From RBC
EQUITY RESEARCH
November 28, 2021
Enbridge Inc.
Back to the drawing board
Our view: Following the CER denial of Enbridge’s Mainline contracting
proposal, we believe the stock could underperform its peers on Monday
given the uncertainty with respect to the path forward and, more
importantly, the risk-reward trade-off for a negotiated settlement or
regulatory process. We believe that any material weakness in the share
price would be a buying opportunity ahead of the December 7 investor
day, where we expect Enbridge to largely hit the mark on capital allocation
messaging as well as providing additional details on its path forward for the
Mainline.
Key points:
The CER could not support a “foundational shift” in oil transportation.
Boiling down the CER’s 154-page document, the regulator was not willing
to support the proposal that would “dramatically change access to the
pipeline” to lock in 90% of the pipeline’s capacity under long-term
contracts. The CER also noted that “the negative impacts would affect
certain groups more than others” and that the tolling framework would
“excessively favour” shippers who signed long-term contracts.
We believe a negotiated settlement is in the cards. While a fractured
shipping group could make for contentious settlement negotiations, we
continue to believe that a cost-of-service regulatory framework would be
a bad outcome for both shippers and Enbridge. Particularly given language
in the CER’s decision that encourages a settlement, we view this as a more
likely outcome versus a cost-of-service regulatory filing (outside of cost-of-
service potentially being a short-term bridge solution). Enbridge noted that
it intends to imminently engage with stakeholders.
Reducing our estimates. Given the CER’s willingness to give significant
weight to non-customers and a minority of shippers, along with its
comments on returns, we believe that Enbridge is unlikely to preserve CTS-
like economics. Our changes are as follows:
• 2022 – aligned with what Enbridge is likely to provision. We expect
Enbridge to book Mainline results based its assumed economics from
a settlement, and our forecast for that allowance is roughly half of our
more conservative assumption incorporated in our 2023 estimates. With
that, our new EPS and DCF/share estimates are $3.07 and $5.27 (down
from $3.16 and $5.38), respectively.
• 2023 – we have made a more conservative assumption. Based on our
analysis published on November 17, 2021, we have incorporated a more
conservative assumption for the post-CTS economics being a roughly
$500 million reduction in our 2023 EBITDA forecast. With that, our EPS
and DCF/share estimates decline to $3.17 and $5.37 (from $3.37 and
$5.60), respectively.
Valuation: reducing price target to $60.00 from $61.00. Our lower EPS
forecast for 2023 is partly offset by nudging up our P/E valuation to 19x
(from 18x) to reflect the potential that Enbridge will be able to negotiate
enhanced risk mitigation versus the contracting proposal (i.e., giving up
EBITDA to reduce overall risk).