Upgrades G&M CIBC World Markets analyst Robert Catellier views Enbridge Inc.’s (
) US$3-billion acquisition of terminal and logistics company Moda Midstream Operating LLC as a “positive,” seeing it as a “high-quality asset at an accretive price,” aligned with its strategy and business risk profile and possessing “some future growth potential.”
Shares of the Calgary-based company rose 0.9 per cent on Tuesday following the premarket announcement of the deal with San Antonio-based private-equity firm EnCap Flatrock Midstream. It includes the Ingleside Energy Center near Corpus Christi, Texas, which is currently North America’s largest crude export terminal.
“The assets provide Enbridge with over $1-billion of accretive future organic growth potential,” said Mr. Catellier in a research note. “The 15.6 million barrels of storage is permitted to expand to 21 million barrels, and the 1.5 million Bbl/d of export capacity is permitted to expand to 1.9 million Bbl/d. In addition, future solar initiatives are expected to align with the company’s goal of net zero by 2050 by generating up to 60 MW of solar power. The site includes over 500 acres of unused land. This could lead to a negative emissions terminal with longerterm potential to add renewable fuels. There are also potential storage and handling opportunities in the petrochemical and natural gas liquids industries as well as for carbon capture utilization and storage.”
In response to the deal, Mr. Catellier raised his 2022 and 2023 EBITDA projections by just over 3 per cent, while his operating earnings per share estimates rose by 2.8 per cent to $3.24 and $3.49, respectively, from $3.15 and $3.40.
“The acquisition is a digestible size, and should not have any impact on future capital allocation,” he added. “Specifically, with leverage reducing to an estimated 4.6 times, near the low end of the targeted 4.5x-5.0x range, we still see the potential for share buybacks in 2022. This is contingent on placing L3R into service. Similarly, our dividend growth outlook is unchanged as well, albeit with more conservative future payout metrics. Capital deployments of this nature are important to give investors confidence in the company’s ability to reinvest cash flow in the future. We are somewhat surprised at the attractive multiple, but there are simply not a lot of buyers for these types of assets. The sale was made from a private equity firm, probably not interested in selling to other PE firms. ESG considerations probably also limited potential buyers of these oil-based assets, notwithstanding that this should be one of the lowest emissions profile terminals in North America and could have a negative emissions profile once the solar assets are placed into service.”
Maintaining an “outperformer” rating for Enbridge shares, Mr. Catellier increased his target to $58 from $57, citing the accretive nature of the transaction. The average target on the Street is $54.47, according to Refinitiv data.
Elsewhere, RBC Dominion Securities’ Robert Kwan bumped up his target to $57 from $56 with an “outperform” rating.
“We positively view the accretive bolt-on (i.e., less than 2 per centof Enbridge’s enterprise value) acquisition of assets in line with the company’s longstanding strategy to build-out its U.S. Gulf Coast export footprint via the largest crude export facility in the region,” said Mr. Kwan. “Importantly, despite the US$3-billion acquisition price being paid in cash, we calculate a negligible impact to leverage (i.e., roughly 0.1-times impact to debt/EBITDA) and Enbridge stated that the acquisition does not change its 2022+ capital allocation priorities (i.e., potential for share buybacks in 2022 post L3R’s completion, which could be in the coming weeks).”