Spring Sale
High-quality stocks rarely go on sale, but when they do, you should be prepared to act. These opportunities are often your best chance at beating the market over the long term.
Over the last five years, Enbridge (TSX:ENB)(NYSE:ENB) stock hasn’t increased an inch. There have been bumps along the way, but today, the share price is the same as it was in 2015. This is a huge mistake.
Something isn’t right
Despite the stagnant share price, Enbridge has done exceptionally well since 2015. Revenue has increased by 5.3% per year, EBITDA by 24.2% per year, and net income by 27% per year. EPS on a diluted basis has risen by roughly 10% annually. Even though the share price hasn’t budged, the company has continued to pay a rising dividend, averaging around 6%, meaning long-term shareholders still booked a nice profit.
The lack of upward price movement is difficult to understand given its historical performance, but what about the future? Might the poor stock performance be related to concerns over what lies ahead?
When looking at market fundamentals, it’s difficult to think the future isn’t bright for Enbridge. As a pipeline company, Enbridge largely earns revenues on volumes, not commodity pricing. As long as there’s oil and natural gas that needs transporting, Enbridge can capitalize.
According to the Canadian Association of Petroleum Producers, Canadian crude oil production will “increase by 1.27 million barrels per day (b/d) to 5.86 million b/d by 2035.” That’s not huge growth, but it’s growth nonetheless. Because Canada’s pipelines are already running at capacity, there are only two options: build more pipelines or increase pricing. Both of these scenarios benefit Enbridge.
As the largest pipeline company in North America, Enbridge is the logical choice to increase Canada’s pipeline infrastructure. Pipelines can take years or even decades to build. The total cost can run into the billions. Intense regulatory hurdles favour companies with experience and existing influence. Only a handful of energy companies can comply with those steep hurdles, and Enbridge leads the pack.
Even if more pipelines aren’t built, Enbridge will benefit via increased pricing. There simply isn’t enough current pipeline capacity to service everyone. As we saw last October, when oil producers bid to the death to secure pipeline throughput, pricing wars are a real possibility. Recently, rumours surfaced that Enbridge was asking customer to sign 10-year agreements to secure additional space. Now that’s pricing power!
Whether it’s through more infrastructure or better pricing, this company is set to win.
The market is wrong
The truth is that the market isn’t worried about Enbridge; it’s worried about oil. For nearly four years, oil prices have been stuck at US$55 per barrel. Major energy investors, such as Norway’s $1.1 trillion sovereign fund, are divesting themselves of oil stocks, not just due to environmental concerns but also due to the belief that oil prices will stay lower for longer.
There’s no doubt that oil is in secular decline, but how long it will stay there is up for debate. Some industries in secular decline take decades to play out, with plenty of temporary bull markets in between. Long term, the rise of renewables and electric vehicles will put a big dent in oil demand, while falling costs will push lower-quality producers out of profitability.
The issues surrounding oil are real, but they don’t necessarily impact Enbridge, considering the company profits from volumes, not pricing. As long as Canada continues to pump oil, it doesn’t matter which companies survive and which fail.
Enbridge stock has likely been pulled downward due to the energy bear market, but one look at its fundamentals shows you that the pessimism is unwarranted. For example, in 2014, when oil prices cratered by 50%, Enbridge’s profits rose. This is simply a great stock being overshadowed by industry troubles that don’t necessarily hinder the company.
