dominion assets.
While a deceleration in dividend growth is imminent, the investment offers concomitant dividend safety, assuring stakeholders of a reliable income stream.
Eclipsing the horizon, Enbridge’s growth trajectory extends beyond legacy gas/liquids and utilities to encompass a burgeoning presence in European renewables, with operational assets alongside under-construction facilities anticipated to drive substantial growth in the renewable portfolio by 2024E.
Presently, Enbridge is in the throes of augmenting its arsenal, with seven operational landfill-to-RNG facilities strewn across North America. These infrastructural milestones serve to fortify the company’s lower carbon outlook and yield immediate accretive DCF (discounted cash flow).
Ostensibly, Enbridge grapples with concurrent headwinds, beset by surging financing costs and regulatory revisions. Nonetheless, the company steadfastly upholds its guidance, unfazed by escalated costs and reduced mainline tolls.
Buoyed by such optimistic prospects, projections necessitate a swift mobilization of over $14 billion in funding for U.S. gas utility M&A. Consequently, Enbridge epitomizes a model of consistency, upholding its commitments, and envisaging an 8% CAGR for Dominion assets.
Similarly, the company’s future outlook denotes a material swell not just in traditional energy segments but also in the burgeoning European renewables domain. Concurrently operational and under-construction assets promise an accelerated growth trajectory in the renewable portfolio by 2024E.
Enbridge’s allure can be attributed to its strategic stance at the lower end of its leverage target, coupled with a conservative midpoint payout. The company beckons investors with its low-risk growth strategies, especially in utilities, epitomizing a singular commitment to safety and stability.
Enbridge’s business model stands tall amidst industry peers, ushering in formidable gross, operating, and free cash flow margins. Indicative of its resilient profitability, the company’s yield positions itself within the 60-70th percentile range of the sector, affirming its prominence in the arena.
While Enbridge may no longer resemble the bargain it once was, it remains an indomitable and economically sound entity. The company’s steadfast business model imparts stability, rendering it an unequivocal value proposition.
Not surprisingly, numerous analysts have seized the opportunity to capitalize on Enbridge’s protracted descent. Conversely, we adopted a different stance, maneuvering to leverage Enbridge’s undervalued status, primed for a triumphant resurgence.
Nevertheless, the time has ripened to capitalize on this underpriced asset. As the company’s shares languish below $35 each, and even plummeting beneath the $32 threshold, the common shares emanate a compelling allure.
Harnessing these favorable conditions, we lock in steady yields and relish in what we reckon as attractive returns.
Enbridge is poised to entice stakeholders with its poised trajectory, adhering steadfastly to its conservative leverage target and pursuing low-risk growth strategies, particularly in the utilities sector.
Exemplifying an ultimate endorsement of this strategic trajectory, let’s fortify this investment pursuit.
An Investment Prospect with Profitable Outcomes
The primary impetus behind our investment in Enbridge was the tantalizing income prospects it served up. We’ve managed to secure an impressive yield, ranging close to 8% on our common shares, an enviable feat by any measure.
As it stands today, Enbridge remains a BBB+ rated stock, underscored by an ample 7.6%+ yield, trading at a P/OCF/FFO of 7.7x. In comparison to its historical multiple hovering within the 9-10x range, this current valuation denotes an attractive discount, indicative of substantial undervaluation from our vantage point.
Borne out of these salient prospects, Enbridge is poised to foster growth. While its anticipated OCF is projected to contract over the ensuing years before staging a recovery, underscoring the gestation period for the company’s new assets and strategies, a resounding 8% surge is anticipated in 2025.
Delving into historical precedents fortifying this outlook, connoisseurs of Enbridge stock know that whenever it has traded at sub-8x P/OCF or FFO in the last decade, a favorable investment window has ensued. The company mirrors a recurrent pattern of triple-digit reversals, projecting a lofty upcycle target of $45-$50/share.
With a formidable precedent, the company’s ascent to these levels has invariably transpired, indicating no marked deviation from this trajectory, even in the face of a modifying rate environment that may temper this pinnacle. Advance bids exceeding $45/share would be met with dubious scrutiny, with a decisive divestment strategy ranging between $48-$50/share, contingent on prevailing market dynamics.
A bulwark against unwarranted inflation, robust dividends are poised to underpin our yield under a gamut of FX scenarios, affirmed by a fundamental bedrock that renders the income-potential proposition immensely compelling.
Ergo, the palpable upside beckons an ensemble of conservative investors, buttressed by a 9.6x P/FFO, heralding an almost 20% annual windfall, substantiated by a modest 1-2% growth projection. Riding on such a conservative yet likely trajectory, a resounding “BUY” endorsement reverberates.
- Enbridge epitomizes a class-leading investment within the energy sphere, offering a resounding upside below $35/share to orchestrate a befitting narrative. Eerily, the company’s trading price is positioned below this inflection point as we speak.
- In the wake of a decade-long portfolio evolution, Enbridge signifies one of the safest income investments across the entire North American energy terrain. However, a strategic entry, specifically earmarked for the “right” avenue, is pivotal, finessing our purview.
- Braced for a substantial value add, a sub-$35/share position resonates as a compelling value proposition, fractalling a 15% to 20% annual upside, underscoring an unequivocal “BUY” recommendation.
Ascintillating with a streak of wise investment tenets:
- Seizing undervalued stock at a discount and capitalizing on its normalization over time, while concurrently harvesting capital gains and dividends.
- Discerning company valuation tiers effectively, exiting prior to overvaluation, and reinventing positioning within undervalued domains, actualizing a consistent loop.
- Punctuating fair value oscillations as an opportune juncture for augmenting positions, fortifying our stance within the investment.
- Recycling the dividend windfall, work proceeds, and ancillary cash inflows in consonance with the first tenet.
A Salient Note:
Enbridge is a Canadian company.
In the realm of taxable brokerage accounts, a 15% Canadian withholding tax levied on US-based investors prevails. Conversely, owernship in retirement accounts posits itself as an antidote to this foible, rendering investors impervious to the withholding tax, thereby embellishing the tax-free IRA, 401K, Roth IRA, etc.