Investing in the energy sector can be as unpredictable as the ups and downs of the stock market. Just when you think you’ve found a stable investment, something unexpected happens that can send shockwaves through the market. And that’s exactly what happened with Enbridge (NYSE:ENB) and their recent $14 billion acquisition. But is this a risky move or a hidden opportunity for investors?
Changing Tides in the Gas Market
The gas market has experienced its fair share of turbulence in recent years. From the effects of the Covid-19 pandemic to a surge in gas prices, investors have had to navigate through uncertain waters. However, with the recent solid 33% gain in gas prices to around $3.00 per mmbtu, the industry is setting a solid base for enhanced profitability. While we shouldn’t expect gas prices to skyrocket, the industry is poised for better performance if certain factors fall into place.
One of the key driving forces behind the potential increase in gas prices is the additional 3.2 BCF/D of LNG export capacity that will come online in the next year. In addition to that, the shift away from coal and the possibility of a harsh winter can further support and drive gas prices higher. These factors, combined with Enbridge’s latest deal, are setting the stage for an interesting investment opportunity.
Enbridge’s Latest Deal: A Strategic Move?
Enbridge’s recent acquisition seems to have taken many investors by surprise. With no clear indication during their earnings call or management’s commentary, the market was left in a state of uncertainty. However, the move to increase their utility base rate business from 12% to 22% of total revenue indicates a strategic shift towards a more stable revenue environment.
One of the concerns surrounding this acquisition is the additional debt that Enbridge will incur. The company already has $54 billion in long-term debt, and it is expected to increase with this deal. However, analysts are not overly concerned and are still recommending the stock as a buy, with price targets ranging from $32 to $44. The potential for increased profitability in the coming year and the coverage of capex, distributions, buybacks, and debt service by cash flow provide some reassurance.
Another aspect to consider is the company’s investment in “gas-friendly jurisdictions.” By focusing their spending in areas where their products are welcomed, Enbridge is positioning itself to benefit from the backup demand for gas, especially in renewable projects. In a world where the need for reliable, clean-burning natural gas remains high, this strategic move by Enbridge has the potential to pay dividends.
Risks and Opportunities
As with any investment, there are risks to consider. The chief risk for Enbridge lies in the debt it carries, which is currently around 5 times its EBITDA. However, the company remains confident that it can manage its debt and expects to remain within the 4-5 times EBITDA range. Additionally, political and legal risks associated with the pipeline business are always a concern. However, with the growing demand for cheap and reliable power, pipelines still play a vital role in the energy landscape.
Despite the risks, Enbridge presents an opportunity for investors looking for a stable income. With a current yield of over 8% and the potential for growth, the stock aligns with the income-focused retirement plans of many investors. While there are no guarantees in the market, the company’s long-term dividend history and the encouraging chart of its returns provide some reassurance.
In conclusion, Enbridge’s latest acquisition may initially have shocked the market, but it also presents an opportunity for investors. The shift towards a more stable revenue environment, combined with the potential for increased profitability and the company’s strategic investments, make Enbridge a stock worth considering. It’s a risky move, no doubt, but sometimes hidden opportunities lie in unexpected places.
