Good contributions The two posts this morning by bttmfischer and Defiance offered more useful thinking and analysis than I have seen in months on this thread. Great work guys.
Concerns about the likelihood of increasing interest rates going forward are understandable as the outcome of the inflation we are experiencing is inevitable.
In order to understand the necessity of borrowing in a capital intensive industry like pipelines, it is necessary to look at the cost of debt and the ROI of new projects.
I tried to cut and past of ENB's debt as of the 2020 fiscal year end (the more recent quarterlies don't offer the same depth) but SH's format chopped it up and made it difficult to read. So, check out Page 48 from this link to see a summary of ENB's DEBT:
https://www.enbridge.com/~/media/Enb/Documents/Investor%20Relations/2020/2020_Q4_Financials_and_MDA.pdf
You will note that of the $67 billion in debt ($63 billion after the current portion due in 2021) is spread out over 20 to 30 years with some of the debt actually reaching out 60 years. You will also note that the majority of the big numbers have interest rates less than 4%. If I'm not mistaken, the average overall cost of debt for ENB is 3.8%. The interest rate percentages have been lower for 2021 renewals and one loan mgmt was very proud of included a special environmental bonus rate for achieving GHG emission targets.
EMB's mgmt has indicated in MD&A's that the company has a series of qualifying hoops that new projects have to jump through in order to be approved. If I remember correctly, the qualifying target ROI for "add-on" projects (hydrocarbon based) is 20% and the target ROI for renewables is 15%. The real return on renewable projects across the industry is 8% to 10% and the difference in the spread to 15% is covered by government subsidies.
The reason that ENB is able to offer guidance of 5% to 7% growth in DCF while they are only growing the asset base by 3.6% ($6 million CAPEX divided by $165 million asset base) is due to the difference in the anticipated ROI vs the cost of borrowing. for projects.
ENB's decision to grow entirely through DCF instead of using debt, eliminates the ability to leverage projects. In absolute terms, zero-cost financing from DCF increases returns on a project, but overall growth is limited by the amount of DCF the company generates.
All is not lost. Fantome (we talk a lot privately after meeting on SH) and I are excited about the the growth opportunities available via the Ingleside acquisition (initial cost $4 billion financed by DCF) in combination with ENB's new focus on providing north to south transportation of heavy oil to Houston and then on to Corpus Christi. I believe (can't speak for Fantome) that ENB can and should be driving forward with developing both the land they purchased in Corpus Christi and proceeding full throttle with expanding the capacity of their north-south corridor. Those items will cost far more than the DCF can provide.
One poster (sorry that I don't remember who) correctly identified the risk that Biden based upon political pressure could shut down O&G exports which would throw a wrench into ENB's Ingleside acquisition. I don't see any possible way that could happen as the USA is gearing up to be the biggest exporter of LNG in the world.
The O&G industry has correctly challenged the green movement's complaint that exports are raising domestic rates with the fact that by exporting LNG, America is doing more than anybody in reducing global GHG by helping China and others reduce the use of coal. Warren (as the spokesperson for the greenies) has no response as they can't have it both ways.
My concern after reading the latest MD&A is that the projects that ENB has committed to vs what they could be committing to using a 20% ROI threshold is stunting growth. ENB can borrow money for less than 3.5% these days, so any projects that can be built without grief from protestors that yield 20% will enhance the value of the company.
My question is WHY is ENB pulling back on the reins? Are the BoD and mgmt concerned that new projects can't be relied upon over the long haul going forward? That is why I found Fiddy's link the the article about reducing the life expectancy from 30 years to 18 years so interesting.
ENB has historically preferred the tortoise over the hare approach. Well, until they broke the mold and acquired Spectra. Then the company when on a CAPEX binge for the past 4 years. Now, we are seeing ENB retreat back into its shell (hehe). Is the BoD simply being prudent in choosing to be ultra conservative or are they missing out on opportunities to improve the bottom line and increase the moat around the company?
The market won't be patient with ENB for long as the market exists to promote growth. Fund managers have become very proactive in moving money towards growth stories. I just have to wonder if ENB's BoD realized that their move to being more conservative would cause some funds to move to the sidelines, and as such, instituted the NCIB to accomodate sellers.
I have cut out a lot of what I wanted to say (I've been away for awhile) to keep this as short and
simple as possible. If I have lost you or put you to sleep, I hope you enjoyed the nap. For those that have made it this far, I encourage you to share your thoughts and ideas as we can all learn from others.