cibc analyst: Q4/20: Trimming Target L3R Capex IncreaseOur Conclusion
While results are tracking in line with our expectations, a US$1.1B increase in L3R costs causes us to trim our price target. 2021 is an important execution year, with ~$10B expected to be placed into service and with the ongoing mainline contracting process. While the stock may pause to digest the L3R cost increase, we think project execution over the year will be an important driver. We reiterate our Outperformer rating but trim our EV/EBITDA price target to $52 (was $53).
Results: The company reported mostly in-line Q4 results with lower adjusted EBITDA of $3.201B compared to our estimate of $3,303B and consensus of $3.378B. Reported DCF/sh beat our estimate and consensus, with $1.09/sh reported compared to our estimate of $1.08/sh and consensus of $1.07/sh.
Guidance: 2021 DCF/sh guidance was reiterated with a range between $4.70/sh to $5.00/sh and EBITDA of between $13.9B to $14.3B. Looking further, the company expects to grow DCF by 5%-7% through 2023 by executing on its $16B secured growth projects.
Capital Allocation: As previously announced, Enbridge increased its 2021 quarterly dividend by 3% to $0.835/sh. Management reiterated its position that share buybacks have an increased priority given where the stock price is today compared to other competing capital allocation opportunities to drive organic growth. The company also remains steady with its target leverage range of between 4.5x to 5.0x (currently 4.6x).
ESG: The company entered into a three-year, syndicated Sustainability Linked Credit Facility for $1.0B in February 2021. This credit facility is a first among its peer group. The credit facility allows Enbridge to reduce borrowing costs if it achieves ESG goals, including emissions. With the Sustainability Linked Credit Facility and other financing activities completed, the company cancelled a $3.0B revolving syndicated credit facility with a March 2021 maturity that was put in place at the onset of the COVID-19 pandemic
Segment Performance: The Liquids Pipelines results were in line with our estimates, with $1,787MM in adjusted EBITDA vs. our $1,802MM estimate. Enbridge continues to expect mainline volumes of 2.7 MMBbl/d or more in Q1/21 and a continued improvement through 2021. Construction on the L3R is progressing well towards its targeted Q4/21 in-service date despite the cost increase. Gas Transmission missed with $878MM in adjusted EBITDA compared to our $961MM estimate due to pressure restrictions on Texas Eastern and integrity costs. The Renewable Power Generation business beat with $146MM in adjusted EBITDA compared to our estimate of $121MM, driven by stronger wind resources in both Canadian and U.S. facilities.
Line 3 Costs Revised Now that it is fully permitted and in construction, Enbridge provided a long-awaited update to construction costs, which included a US$1.1B increase, a larger increase than we expected. The increase covers everything from regulatory delays, winter construction costs, further enhancements for environmental protections and COVID-19 protocols. The project is tracking as expected, and the in-service date was reiterated, but the company still has to execute. Indeed, with $10B in planned additions to in-service capital this year, not to mention the ongoing mainline contracting process, it will be an important execution for the company in general. The increase in L3R costs will not be passed through in rates, as a surcharge for 10 years was agreed to with shippers. Following that time, it will be placed into the rate base. We believe this will be funded internally, with no need for additional equity. The company reiterated its near-term mainline volume expectations while acknowledging the uncertain timing of a recovery, but with Asia leading the recovery, there is strong export demand pulling volumes through the system. A longer path to market drives higher tolling revenue. The company recently added 6.6 million barrels of storage in Cushing in an effort to advance the U.S. Gulf Coast strategy and is seeing strengthening interest in the SPOT terminal under development. If fundamentals persist, it can drive additional capital projects. Natural gas fundamentals appear even stronger. While pressure restrictions on Texas Eastern and warm weather to start the heating season impacted Q4 results, recently colder winter weather is driving record exports.
Price Target Calculation
We are decreasing our price target to $52.00 (previously $53.00) 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 2022E EBITDA, using debt, minority interest and preferred shares totalling $80.6B.