ENB:CC - Enbridge: Investors Have Reason To Be Bullish As We Head Into A New Year

2023-12-15 04:57:18 ET

Summary

• Enbridge has released financial guidance for the 2024 fiscal year, showing continued growth and increased cash flows.
• Management expects EBITDA to be between $16.6 billion and $17.2 billion in 2024, up from $15.9 billion to $16.5 billion in 2023.
• Overall prospects for the business have probably never been better, with future growth also on the table.
• ENB stock is pricey compared to similar firms, but it's still appealing enough to warrant optimism.

Those who follow my work closely know that I am a huge fan of the energy market. At present, my third largest holding is actually a midstream/pipeline firm by the name of Energy Transfer ( ET ). It accounts for about 13% of my total portfolio. However, there are many other players in this space that investors would be wise to be aware of. One of the companies in this space that I have written about a number of times is Enbridge Inc. ( ENB ). With a market capitalization as of this writing of $75.08 billion, it truly is a large player. The company has thousands of miles of pipeline that it uses, not only for natural gas transmission in the US but also for Canadian gas transmission. The company has an ownership interest in certain US midstream assets as well, plus some other miscellaneous assets.

Just recently, management revealed guidance for the 2024 fiscal year. This guidance shows that the company continues to expand and continues to grow its cash flows. Compared to other players in the space, I would argue that the stock is a bit pricey. But on an absolute basis, shares are still cheap enough to warrant upside. Because of this, I am keeping my soft 'buy' rating on the company at this point in time.

A special note

In its own financial filings, Enbridge references its financial results using Canadian dollars. They do the same thing in their investor presentations. For the purpose of this article, I will have the data broken up into two separate sections. The first section, which will focus on management's own guidance for the year and some fundamental data, will refer to all pecuniary amounts on a Canadian basis unless otherwise pointed out. Unless otherwise pointed out, the second section of this article has translated Canadian dollars into US dollars at the current exchange rate.

Continued growth lies ahead

On November 29th, the management team at Enbridge released financial guidance covering the 2024 fiscal year. It is worth noting that the company has not included in this the US$14 billion purchase it is making of certain assets currently owned by Dominion Energy ( D ). In the next section of this article where I actually look at valuation data, I am incorporating my own estimates for this transaction into the guidance that management has provided so that we get a better picture of what the company will look like once the deal is completed.

When it comes to 2024, management has rather high hopes . They currently expect EBITDA to be between $16.6 billion and $17.2 billion. At the midpoint, that would give us $16.9 billion. That's up from the $15.9 billion to $16.5 billion, with a midpoint of $16.2 billion, currently expected for the 2023 fiscal year. $400 million of this increase should be driven by the gas transmission and midstream operations of the company, with another $250 million split between gas distribution and storage, and renewable power. $300 million will be attributable to its liquid pipelines.

There are some areas in which the firm is slated to weaken. And those should impact the company negatively to the tune of $250 million. This is not a one-year bump, however. From 2021 through 2024, the company has seen and annualized growth in EBITDA of right around 6%. Over that same window of time, the company has seen growth in other areas. DCF, or distributable cash flow, per share will have grown from $4.96 to $5.60 at the midpoint. That's a roughly 4% annualized growth rate. Current guidance for 2024 calls for DCF to be between $11 billion and $11.8 billion for next year.

This growth by the company has been made possible by significant investments in operations. Acquisitions have certainly played a role, but so has organic growth. And if all goes according to plan, 2024 will not be a deviation from this path. You see, management believes that total cash inflows for the year, between debt funding and excess cash flows from operations, will be around $20 billion. They plan to use $7 billion of this toward retiring certain debt. Another $5 billion will be used for growth initiatives. $1 billion will be used for maintenance capital expenditures. And that will leave about $7 billion for the company to pay in the form of distributions to common shareholders.

Shares are attractive (US dollars from here on)

Now that we know what the picture should look like for 2024 and since management has reaffirmed guidance for 2023, it's fairly simple to go in and value the company. However, we do need to make certain adjustments for the aforementioned acquisition of assets from Dominion. For those particular assets, I factored in the fact that management is assuming $4.60 billion worth of debt associated with the transaction. Management recently issued some additional stock, raising $3.39 billion. I also assumed that the company would use $500 million of its cash on hand, leaving it having to come up with another $5.51 billion in debt. I also added on a couple of smaller purchases that management announced subsequent to the end of the most recent quarter. This would be of the Aitken Creek Gas Storage assets and the additional ownership interest in both the Hohe See and Albatross renewable energy facilities. This naturally increases net debt, regardless of how management funds it. I assumed that they would fund it using cash on hand though.

For the purpose of calculating both DCF and operating cash flow, I also stripped out preferred distributions. These are not typically reduced from these metrics, especially operating cash flow. But since they are mandatory cash demands, I believe that valuing the company on an absolute basis makes more sense by stripping these out. In the table below, the valuation approach that keeps the preferred distributions in them is highlighted in the blue column. But when it comes to comparing Enbridge to similar companies, I added the preferred distributions back in for purposes of comparability.

In the table below, you can see how the shares of Enbridge are valued compared to five similar firms. This table looks at both the price-to-operating cash flow approach and the EV-to-EBITDA approach. Unfortunately, using the price-to-operating cash flow approach, it ended up being the most expensive of the six firms. And it ended up being tied with one other as the most expensive when it comes to the EV to EBITDA approach.

Takeaway

All things considered, I do believe that Enbridge is a high-quality company that, in the long run, will do just fine for shareholders. Relative to similar firms, the stock is quite pricey. But on an absolute basis, shares are still cheap enough to warrant additional upside. This is especially true when you factor in continued growth, even outside of the big asset purchase announced earlier this year. Because of this, I have no problem keeping the company rated a 'buy' for now. But clearly, as evidenced by my holdings of Energy Transfer, Enbridge is not my favorite in the space.

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