Is Enbridge Inc. a Risky Stock?

Moody’s recently downgraded Enbridge Inc. (TSX:ENB)(NYSE:ENB), but investors shouldn’t be concerned.

| More on:

In late December, Moody’s downgraded Enbridge Inc. (TSX:ENB)(NYSE:ENB) to just short of junk status at Baa3. Previously, the company’s debt was rated at Baa2; however, Moody’s believes the changes Enbridge is making are insufficient to improve its finances quickly enough to maintain that rating.

Gavin MacFarlane, Moody’s vice president, stated that “Our assessment of the plans is that the actions articulated are insufficient to improve the financial profile of the company in a timely manner to be in line with our previously stated expectations for a Baa2 rating.”

Previously, Enbridge had said that it would sell $3 billion worth of assets in 2018, and that the company would also be making smaller increases to its dividend in an effort to improve its finances. Investors were concerned with the company’s debt after its takeover of Spectra Energy early in 2017.

How big of a risk is Enbridge?

In its most recent financials, Enbridge’s total debt was $65 billion and nearly 60% higher than the $41 billion that was on the company’s books a year ago. The Spectra deal was complete in February, and as part of it Enbridge agreed to take on approximately $22 billion of the company’s existing debt.

Debt to equity is one ratio that is often used by investors to assess the risk posed by a stock. Before the deal happened, Enbridge’s debt was more than two times the equity the company had on its books. In its most recent quarter, the ratio had actually fallen to just 1.14, as the rise in equity more than offset the increase in debt.

Another way to evaluate the company’s liquidity is by looking at its current ratio. A year ago, the company’s current ratio was 0.52 compared to 0.64 this past quarter.

If we take inventory out of the equation and calculate the company’s quick ratio, then we get a more realistic assessment of risk, given that inventory can be difficult to move, especially at its stated value if a company were under duress. A year ago, this ratio was 0.42 and has since increased to 0.50.

Using some of the most common tools to assess liquidity, a case can be made that Enbridge’s balance sheet has actually improved. However, Moody’s uses its own calculations to assess risk and does so using multiples of EBITDA.

Investors seemed unfazed by the downgrade

Despite the concerning words from Moody’s, the stock did not see any noticeable drop off in price on the day of the announcement. However, since the start of 2017, the stock has already lost more than 12% of its value. It has only been recently that the share price has seen any sort of recovery, as it has risen 6% in the just past month.

Should you buy Enbridge?

A Baa3 rating indicates a moderate level of risk, and the company could bounce back with a strong 2018, especially as oil prices continue to rise and with OPEC agreeing to extend supply cuts. Enbridge’s operating income has been over $1.3 billion in each of the past three quarters, and there is no reason to expect the company is in any serious danger.

Instead, it might be a good time to lock in a low price and secure a great dividend.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

More on Energy Stocks

Oil industry worker works in oilfield
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor stock looks undervalued as the company continues to increases cash flows, earnings, and shareholder returns.

Read more »

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

bulb idea thinking
Energy Stocks

3 Incredibly Cheap Energy Stocks to Buy Now

Energy stocks are trending upwards on the back of several key factors. And these three continue to be top cheap…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Should You Buy Freehold Royalties Stock for its 8% Yield?

Freehold Royalties is a TSX dividend stock that offers shareholders a forward yield of 8%. But is the energy stock…

Read more »

Muscles Drawn On Black board
Energy Stocks

Is Suncor Energy Stock a Good Buy?

Suncor is on a roll in 2024. Are more gains on the way?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy for its 4.5% Dividend Yield?

CNQ stock is one of the best options out there for dividend growth. But what about value? Let's take a…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Imperial Oil stock is in a precarious position, so what should investors consider as we head nearer to 2025?

Read more »