Investment Thesis – Enbridge Inc (ENB)

Thesis:

  • Consistent Dividend growth
  • Industry leader in Canada energy sector
  • Regulation-led industry provide high barriers to entry
  • Merger with Spectra (SEP) is seen to benefit ENB in terms of assets available for use and cost synergies
  • Cash flow is highly rate insensitive
  • Growing world demand for energy
  • PE of 26, which is way below industry average of 85 (S&P 500)

Risks:

  • High debt holdings (partially due to the Spectra merger) may be worsened by rising interest rates
  • Canada’s declining energy sector (CBC News: While the U.S. invests in energy, Canada backs away. Guess who will benefit)
    1. USA’s support of growth in the energy industry (such as tax relief and preferential treatment, which means flow of investments and capital away from Canada towards USA)
    2. Increased regulations in Canada due to the Clean Fuel Standards policy (which means regulatory delays for laying pipelines [ENB’s Line 3 pipeline Replacement project is facing this problem], less investments in Canada’s energy sector, and higher domestic energy prices)
  • Trump’s US tariffs on aluminium and steel raising costs of pipeline projects
  • Renewable energy, although currently still expensive and unreliable, may eventually replace traditional energy demand

Verdict

  • ENB’s market dominance is likely to continue
  • Projected annual returns for the next 10 years is estimated at 16%
  • Management acknowledges the debt problem and has provided forward guidance to drastically cut down on debt
  • Despite the challenges in Canadian energy sector, growth outlook is still positive due to merger with SEP and Line 3 pipeline Replacement project
  • Attractive valuation (from PE ratio)
  • Consider a fixed exit date of 15-20 years due to threat from renewable energy
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