Enbridge sees lots of growth in the pipeline
Already a huge transporter of oil and natural gas, the company has ambitious projects and an ability to execute.
By Matt Coffina, Morningstar StockInvestor
Enbridge (ENB) transports and stores oil and natural gas throughout the U.S. and Canada. It also owns several green energy assets and is developing an electricity transmission business.
The company owns one of North America's largest crude-oil pipeline networks, most of which derives its oil supply from Alberta. On the natural gas side, Enbridge owns both long-haul pipelines and Canada's largest gas distribution utility, serving 2 million customers in Ontario, Quebec, New Brunswick, and upstate New York.
Enbridge is one of a handful of experienced midstream companies with the expertise, scale, access to capital, and geographic reach to successfully grow its pipeline transportation business. This includes opportunities that are developing from the explosive growth in liquids in Alberta's oil sands, the Bakken, and overall volume growth flowing into the major oil hub of Cushing, Oklahoma.
Enbridge also benefits from growth opportunities in its natural gas, distribution, and electricity business units. Enbridge has an extensive network of liquids pipelines spread across parts of Canada and the United States, in addition to a distribution and storage business in Ontario, and a 23% interest in a master limited partnership, Enbridge Energy Partners (EEP).
While its main rival, TransCanada (TRP), has been seeking approval of the Keystone XL pipeline (running from central Alberta to Nebraska), Enbridge has taken some of TransCanada's thunder with its 50% acquisition of the Seaway Pipeline.
Seaway is flowing more than 150,000 barrels per day (bpd) of oil from Cushing to the Gulf Coast, with 400,000 bpd in capacity. By 2014, we look for the pipeline to grow to 850,000 bpd.
Additional growth in liquids is expected from more than C$3 billion worth of oil sands-related pipeline, terminal, and tank projects in Alberta. Its secured (or allocated) liquids-related growth projects are approximately $20 billion over 2013-2017; unsecured (or unallocated) capital is $3 billion. This represents 82% of its growth capital.
Combined, these growth projects should provide $1 billion in unadjusted earnings growth from 2013-2017, and most leverage Enbridge's existing infrastructure, such as the Mainline, Spearhead, and Seaway pipelines.
Unallocated capital is estimated to be around $600 million. We look for modest unadjusted earnings growth ($500 million over 2013-2017) in this unit, and expect gas-related opportunities to improve with natural gas prices.
We are confident in Enbridge's ability to execute the $27 billion of growth projects (89% secured). However, the firm's success is dependent on the success of the exploration and production industry and its ability to bring projects online.
Earnings volatility comes from its ability to share in any net margins that are generated from processing liquids-rich gas. Compared with other pipeline C corporations, however, Enbridge has among the least commodity exposure.
Non-Canadian investors should consider foreign-exchange risk, although we think this risk is minimal for US investors in light of Enbridge's hedging and continued heavy investment and borrowing south of the border.
We like Enbridge's ability to execute on projects, and with more than $32 billion in potential projects, there is room to grow. Of its potential projects, roughly $24 billion is considered commercially secure, and we estimate $2.4 billion worth of unallocated projects are possible in the next several years.
Our five-year compound annual growth rate for diluted earnings per share is 12%, with additional upside depending on volume, regulatory risk, and acquisitions.
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