ENBRIDGE INC. $62(Toronto symbol ENB; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 851.6 million; Market cap: $52.8 billion; Price-to-sales ratio: 1.4; Dividend yield: 3.0%; TSINetwork Rating: Above Average; www.enbridge.com) gets 90% of its revenue from pipelines that pump oil and natural gas from Western Canada to Eastern Canada and the U.S. The remaining 10% mainly comes from distributing gas to 2.1 million consumers in Ontario, Quebec, New Brunswick and New York State.
New projects boost revenue
Since 2008, Enbridge has spent $20 billion on 39 new pipelines and other projects. Thanks to these investments, the company’s revenue soared 164.1%, from $12.5 billion in 2009 to $32.9 billion in 2013. Its revenue probably increased to $37.7 billion in 2014.
Earnings jumped 68.8%, from $857.4 million in 2009 to $1.4 billion in 2013. The company sold shares to help pay for its new projects, so per-share earnings rose 50.8%, from $1.18 to $1.78.
Enbridge is now developing 27 more projects. In all, it expects to spend $27 billion on these assets, including $8.3 billion in 2015.
These outlays exclude the proposed $6.5-billion Northern Gateway pipeline, which would pump crude from Alberta to the B.C. coast. Regulators have approved the line, but it still faces a number of political and other hurdles. Enbridge will probably make a final decision on whether to go ahead in the next year or two.
To help pay for its expansion, Enbridge will transfer pipelines that pump oil sands crude to the U.S., along with wind farms in Alberta and Quebec, to 19.9%-owned Enbridge Income Fund Holdings Inc. (Toronto symbol ENF). This company owns 42% of Enbridge Income Fund (Enbridge Inc. owns the remaining 58%), which holds a range of businesses, including oil and gas pipelines and solar and wind farms.
“Drop-downs” will benefit Enbridge
These types of transfers, called drop-downs, free up cash the parent company can use for new projects. The affiliate also benefits because the new assets’ cash flow helps it maintain or increase its distributions to investors. Enbridge expects to complete these transfers in 2018.
The plan will also give Enbridge more cash for dividends. The company recently raised its quarterly payout by 32.9%, to $0.465 a share from $0.35. The new annual rate of $1.86 yields 3.0%.
Little exposure to falling oil prices
The reorganization should also help increase Enbridge’s projected earnings by 16.6%, from $1.93 a share in 2014 to $2.25 this year. The stock trades at 27.6 times the 2015 estimate.
That’s a high multiple, but it’s still reasonable in light of Enbridge’s improving earnings and cash flow. Moreover, the company charges oil producers a flat fee to ship crude through its pipelines. That cuts its exposure to the recent drop in oil prices.
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