CA - Enbridge Stock Earnings Preview: What To Watch For

2023-04-24 11:30:00 ET

Summary

• ENB is a sleep well at night midstream business.
• We preview its Q1 earnings report.
• We also provide a longer term outlook for the stock and discuss whether it is worth buying before earnings.

Enbridge Inc. ( ENB ) is a leading midstream business that also has a very impressive 28 year dividend growth track record that puts it in the company of the Dividend Aristocrats ( NOBL ).

ENB Stock Key Metrics

ENB is a midstream infrastructure business with a growing - though still small - renewable power segment. It generates very stable cash flow, with nearly all of it supported by commodity price resistant contracts and investment-grade counterparties.

Its large and diversified asset portfolio provides protection against commodity and geographic concentration risk along with economies of scale benefits, high return, low-risk growth investment opportunities, and a critical role in North America's energy value chain.

Last, but not least, ENB has a strong financial position with a BBB+ credit rating, fixed interest rates, a low leverage ratio relative to management's long-term target, very long-termed debt, and diversified assets, suggesting little to no financial distress risk in the near future.

How Was Enbridge's Previous Earnings?

ENB's fourth quarter earnings report showed that the company managed to grow its adjusted EBITDA by 6% year over year and generated distributable cash flows of CAD$2.7 billion, up by 7% year over year. Enbridge forecasts distributable cash flows in a range of CAD$5.25-5.65 per share for the current year, which would be a new record for the company. Enbridge also raised its dividend by 3% in Canadian Dollars, marking its 27th yearly dividend increase in a row.

When Does Enbridge Report Earnings?

ENB is expected to report earnings on May 5th, followed by a conference call and webcast at 9 a.m. Eastern Time in which it will provide a business update and review of its 2023 first quarter results.

Is Enbridge Expected To Beat Earnings?

Given that ENB is a midstream business with a widely diversified portfolio of assets with overwhelmingly investment grade counterparties and commodity-price resistant contracts, it generates very stable cash flow results. As such, ENB's precise results are not expected to differ much from analyst expectations.

What is far more important is any guidance that management may provide regarding their capital allocation priorities moving forward and how robust the DCF per share and dividend per share outlook is.

What Can You Expect From Upcoming Earnings?

There is little reason to expect any surprises this next quarter given that ENB generates pretty stable cash flows and energy prices were relatively stable during the first quarter:

Moreover, ENB has already announced its dividend increase for the year, in-line with the company's past tradition of increasing its quarterly dividend during the first quarter and then holding it constant for the remainder of the year:

As a result, we see few potential catalysts for the stock either to the upside or downside in the coming quarter.

Moreover, management is unlikely to follow midstream peers in lowering ENB's leverage ratio below its long-term target range. Two big examples of midstream businesses who have done this are Enterprise Products Partners ( EPD ) - which actually lowered its long-term leverage target range - and Plains All American Pipeline ( PAA )( PAGP ) - which is operating well below its target leverage range and has hinted that it may very well lower its target leverage ratio in the near future.

On the last earnings call, ENB was asked the following question by an analyst:

With your leverage now down to 4.5, 4.7. I think it's the lowest it's been in a very, very long time. I guess what is the right leverage for your business as you look out over the next few years? And are you going to keep driving that lower, or are you hitting a point where you could potentially pivot more of that free cash flow back to - either back into the business or to equity holders? And then just tied to that, how do you think about leverage in the context of ESG recognizing the more oil-weighted asset base?

Management responded:

I think we are quite comfortable where we are in the debt-to-EBITDA range. You have to remember that lots of our assets are highly regulated with highly regulated capital structures. So, there is a limit on how far we can push the debt-to-EBITDA down. But being in the lower half of the range provides us tons of flexibility to allocate capital to all kinds of great stuff, more organic growth, tuck-in M&A, share buybacks and potentially a slightly lower leverage. But I think we are happy where we are at, and we will continue to try to be around this point in the debt-to-EBITDA range.

Given that they operate some regulated assets in Canada, they are actually required to have certain leverage ratios and the safety of their assets with strong counterparties and commodity resistant contracts with extremely long-term debt frees them from much pressure to lower their leverage ratio.

As a result, it will be interesting to hear if management announces anything on the M&A front. This is especially likely given that the stock price is not particularly discounted at the moment, so an acceleration of share buybacks - which management has emphasized will be opportunistic - are unlikely here.

What Is The Long-Term Outlook For ENB Stock?

ENB's medium-term outlook is fairly easy to model. With the balance sheet in good position in regards to its leverage, management should be freed up to meet its investment targets across its diversified business model to drive solid long-term per share growth.

Management has emphasized that it plans to sustain a 60-70% payout ratio. With the 2023 payout ratio expected to come in at 65%, moving forward we can expect the dividend per share to grow in-line with the distributable cash flow per share growth.

To fuel its growth, ENB expects to invest primarily in low-capital and utility-like growth investments across its gas transmission & midstream, gas distribution, renewables, and liquids pipelines business segments, of which it expects to have plenty:

It also plans to opportunistically enhance those investments with selective tuck-in M&A as well as share buybacks whenever the stock price looks particularly cheap.

Is ENB Stock A Buy, Sell, or Hold?

Putting it all together, ENB offers investors a 6.7% forward dividend yield along with an estimated 3-5% per share DCF CAGR, putting it in-line for ~10-11% annualized total returns. We expect the valuation multiples to remain roughly constant (assuming no major permanent shifts in energy prices and/or interest rates from current levels) moving forward. As a result, we rate it as a modest Buy, especially when taking into account the low risk profile that ENB enjoys.

Investor Takeaway

ENB is one of the most stead-as-she-goes sleep well at night investments available in the energy and infrastructure sectors today.

While we do not expect too much excitement in this upcoming quarterly report, it will be interesting to see if management leans into growth with some acquisitions and aggressive capital investments that could push its long-term growth rate closer to 5% rather than 3%. We think it is worth buying for investors who focus on high current income, reliable steady dividend growth, and have a lower risk profile.

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