Enbridge - financials and analysis
Four Blue Chip Franchises
Enbridge as a single entity represents leading diversification in all aspects of energy. As a oil distributor is insulated costs of production, if oil is $5/barrel or $200/barrel Enbridge’s profits come from volume of distribution. As the world transitions to renewables, the Line 3 Replacement may be the last pipeline made in North America cementing their monopoly status for the duration of oil’s remaining life.
Resilience during the worst crisis of our lifetimes
Despite historically low demand for oil, due to the diversity of the businesses, Enbridge boasted an increase in EBITDA and a WACC value of 7.2% when all oil producers were selling bonds and cutting costs to avoid bankruptcy, according to the latest form 10 k. The customers of their products are investment grade, in Toronto 100% of natural gas used to heat homes, and hear food in restaurants comes from Enbridge. The renewables account for 5% of revenue, this will increase as Enbridge is spending 1b+ annually for the next 5 years and boost the DCF valuation to 63, this number may increase if governments hand out “green rebates” as part of a stimulus package (my investment thesis does not depend on this rebate, but if it happens ENB will pick up all of the Canadian rebates)
Increased Energy demand
As the world becomes more digitized and home devices become more "smart” coupled with increase in population, energy usage will continue to increase. Based on form 10q, most of the expensive infrastructure to deliver the energy has already been built. Future projects will be to improve efficiency, cut costs, renewable projects, and improve storage.
Going forward Enbridge projects 5-7% in cashflow growth which translates to 5-7% dividend and fundamental growth. Given the current 8% yield at the time of this writing, that results in 13-15% returns from fundamentals + the stock is trading 25% below historical levels. This should result in a solid intrinsic value and a comfortable 20% annualized return over the next 5 years assuming it reverts to historical levels, if it does not wellI will gladly settle for 13-15%.
The Energy sector is expected to mostly stay the same with renewables experiencing the highest % growth, but in absolute terms (net energy produced) they significantly lag fossil fuels. These projections are taken from form 8k. That said, Enbridge will do well in all energy demand environments as they are hedging their bets.
Green energy projects have high upfront costs and will be dominated by the best funded and connected players. Enbridge has been in the energy business for 71 years and has access to capital + a proven record in execution. The combination of this will win them disproportionately more contracts than others. Based on value investing, I believe the most likely outcome over the next 20 years will be similar to the last 20, business as usual while using the money from fossil fuels to fund the socially responsible projects.
Given the above, many of the best stock research websites recommend Enbridge, and I expect to hold it 20+ years unless something changes fundamentally or a better opportunity presents itself. At these levels I expect ~20% annualized for the next 5 years. Note the PEG is quite high at 3.56. PEG is a function of earnings (according to their SEC filings) and expenses so if a business makes 100k a year but choses to expand on the 5th year with a new store costing $80k, the earnings that year will be reported as $20k. Given the capital heavy nature of the energy business (unlike tech or banks) I look at operating and direct cashflows to evaluate the business, for which has grown in 2020 (the worst year for energy companies in my lifetime)