After a tough 2018, midstream services giant Enbridge Energy Inc. (TSX:ENB)(NYSE:ENB) has bounced back rallying by 16% since the start of 2019. This spike in value can be attributed primarily to firmer oil, with West Texas Intermediate (WTI) up by 20% and Enbridge reporting strong 2018 results including record financial results. Even considerable negative interest which sees Enbridge ranked as the third most shorted stock on the TSX failed to curtail that rally. There are signs that investors should ignore this unfavourable sentiment because Enbridge is poised to experience further robust gains during 2019 making now the time to buy the stock.
Rock-solid 2018 results
Full-year 2018 adjusted EBITDA was $12.8 billion or an impressive 25% greater than 2017, while adjusted earnings soared by 53% to $4.6 billion or a record $2.65 per share, beating analyst estimates.
Notably, Enbridge is making considerable progress with repositioning the business for growth by reducing debt, simplifying its corporate structure and positioning its core business for further growth. In 2018, Enbridge completed $7.8 billion of non-core asset sales as it moved to accelerate the deleveraging process and strengthen its balance sheet.
As a result, the company finished 2018 with long-term debt totalling $60.3 billion, which was 1% lower than a year earlier and will fall further as Enbridge receives the proceeds of asset sales as they close during 2019. Management’s goal is to reduce leverage Enbridge’s consolidated debt to less than 4.5 times, and by the end of 2018 it was less than 5 times EBITDA, with it forecast to fall below 4.5 times by the end of 2020.
By significantly reducing debt management, Enbridge is enhancing the midstream services provider’s financial flexibility, including its ability to continue developing its portfolio of development projects, which will increase the capacity of its facilities and create greater efficiencies.
As at the end of 2018, Enbridge had $16 billion of projects underdevelopment that are forecast to be completed and commence operations between 2019 and 2023 with the majority slated for 2019. Upon entering service, those assets will give Enbridge’s pipeline and storage capacity a significant boost, thereby allowing it to meet sustained demand for more pipeline capacity from Canada’s energy patch.
A significant lack of pipeline exit capacity was weighing so heavily on Canadian crude benchmark prices that the government of Alberta was forced to intervene, introducing mandatory production cuts for the oil industry at the start of 2019. That lack of transportation capacity combined with rising production levels caused oil inventories in Western Canada to reach record levels that saw the price of Canadian heavy crude known as Western Canadian Select (WCS) plunge to record lows despite WTI trading at over US$73 per barrel. Even record crude by rail shipments were incapable of reducing the large supply glut caused by a lack of pipeline capacity.
Enbridge’s Line 3 Replacement has a capital cost of $9 billion and is expected to commence service during the second half of 2019, as the line is critical to expanding the volume of crude that can be transported. In fact, Edmonton was originally targeting the successful commissioning of the Line 3 expansion as being the date to commence winding down the mandatory production cuts.
A similar phenomenon is impacting domestic natural gas prices, thereby underscoring the considerable demand for Enbridge’s infrastructure, storage and transportation services.
Booming oil and natural gas production, which sees the Canadian Association of Petroleum Producers (CAPP) predicting that domestic oil output alone will grow by a third between 2017 and 2035, will cause demand for transportation, processing and storage infrastructure to expand at a solid clip. And this, coupled with the expansion of Enbridge’s pipeline operations and hence increased transportation volumes, will all support the company’s forecast earnings growth of around 15% between now and 2020.
Why buy Enbridge?
Enbridge’s strong 2018 results allowed it to hike its dividend by 10% to $2.95 per share annually, the 23rd straight annual increase, giving it a very juicy yield of 6%. The forecast solid earnings growth will support further annual hikes, with Enbridge anticipating that it can grow the dividend by 10% through to 2020 and then by 5% to 7% annually thereafter. For the aforementioned reasons, Enbridge offers investors a solid combination of capital appreciation and income, which, along with an almost insurmountable economic moat and the growing demand for energy, makes it a cornerstone holding for any portfolio.
