Key Morningstar Metrics for Enbridge
- : C$76.00Fair Value Estimate
- : ★★★Morningstar Rating
- : NarrowMorningstar Economic Moat Rating
- : MediumMorningstar Uncertainty Rating
What We Thought of Enbridge’s Earnings
Enbridge ENB announced the sanctioning of the Line 5 replacement, the critical artery for crude and refined products into Michigan and eastern Canada, which has been under legal threat. It also announced the Bay Runner Twin and an option to buy the TTC Connector pipeline to serve liquefied natural gas.
Why it matters: Line 5 remains controversial, but it is also vital in the absence of Northern Shield, a recently proposed all-Canada route that is redundant to Line 5 without export capacity on the east coast.
- Northern Shield could serve a compelling need for egress but will likely sit empty without subsidy or export capacity. It is slightly smaller than Line 5 and likely requires higher fees than the mostly legacy Mainline. Shippers would also have to sign long-term commitments.
- One of the proposed export terminals is at Port Churchill on Hudson Bay, a route that does not require a full path to Ontario. As an Arctic port, it also freezes over, requiring icebreaking and other investments to maintain throughput, adding to costs.
The bottom line: We are increasing our Canadian dollar fair value estimate to C$76 per share from C$75. We are lowering our US dollar fair value estimate to USD 54 from USD 55 as a weaker exchange rate outweighed the Canadian increase.
- We see shares as fairly valued, trading in 3-star territory.
- Our Narrow Economic Moat, Standard Capital Allocation, and Medium Uncertainty Ratings are unchanged.
Key stats: Leverage exceeded management’s target of 4.5-5.0 times EBITDA. We see the issue as temporary as capital spending inflects through next year and earnings increase with projects entering service. Management said weakening exchange rates amplified the excess.
- Lower spending and higher earnings will create additional investment capacity as natural gas pipeline developers increasingly look to the 2030s for backlog projects. Crude oil also maintains a consistent investment option, as low-cost Canadian crude is limited by market access rather than demand.
