RE:ENB just delivered a very conservative messageMarner16 wrote: I don't like ENB's Q3 message to the market.
ENB has signalled the following to the market:
1) Investors should be expecting a future of 3% dividend growth as opposed to much higher growth rates in the past
2) The company is not focused on using debt to grow as they intend to fund future projects from cash flow like they did for Ingleside.
3) The NCIB declaration puts the company onside with a popular trend.
This is how I read the signals:
1) The company reduced their dividend growth rate so they can focus on CAPEX growth opportunities in its ongoing efforts to reduce risk. The segment of the market that depends upon dividend income won't be happy with the reduced growth rate.
2) ENB seems to be fixated on the complaints from the street about the company carrying too much debt following the acquisition of Spectra, and how they were rewarded when they sold off $8 billion of debt.
When Berkshire bought Dominion Energy in July 2020, they paid $4 billion in cash and assumed $6 billion in debt (60% debt). The bottom line is that you can't make your margins in pipelines unless you utilize debt. The fact that FERC (in the USA) and CER (in Canada) build debt servicing into line tarrifs takes the risk out of debt which makes debt appealing as opposed to a burden for investment purposes
When Energy Transfer acquired Enable Midsteam in February, the transaction was entirely for shares in ET which caused dilution to existing ET shareholders (an alternative to debt).
When Cenovus picked up Husky last fall, Husky shareholders ended up owning 39% of the merged company and the new entity absorbed Husky's debt.
Berkshire took on debt and only paid 40% cash for Dominion even though Berkshire had about $140 billion cash on hand. Why would Berkshire use debt when it had so much cash on hand that it was having trouble finding a home for? The answer is simple....you can't make pipeline investments work without debt.
While there is a segment of the market that wants dividend income, there is another segment of the market that focus' on Total Return and they are not going to be happy ENB's incredibly conservative business plan that excludes issuing equity or debt.
3) The NCIB is so small that it is insignificant other than for optics.
ENB has stopped being an exciting investment for me because they have hit the brakes HARD. Maybe hitting the brakes is a good thing with so much uncertainty about the future pathway of hydrocarbons and alternatives, but expect the street will exit ENB until the company sends a different signal because the street is not patient.
I'm hoping the ENB share price will partake in the traditional Santa Clause rally followed by the New Year's rally and work its way up to the mid $50 range in advance of the next ex-dividend date. If that happens, I will sell my ENB pre-ex-dividend like always, but this time, I won't be in any rush to buy back in afterwards. I expect I will still buy back some ENB shares for dividend purposes, but the bloom is off the rose for now. Management has sent a clear message that they want to go back to their boring/safe opertating ways which doesn't warrant an overweight position in my portfolio.
I apologize to Fiddy and others if this post is too long for them but I don't write for them . I have decided to write something to see if it will stimulate thoughts and comments from the real investors who read this thread so that this board can become meaningful again.
BTW, Fantome is itching to come back as there are some interesting issues to discuss as ENB has changed its focus. He will not do so as long as the board remains a dumpster fire. I can't blame him and will join him on the sidelines again if the useful contribution of this board can be written on the back of a postage stamp.
Good post Marner. I agree with your points but I will add my thoughts.
We are in a world that people suspect interest rates will go up to counter inflation (although inflation is caused currently from high levels of government spending, labour shortages and logistical issues from Covid)
Both ENB and TRP are being conservative on dividend to support their higher credit quality. Lets say variable rates go up, but a bigger cost if the spread increases at the same time.
Purely hypothetically lets say instead of a 3% raise it was a 13% raise. Would the SP increase, would a possibility of a decrease in credit quality occur, would it benefit the medium term 5-10 years. Difficult to know with certainty other than with ESG focus anything energy related has been in the public market doghouse for years.
Publically listed options that would have synergies for acquiring the whole company are limited. ENB has a higher valuation but lets assume that it requires a premium (since gold is the only sector I have seen zero premium mergers) so the benefits are reduced.
Single or group assets would be good at the right price. Private companies, investment funds, pension funds are buying at higher valuations on mature assets. Individual assets from producers or integrated operators would likely want cash and wouldnt want to hold ENB shares.
Hypothetically if on the other hand lets say pension funds and investment companies team up and buy ENB at $60 would the assets be worth more divided, sold or kept long term? On the private market with the valuations of mature assets can lean towards 20x EBITDA/EV.