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Morningstar | Enbridge's Long and Winding Road Leads to Significant Upside

The last year and a half has mostly been a slog for Enbridge shareholders. The stock declined 16% in 2018, underperforming the market considerably. In 2019, the stock has performed in line with the Canadian market (up 14%) but has lagged the U.S. market and Canadian midstream peer TransCanada. We think uncertainty surrounding long-term mainline utilization and the Line 3 replacement project has made investors tentative. In our view, the market underappreciates the long-term cash flows from these assets.

We anticipate that all three major pipeline expansion projects—Enbridge's Line 3 replacement, TransCanada's Keystone XL, and the Trans Mountain expansion—will be built by the end of 2022. This naturally creates concerns about the utilization of Enbridge's mainline system. However, we think advancements associated with solvent-assisted technology will lower oil sands break-evens, leading to long-term Canadian production that will surprise to the upside and add 1.3 million barrels of oil per day over the next decade. Investors shouldn't expect mainline underutilization to last long, as we expect it to operate near full capacity as supply ramps up to our forecast levels by 2025. Even when the mainline is operating at a lower capacity, we expect Enbridge to generate enough cash flow to meet our 3% annual dividend growth forecast, aided by cash flows associated with the legacy Spectra Energy assets.

With major crude pipeline delays the norm, the market has also been cautious about giving Enbridge credit for the Line 3 replacement. However, the project carries minimal federal political risk, and we think that the increased safety standards and immense economic upside make it likely that the Minnesota Court of Appeals will uphold the project's approval. Accordingly, we expect the Line 3 replacement to be placed into service by the end of 2020.

Wide-moat and 4-star-rated Best Idea 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. 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."