cibc: Outlook Should Reassure Investors target $49Enbridge reported a strong quarter with EBITDA higher than estimates by 5.9% and AFFO/sh higher by 13.7%. The 2020 outlook was maintained with some corporate cost-reduction actions taken, including reduced operating costs and capex. We reiterate our Outperformer rating and increase our EV/EBITDA-based price target to $49 (previously $47). Key Points Strong results and a reassuring outlook, particularly for the Mainline, should provide relief to investors. The company reported adjusted EBITDA of $3.76B vs. our estimate of $3.55B and consensus of $3.60B. Reported DCF/share was $1.34 vs. our estimate of $1.18 and consensus of $1.29. As the COVID-19 crisis continues to disrupt the global economy and energy markets, Enbridge has taken steps to manage through the challenges of the energy market while maintaining its prior DCF/sh guidance of between $4.50 and $4.80 for 2020. F/X impacts increased leverage to 4.8x on a TTM basis, but we expect it to remain in the guidance range of between 4.5x and 5.0x. The company has adopted several cost-saving measures, including: a capital spending deferral of ~$1B; reduced compensation across the company ($300MM); asset sales ($400MM), including a minority interest in three wind projects in France to CPPIB ($100MM); and increasing access to liquidity by securing a new $3B credit facility, increasing available liquidity to $14B. COVID-19 has had a major impact on North American energy demand, namely transportation demand where air traffic and vehicle miles are downsignificantly. The company provided additional disclosures about its expectations and the impact this can have on the mainline system, with Q2 declines peaking between 400 and 600 MBbl/d, recovering over the balance of 2020 under the assumption of a partial recovery of the economy. Our estimates are more conservative and are on the higher end of the company’s range, with 600 MBbl/d in Q2 and with volumes recovering in H2/2021. The company also provided sensitivities that indicate its expectations are for a 3% impact on EBITDA as a result. While this is a relatively minor impact, we caution that the situation still has a fair amount of uncertainty. The company continues to pursue the Mainline contracting application, underpinned by shipper demand, despite the objections of producers. There were no material updates on Line 5, but we are modestly more confident in the timelines for L3R. The minority interest sale of the offshhore wind farm projects to CPPIB should help bolster Enbridge’s partnership with the pension fund, and helps decrease the future ongoing development costs. We would not be surprised if this relationship continues as Enbridge takes the position as a developer of other projects.Enbridge Inc. (ENB-TSX) — Outperformer Price (5/7/20) C$45.13 12-18 mo. Price Target C$49.00 Sector: Energy Robert Catellier, CFA Source: Company reports and CIBC World Markets Inc. Company Profile Enbridge Inc. is a leading North American oil and gas pipeline, gas processing and natural gas distribution company. Investment Thesis The company has strong visibility to 5%-7% dcf/sh growth on a self-funded basis. Price Target (Base Case): C$49.00 We apply a 12.0x EV/EBITDA multiple on 2021E EBITDA Key Financial Metrics
The Rubber Meets The Road In Q2
Given the upheaval in energy markets, more emphasis should be placed on Q2 results, including the Mainline outlook. The sensitivities provided are somewhat reassuring, despite the evolving nature of the situation. We are also pleased to see the company taking steps to reduce operating costs. These include company-wide salary reductions, with 10% reductions at the executive leadership team level and 15% for the CEO and board of directors. Of the $300 million in operating costs savings, about two-thirds could be sustainable. Capex reductions of $1B for 2020 are a deferral into 2021, and include $300 million for the Line 3 Replacement project, as recent permits have bumped the timeline to include more capital in 2021. The company had conservatively forecast all capital for the project to be spent in 2020, and gives us confidence in our mid-2021 in-service date, despite the modest capital deferral. The company also indicated the Nationwide Permit issue that arose in a KXL ruling does not impact the project, which relies on local permits, not the nationwide mechanism. There is still risk in the appeals process to the recently reissued Certificate of Need and Routing Permit. Changes To Estimates We are updating our estimates for reported results and lower capex. We have not modified our Mainline volume expectations at this time given the uncertain state of the energy markets. We believe it is too early to fully incorporate recent improvements in demand as the energy market and economic recovery may be uneven.
Price Target Calculation
We reiterate our Outperformer rating and increase our price target to $49 using an EV/EBITDA multiple valuation approach. We are basing our valuation methodology on peer group analysis and a discount to historical trading ranges. We calculate our price target by applying a 12x EV/EBITDA multiple on 2021E EBITDA, using debt, minority interest and preferred shares totaling $81.6B.