安桥(Enbridge)

Enbridge has spent CAD 4.5 billion on acquisitions over the past month, acquiring Salt Creek gathering and Tallgrass pipeline assets. The acquisitions were mostly funded by CAD 3 billion in equity issuance, with debt making up the balance.

Why it matters: The Tallgrass acquisition looks strategically sound, but at a rich price. Liquids pipelines have traded at 10 times forward EBITDA in public markets, so 10-11 times 2027 EBITDA will require more organic growth. There is one expansion that has been commercialized and will come online at the end of 2027. As a result, the rich valuation should move closer to peer transactions in 2028. Management stressed the complementary nature of the assets to existing routes and accommodating regulators. This may become an alternative egress path for Bakken and Canadian crude, should shippers sign up.

The bottom line: We are lowering our Canadian-denominated fair value estimate to CAD 75 per share from CAD 76 and maintaining our USD 54 fair value estimate. The decline resulted from several puts and takes, including the Westcoast joint venture and acquisitions. The shares look fairly valued, trading in 3-star territory. Our Narrow Economic Moat, Medium Uncertainty, and Standard Capital Allocation Ratings are unchanged.

Between the lines: The Salt Creek acquisition was at a better price and is less dependent on future growth. The strategic rationale of extending the value chain is sound, reducing recontracting risk on pipelines and terminals. Management highlighted the low utilization levels on the assets, allowing for low-cost growth. Given Permian producers' maintenance capital plans, incremental throughput growth is the most likely outcome.

Our fair value estimate is USD 54 per share, unchanged after updating our model for the Tallgrass and Salt Creek acquisitions. We also included the previously announced Westcoast pipeline joint venture. We use a USD 1/CAD 1.38 conversion rate.

Our forecast anticipates adjusted EBITDA of CAD 20.7 billion and CAD 22.5 billion in 2026 and 2027, respectively. This translates to distributable cash flow of CAD 12.2 billion and 13.5 billion, respectively.

The gas transmission segment should realize growth through new projects entering service along with incremental rate increases. In the near term, the most significant will be the Tennessee Ridgeline and T-North expansions, with an in-service date of 2026. In the medium term, Canadian assets will be receiving the bulk of capital as Woodfibre LNG and the Westcoast expansions will come into service in 2027 and 2028.

We expect utility operations will grow through new projects and rate recovery, along with rate increases to account for changes in operating costs. Through 2027, both the Canadian and US assets will be the recipients of general growth capital.

Enbridge earns a Narrow Morningstar Economic Moat Rating due to efficient scale. More than 95% of its revenue is generated under cost-of-service or regulated activities.

Liquids Pipelines Earns a Narrow Moat

The liquids pipelines segment contains the critical Mainline system, responsible for moving about 75% of Canada’s crude exports and linking producers to US refineries. Refiners have optimized their facilities to process Canada’s heavy crude as opposed to US light oil produced in shale regions. As such, the segment is deeply embedded in the infrastructure responsible for powering US industry and homes. Regulatory challenges in building new pipelines connecting the US and Canada have prevented new entrants, specifically Keystone XL, which enhances the moat of this critical asset.

While 65% of segment profits are derived from the Mainline and regional systems in Canada, lines connecting the US Midcontinent region and US Gulf Coast provide the remainder. The Gulf Coast and Midcontinent assets represent the terminus of the network and include pipelines linking the Permian and oil hubs to the Gulf Coast refining hubs. Finally, the Enbridge Ingleside Energy Center is a crude marine terminal responsible for one-fourth of US crude exports.

While the Mainline has commodity risk exposure, it also has limited competition due to its scale and regulatory protection, providing greater earnings certainty. The price charged is currently governed by a cost-of-service methodology, approved by regulators, allowing 11%-14.5% returns on equity, assuming a 50% equity capital structure. These tolls flex up or down, with makeup charges and discounts assessed to ensure the returns are maintained and balance the interests of shippers and Enbridge. In effect, this means that if oil is being exported, the returns for the Mainline are consistent.

Gas Transmission Earns a Narrow Moat

Gas transmission earns regulated take-or-pay revenue under cost-of-service frameworks, providing a high degree of certainty. Fees are collected for capacity reservations, with only limited incremental revenue tied to usage. Contracts between the pipeline operator and consumer can last decades, providing certainty for both. The basins connected by the network are estimated by Rystad to contain 65% and 95% of remaining natural gas resources in the US and Canada, respectively.

Natural gas transmission involves moving molecules across state and national borders, delivering to regional utilities, power plants, or LNG export facilities. The assets are protected by contracts where consumers reserve capacity to ensure they can maintain power or service. These customers are strong investment-grade counterparties who can pass most costs on to customers, providing stable returns.

Gas Distribution and Storage Earns a Narrow Moat

This segment boasts a collection of regional utilities across the US and Canada. It serves Canada’s Ontario and Quebec provinces in addition to markets in North Carolina, Ohio, and a clutch of states in the Rockies. Utilities exhibit many characteristics of wide-moat businesses, namely regional monopolies, but are regulated by the government to prevent exploitation of market power. This caps the returns on investment and limits rate increases, but protects earnings, giving us confidence in the moat. After acquiring three regional US utilities from Dominion in 2024, the segment is about half legacy Canada and half US by EBITDA.

While the Canadian assets are critical as the franchise is Canada’s largest natural gas distributor, they also produce lower returns on invested capital. For the average utility to justify a moat, its return on equity usually approaches 10%, assuming a 50% equity capital structure. Current rates are based on a 9.2% allowed return on equity and a 38% equity capital structure, with the ability for an additional 100 basis points before sharing returns with ratepayers.

We believe the former Dominion assets have a narrow moat. Crucial to this determination is higher allowed equity thickness and returns on equity. Details vary among the entities but generally are allowed greater than 10% returns on equity and a 50% equity structure.

Renewable Energy Earns No Moat

Renewable energy projects can offer attractive returns with tax credits and often have lower all-in costs than other generation sources because they don’t require fuel. The renewable energy projects are also among the most expensive, with the company estimating capital investment to EBITDA in the midteens, though long-term power purchasing agreements enable greater certainty of returns. As the segment is a small portion of the overall business, we don't see it threatening Enbridge’s overall moat.

The Mainline system is critical to the Canadian oil sector and can expand capacity more effectively than competing pipelines.

Enbridge is highly exposed to North American natural gas demand, which we expect to grow rapidly through 2035.

Enbridge has pursued utility-like businesses to create stable returns that can reliably increase the dividend.

Enbridge owns one of the best liquids pipelines for now, but competition could heat up with new entrants like Trans Mountain.

Canadian oil sands are subject to a carbon tax, increasing through 2030, which could negatively affect production in the long term.

Rising interest rates could increase interest costs and make the dividend less attractive.