Raymond James - Shaw evaluation Raymond James analyst Michael Shaw expects Enbridge Inc. (ENB-T) to “continue to rightfully garner a premium valuation.”
However, he pointed to two significant concerns moving forward upon resuming coverage of the Calgary-based company on Wednesday.
“First is the regulatory uncertainly of the Canadian Mainline commercial structure,” Mr. Shaw said. “The Canadian Energy Regulator’s decision to deny Enbridge’s proposed Mainline contracting and the questions the CER raised about the appropriateness of the tolls, challenges the outlook for Enbridge’s single largest asset. Enbridge expects the ultimate impact of the CER decisions will be small (1 per cent to 3 per cent of consolidated EBITDA) but we expect questions on the mainline will overhang the equity until a resolution late 2022/early 2023.
“Our second concern is the outlook for organic growth beyond 2022. Under the current committed capital program, organic growth will begin to slow. Growth in recent years had been driven by large Liquids Pipeline projects. Enbridge’s current plans are shifting capital spending toward more bite-sized ‘in-corridor’ growth that carry attractive traditional returns, though with a smaller growth profile. Enbridge has plenty of levers which it can pull to reach its Distributable Cash Flow (DCF) per share growth target. We expect it will achieve its target through a combination of share buybacks, acquisitions, and incremental growth capital, but we suspect the market’s preference leans toward midstream and pipeline investments with well-defined growth programs.”
Despite those concerns, Mr. Shaw said Enbridge can “rightfully boast about an impressive energy infrastructure asset base that is unparalleled in its geographic, product, and end market diversity.”
“Simply put, the breadth and scope of Enbridge’s assets are an advantage that is impossible to replicate and worthy of a premium valuation,” he said. “Enbridge’s existing assets will generate meaningful cash flow to self-fund ‘in-corridor’ growth and incremental energy transition investments while easily covering the dividend and funding more aggressive share buybacks. Moreover, the reach of Enbridge’s assets gives it a meaningful advantage regardless of the direction and pace of the energy transition.”
Also calling its balance sheet “a point of strength,” Mr. Shaw set a “market perform” rating and $53 target for Enbridge shares. The average target on the Street is currently $55.11, according to Refinitiv data.