EUR 850.00 For Business Accounts Only

Morningstar | Enbridge Exceeds All Expectations; Stock Remains Highly Undervalued

Wide-moat and Best Idea Enbridge reported a record quarter that exceeded our and consensus’ expectations. The company reported first-quarter adjusted EBITDA of CAD 3.8 billion compared with CAD 3.4 billion in the year-ago quarter. Enbridge also reported distributable cash flow of CAD 2.8 billion compared with CAD 2.3 billion in the first quarter of 2018. The outperformance was attributed to higher throughput on the Mainline system and downstream pipelines; a stronger-than-expected contribution form new gas transmission projects; colder-than-expected weather in during the first quarter; and wider natural gas and crude-oil basis differentials in the energy services business. As a result of the stronger-than-expected quarter, we are increasing our 2019 adjusted EBITDA forecast to CAD 13 billion from CAD 12.8 billion.

Enbridge continues to advance its priority access contracts for the system and will launch an open season in mid-July with the intention of altering the contract structure to contain 90% take-or-pay commitments with 10% spot capacity. As a reminder, we don’t think the company will be successful in its attempt, but doing so will add modest upside to our fair value estimate.

The Line 3 replacement project continues to progress according to the revised timeline. Enbridge intends to complete work on the Canadian portion by the end of May. The company also still expects Minnesota to complete the permitting process by November of this year. After the state permits are received, Enbridge expects to receive the federal permits 30-60 days later. Accordingly, we still expect Line 3 to be placed into service during the fourth quarter of 2020.

We don’t see our increased near-term outlook as a needle mover, and we are maintaining our CAD 62 fair value estimate and no-moat rating, but we are lowering our U.S. fair value to $46 due to changes in foreign currency exchange rates.

Enbridge remains one of our top picks in the energy sector, as we think the market is mistaken about the future of the company's cash flows associated with future mainline utilization and the Line 3 replacement project. However, we don't expect the market's concerns will be fully addressed for some time, which can lead to volatile swings in the stock. But we advise investors to stay the course while getting paid a handsome 6% (and growing) dividend. In the end, we believe Enbridge's long and winding road will lead to 25% upside.

Please refer to our May 2019 report, "Enbridge's Long and Winding Road Leads to Significant Upside," for a deeper dive into the stock's upside.

For a detailed look into Canadian crude market and pipeline trends, please refer to our January 2019 Energy Observer, "Pipeline Expansions Are Canada's Lifelines."