ENBRIDGE INC. $39 (Toronto symbol ENB; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 779.2 million; Market cap: $30.4 billion; Price-to-sales ratio: 1.6; Dividend yield: 2.9%; TSINetwork Rating: Above Average; www.enbridge.com) gets 85% of its revenue by operating pipelines that pump crude oil and natural gas from western Canada to eastern Canada and the U.S. The company’s pipelines handle 65% of all western Canadian crude oil exports.
The remaining 15% of revenue mainly comes from distributing natural gas to 2 million consumers in Ontario, Quebec, New Brunswick and New York State.
Enbridge’s revenue rose 51.5%, from $10.6 billion in 2006 to $16.1 billion in 2008. Revenue fell 22.7% in 2009, to $12.5 billion, as the recession cut gas sales and prices. New pipelines pushed up revenue by 21.3%, to $15.1 billion, in 2010.
Earnings rose 59.2%, from $622.3 million in 2006 to $991.0 million in 2010. Earnings per share rose 47.8%, from $0.90 in 2006 to $1.33 in 2010, on more shares outstanding (adjusted for a 2-for-1 split in May 2011). Cash flow per share rose 46.2%, from $1.71 in 2006 to $2.50 in 2010.
Including the Northern Gateway pipeline, Enbridge plans to spend over $11 billion on new projects over the next three to five years.
That investment also includes the company’s recent purchase of 50% of the Seaway pipeline for $1.15 billion U.S. Seaway pumps crude oil from Houston, Texas, to Cushing, Oklahoma; Enterprise Product Partners LP (New York symbol EPD) owns the other half and operates the pipeline.
Tapping into oil, gas and green power
Due to rising inventories at Cushing, Enbridge and Enterprise plan to reverse the Seaway pipeline’s flow and pump oil to refineries on the U.S. Gulf Coast. The partners aim to complete this project in mid-2012. They also plan to increase Seaway’s capacity in 2013.
Enbridge is also spending $1.2 billion to build a new pipeline that will pump oil from northern Alberta’s Athabasca oil sands to a storage facility in Hardisty, Alberta. This new pipeline will run alongside Enbridge’s existing Athabasca pipeline, and should begin operating in early 2015.
At the same time, the company is tapping into huge new shale gas discoveries. It recently agreed to pay $1.1 billion for a 71.0% stake in the Cabin gas plant project, which will process gas in the Horn River Basin of northeastern B.C. starting in the third quarter of 2012.
Enbridge is also diversifying into renewable energy projects. In October 2011, it bought Tonbridge Power Inc., which specializes in building transmission lines from remote wind power projects to existing grids. Tonbridge’s main project is a line that will connect wind farms in Montana to power grids in the U.S. and Alberta.
Enbridge paid $20 million for Tonbridge; it also repaid $50 million of the company’s debt and agreed to spend $300 million to complete the Montana-to-Alberta power line. However, the U.S. Department of Energy will give Enbridge a $150 million, 30-year, low-interest loan.
Wind farm less risky than it seems
Enbridge also paid $300 million for 50% of the Lac Alfred wind power project 400 kilometres northeast of Quebec City. Hydro Quebec will construct a 30-kilometre line to connect this wind farm to the transmission grid, and will buy the power from this project for the next 20 years.
Enbridge’s long-term debt of $13.6 billion is 45% of its market cap. However, high debt levels are normal for pipeline companies, which must spend heavily to expand their operations, but get steady cash flows from their regulated businesses.
Enbridge has paid dividends since it became a public company in 1953, and has raised its payout each year for the past 17 years. The current annual rate of $1.13 a share yields 2.9%. The company aims to pay out 60% to 70% of its earnings before unusual items as dividends.
Big gain just the beginning
Enbridge has risen 26% since we first recommended in our July 2011 issue. Even so, we feel it still has plenty of growth ahead.
The stock now trades at 26.0 times Enbridge’s likely 2011 earnings of $1.50 a share, and at 23.5 times the $1.66 a share that it should earn in 2012. These are high multiples, but they are still acceptable in light of Enbridge’s high-quality assets.
Enbridge trades at a more reasonable 15.0 times its 2011 estimated cash flow of $2.60 a share. It also trades at 14.2 times its projected 2012 cash flow of $2.75 a share.
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