Enbridge Inc (TSX:ENB)(NYSE:ENB) stock has long been a reliable source of income and growth. The company has raised the dividend every year since 1999. Over that period, shares have increased in value by more than 500%.
This week, the company’s stock lost 13% in a single day. Over the last few weeks, shares are down roughly 25%. After the plunge, the dividend yield stands at an impressive 7.5%.
What’s going on? More importantly, is this your chance to profit?
Here’s what happened
Enbridge is North America’s largest pipeline company. Its network stretches from British Columbia to Texas, shipping 25% of the continent’s crude oil and 20% of its natural gas. This company is a behemoth, with a valuation of $90 billion.
Over the last 30 days, shares have lost 25% of their value, so the downturn started before this week’s plummet. There are three reasons for the ongoing plunge.
First, of course, is the market correction. Few stocks have been spared. Some of the highest quality companies with multi-decade histories fell by double digits this week. Enbridge was no exception. This is pure, indiscriminate market selling.
The second factor is more nefarious. U.S. shale producers continue to lower production costs, taking market share from international exporters, pressuring OPEC members. Saudi Arabia pushed the cartel for a supply cut, which Russia refused. To retaliate, Saudi Arabia launched an all-out price war. The goal is to punish Russia, but also to push back against shale rivals, and potentially eliminate higher-cost competition from the market.
The OPEC drama could be devastating for Canada’s energy sector. Canada has some of the highest cost oil projects in the world. Several oil sands facilities have breakeven prices between US$40 and US$50 per barrel. If oil stays near its current range of US$33 for an extended period of time, these operators may have a difficult time raising money. Eventually, they may exit the market entirely, never to return.
This scenario would please Saudi Arabia and other low-cost producers, but it would be horrible news for Enbridge. Enbridge charges customers on volumes.
Fewer mega-projects would undoubtedly lower volumes, a direct hit to the company’s bottom line. In recent years, there has been excess demand for pipeline capacity. If a chunk of demand disappears, Enbridge could lose some of its pricing power.
The final factor is the most difficult to predict, both in terms of timing and impact.
In January, Larry Fink, the CEO of BlackRock, sent a letter to CEOs arguing that the climate crisis will radically change the investment industry.
“Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” he said. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
According to The New York Times, BlackRock will begin to exit certain investments that “present a high sustainability-related risk, such as those in coal producers. His intent is to encourage every company, not just energy firms, to rethink their carbon footprints.”
How to invest
Regardless of your views on climate change, Fink’s letter should strike fear into the hearts of fossil fuel investors. BlackRock is the largest asset manager in the world, with $7 trillion in capital. Fink intends to move against businesses that face long-term climate risks.
Other asset managers are expected to follow, potentially leading to a mass divestment movement that raises financing costs for these companies. Crucial funding could be eliminated entirely.
According to Fink, the clock is ticking. BlackRock’s actions combined with the OPEC pricing war and market correction could create a perfect storm for Enbridge.
The business has been of the highest quality for decades, but with plenty of other cheap stocks to choose from, it may be best to leave this company alone.
