Mixed Comments G&M While shares of Enbridge Inc. (
) have “performed well,” iA Capital Markets analyst Matthew Weekes expects slower growth and other headwinds to weigh on performance moving forward.
Accordingly, he’s “moving to the sidelines,” lowering his recommendation to “hold” from “buy.”
On Friday, shares of the Calgary-based company rose 1.9 per cent following the premarket release of its fourth-quarter 2021 results. Adjusted earnings before interest, taxes, depreciation and amortization of $3.69-billion missed both Mr. Weekes’s $3.75-billion estimate and the consensus forecast of $3.78, leaving its full-year EBITDA of $14-billion near the low end of its guidance.
“Distributable cash flow (DCF) per share of $1.23 was strong, resulting in annual DCF [discounted cash flow] per share of $4.96, near the top end of guidance,” the analyst said. “Positives in the quarter included record volumes on the Mainline and contribution from the Moda acquisition, while headwinds included warm weather leading to lower utility demand, the weaker US dollar partially offset by ENB’s hedging program, and a provision related to Mainline tolls under the interim International Joint Toll (IJT).”
After it reiterated its guidance, including adjusted EBITDA of $15.0-$15.6-billion, Mr. Weekes thinks 2022 “should be a strong year for growth,” however he warned it will be increasingly difficult for gains going forward.
“At the midpoint, this represents high single-digit growth, underpinned by a full year of the Line 3 Replacement and the Ingleside Energy Centre (IEC), higher average Mainline volumes, and additional organic growth in the business …but should temper in 2023 and beyond,” he said. “Following a tailwind-heavy year in2022, we expect growth to moderate based on ENB’s secured capital program and normalization of Mainline volumes, which will likely include some attrition to the Trans Mountain Expansion once that pipeline enters service (likely 2023).”
“Mainline tolling will likely re-enter the conversation as the timeline progresses. ENB has re-engaged shippers on tolling options for the Mainline, with the potential for a revised incentive tolling option to be implemented by mid-2023,or a cost of service (COS) framework to be implemented in late-2023. In our view, Mainline tolling represents an overhang of uncertainty that could cause some volatility in the share price as a potential resolution draws nearer.”
Enbridge to settle on new Mainline tolling plan by summer, CEO says
Mr. Weekes maintained a $56 target for Enbridge shares. The average target on the Street is $55.77, according to Refinitiv data.
“ENB’s Q4/21 results do not materially change our outlook,” said Mr. Weekes. “However, following the recent strong stock price performance, we are electing to move to a Hold rating as we consider a more moderate pace of projected organic growth, as well as potential headwinds, including volume competition from the Trans Mountain Expansion and uncertainties in Mainline tolling and various US pipelines. While ENB’s stock price has converged to our target price, the shares continue to offer an attractive dividend yield, largely underpinned by stable, contracted or regulated cash flow and earnings. ENB’s balance sheet is strong, and we look forward to potential catalysts that could provide upside to our outlook, being mainly new projects, which are increasingly weighted toward clean and low-carbon energy.”
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Conversely, Scotia Capital analyst Robert Hope lowered Enbridge to “sector perform” from “sector outperform” with a $58 target, up from $56.
“Since its large Line 3 Replacement project entered service on October 1st, Enbridge’s shares have also outperformed its Canadian peer group. With the strong share price performance to start the year, we see limited room for further valuation expansion and upward estimate revisions relative to its peers. While we don’t believe the Mainline toll process or Line 5 dispute will result in negative outcomes, we continue to field questions on them and could hold back valuation expansion. The shares are currently trading at 9.7 per cent/9.8 per cent 2022/2023 estimated. FCF Yield and we assume some minor valuation expansion is possible,” said Mr. Hope.
Others making target changes include:
* National Bank Financial’s Patrick Kenny to $57 from $56 with an “outperform” rating.
“With the newly secured growth bumping our long-term estimates, our target taps up $1 to $57,” he said. “Despite a relatively skinny total return opportunity of approximately 9 per cent, we maintain our Outperform rating ahead of the Wabamun CCS hub potentially being sanctioned, representing 5-per-cent further valuation upside.”
* CIBC World Markets analyst Robert Catellier to $58 from $57 with an “outperformer” rating.
* TD Securities’ Linda Ezergailis to $59 from $57 with a “buy” rating.
* Raymond James’ Michael Shaw to $54.50 from $53 with a “market perform” rating.
* BMO’s Ben Pham to $59 from $57 with an “outperform” rating.