Company Name: Enbridge, Inc.
Entry Price: $36.50
Target Price: $50
Projected Yield: 35.30%
Projected Dividend Yield: 7.20%
Time Line: 3 to 6 months
Position Size: 2%
About Enbridge, Inc.
Enbridge, Inc. (ENB.US) is a Canada based company that owns a portfolio consisting of large energy infrastructure projects:
- Crude oil, petrochemicals, and natural gas pipelines
- Regulated natural gas distribution entities
- Renewable energy initiatives
The company is involved into crude oil and white oil transit, natural gas transit and distribution, green energy generation, and energy distribution.
What's the Idea?
The idea is to make money with a stock that may rise with monopoly in Canada and orientation towards green energy.
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Why Trade Enbridge?
Reason 1: Sustainable Business and Cash Flow
Many oil and gas companies faced hard times last year; however, Enbridge was resistant to most issues, for a number of reasons:
While many countries are working on various green energy projects, oil and gas will be still in demand, at least in the midterm, which means that pipeline companies, such as Enbrigde, having a competitive edge due to relatively low transit costs, will be still generating their earnings.
Besides, it is quite hard to get a legal permission to build new pipelines in Canada, so any new players are unlikely to appear in that market.
In addition, Enbrige's pipeline location is very profitable, as it connects oil production facilities with refineries in the Gulf of Mexico. The equipment used by these facilities is intended for cheap crude, so using it for other types of crude is not feasible.
Long Term Fixed Price Contracts
Enbridge's natural gas and oil transit is regulated by Canada Energy Regulator, while the pricing is managed and approved by the Canadian Association of Petroleum Producers. All contracts are long term, which means the cash flow coming from them is usually stable.
It is also important that Enbridge 's distribution network and its core pipeline called Mainline work with take or pay contracts only, which means the customer has to pay a fine in case they don't use the capacity. Due to this, only 2% of Enbridge's cash flow depends on oil and gas prices.
Portfolio Diversification in Terms of Oil, Gas, and Energy Transit and Distribution
Oil pipelines account for over 50% of the company's earnings, while gas transportation, storage, and distribution accounts for 40%, and the green energy generation is 4%. This diversification helped Enbridge have a stable EBITDA last year.
Thus, Enbridge is able to generate stable and predictable cash flow that will be further invested into other projects and distributed as dividends among shareholders. The company management is expecting a large increase in the distributed cash flow (DCF) per share, which may amount to 5%-7% a year until 2023; this is quite a good reason to invest into Enbridge as well.
Reason 2: Massive Investment and Business Development
Enbridge is working on its asset expansion and optimization program, which includes renewing utility institutions and pipelines that transfer oil and gas, as well as creating additional renewable energy projects. These initiatives will require a CAD 16B investment, which is roughly USD 12.60B. Currently, an overall amount of CAD 10B (USD 7.90B) is left; this should be invested until late 2023. As per the management's assessment, Enbridge will have 5B to 6B Canadian dollars, or 3,90B to 4.70B US dollars, as free margin every year after dividend payments; these funds will be boosting the company's market cap, while from CAD 3B to CAD 4B (USD 2.40B to USD 3.10B) out of this margin will be used as financing funds.
Meanwhile, the renewable energy part of the portfolio is ready for expansion: Enbridge is focusing on wind power plants in the EU, such as Saint Nazaire and Fécamp. This will help the company diversify its portfolio even more, increasing the green energy share.
Overall, the new investment program should boost the EBITDA by over CAD 2B by 2023, which will increase both the company value and the dividend yields.
Reason 3: Financial Performance
With the entire oil and gas market suffering last year, Enbridge lost 22% of its earnings compared to 2019 results, as the revenue reached CAD 39B; however, the adjusted EBITDA managed to slightly grow to reach CAD 13.273B. Nearly all portfolio items went up, especially Renewable Power Generation, which added 19.60%.
The adjusted earnings fell by 8.40% over last year, but the distributable cash flow rose by 2.30% to reach CAD 9.44B, and the dividend yield amounted to CAD 4.67. In 2021, the adjusted EBITDA is expected at CAD 13.90B to CAD 14.30B, while the EPS should reach CAD 4.70 to CAD 5.00.
Enbridge has a large debt burden of CAD 67B, while the cash is at CAD 452M. The Debt/EBITDA ratio is currently at 4.6х, within the target range of 4.5х to 5.0х. As Enbridge management affirms, such a leverage is quite good for the company. The investment rating is meanwhile BBB+.
Apart from raising the dividend yields, Enbridge is planning a buyout program worth CAD 2B, which may also boost the stock price. Currently, the stock looks undervalued based on the key ratios (especially P/FCF):
- EV/S: 4.1x
- EV/EBITDA: 14.1x
- PE: 31.4x
- P/FCF: 8.4x
In March, various investment institutions and banks raised their target price outlook for Enbridge as follows:
- Raymond James: CAD 54
- Tudor Pickering & Holt: CAD 51
- Tudor Pickering: CAD 51
How to Use the Idea
- Buy the stock at $36.50.
- Allocate no more than 2% of your portfolio for the transaction. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches $50.00.
How to Buy Enbridge, Inc.?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type ENB.US (Enbridge, Inc. ticker in the NASDAQ) in the search box, and select Enbridge, Inc. in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type ENB.US (Enbridge, Inc. ticker in the NASDAQ) and select Enbridge, Inc. in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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