ATB's Views Touting the “resilient, utility-like cash flow predictability” across its integrated infrastructure asset portfolio in North America, ATB Capital Markets analyst Nate Heywood initiated coverage of Enbridge Inc. (
) with an “outperform” recommendation.
“Given its expansive network of assets, the Company is structurally supportive of energy transition initiatives through its growing focus on natural gas (including RNG) and renewables,” he said in a research report released Friday titled Forget Art Vandelay... ENB is the Exporter of Choice.
“ENB maintains a significant secured growth program and continues to employ a self-funded equity model to help maintain its attractive leverage position. With the expected execution of recent material acquisitions, ENB is expected to continue to maintain financial discipline and aims for leverage to remain within its 4.5-5.0 times range.”
Mr. Heywood sees the Calgary-based company “well situated” to take advantage of an “evolving domestic energy macro” through its “well-diversified” fleet of liquids pipelines, natural gas transmission, midstream, natural gas distribution and storage, and renewable power generation. He also sees it exposed to key global fundamentals and growing energy demands.
“The cash flow profile is heavily resilient, with 80 per cent of EBITDA underpinned with inflation protection and 98 per cent of EBITDA from utility-like and contracted cash flows,” he said. “The strong contracted cash flows and associated resilience are seen across the business from its utility assets, to its liquids and natural gas pipelines, and PPA demand for renewable power developments. Overall, the high proportion of contracted cash flow provides confidence in the Company’s ability to meet its growth capital demands and the current secured capital program of $25-billion. With execution of the growth program, management has pointed toward a medium-term (beyond 2025) CAGR [compound annual growth rate] of 5 per cent for EBITDA.”
“ENB has been transitioning its asset portfolio over recent years, increasing its proportion of cash flows toward natural gas assets through growth capital allocations and M&A. The current secured capital program is heavily weighted to the natural gas business lines (more than 80 per cent), with significant amounts being dedicated to growth in the gas transmission and midstream and gas distribution and storage segments. In addition, with the recently announced US utility acquisitions, we estimate pro-forma EBITDA to be 46 per cent from its natural gas business lines compared to 40 per cent in 2022. The investments highlight ENB’s commitment to contracted assets and energy transition initiatives.”
Also emphasizing its “robust” capital program and “sustainable” balance sheet, which he called “strong,” Mr. Heywood thinks investors should be attracted by Enbridge’s history of dividend growth, pointing to its 29 consecutive raises and expectation “to continue increasing its dividend annually with DCF growth.”
“The dividend has boasted a 5-per-cent CAGR since 2019 and the current $3.66 dividend yields 7.5 per cent, which is supported by a sustainable payout ratio within its 60%-70% target range (2024e: 67 per cent),” he said.
Seeing Enbridge “commanding a top tier valuation,” Mr. Heywood set a one-year target of $56 per share. The average target on the Street is $53.34, according to Refinitiv data.
“Overall, we view ENB as a name that attracts a premium valuation in the energy infrastructure space given its significant scale, unique export exposure and growing predictable cash flow base. ENB currently trades at a 2024 estimated EV/EBITDA multiple of 11.4 times, which we expect to compress to 10.5 times in 2025, compared to peers trading between 9-11 times,” he said. “With noted insulation from commodity volatility, ENB provides upside in a dovish interest rate environment and the near-term portfolio growth should attract interest given its self-funding philosophy.”