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Enbridge (NYSE:ENB) on Wednesday was downgraded to Equal Weight from a previous investment rating of Overweight by analysts at financial-services firm Wells Fargo.
They said the Canadian pipeline operator’s debt load will weigh on its stock after financing the $14 billion purchase of several natural gas-distribution companies from Dominion Energy (NYSE:D).
Enbridge’s (ENB) shares on Wednesday morning fell as much as 6.7% in New York trading, echoing a decline in after-hours trading following yesterday’s announcement of the deal.
“Our Equal Weight rating on Enbridge (ENB) is based on our view that 2024 will be a transition year for the company focused on debt paydown and right-sizing the balance sheet following the company's C$19B acquisition ($14 billion) of utility assets,” Praneeth Satish, analyst at Wells Fargo, said in a September 6 report. "While we think Enbridge (ENB) paid a reasonable price and see the long-term merits of the deal (cash flow diversification, enhanced stability of cash flows), high leverage and a funding gap could act as overhangs."
The bank lowered its price target on Enbridge’s (ENB) stock listed on the Toronto Stock Exchange to C$50 a share from C$58 a share, based on a sum-of-the-parts analysis.
The deal's terms include $9.4 billion of cash and $4.6 billion of assumed debt. The gas-distribution companies operate pipelines in Ohio, North Carolina and regions in the Western United States.
"In the current environment, we believe midstream and energy investors at large are keenly focused on free cash flow and capital return," Wells Fargo said. "This acquisition is negative to both metrics, which we believe outweighs the positives of the deal."
The deal coincides with debates among lawmakers and regulators about the future of natural gas and its possible effect on climate change. As some cities and states seek to cut gas usage, utilities are deciding whether to sell or alter their natural-gas delivery networks to avoid potential losses on retired assets.
Dominion Energy (D) 10 months ago said it would begin a thorough review of its business to improve results. The company last year sold its natural gas utility in West Virginia to Hearthstone Utilities, a unit of closely held Ullico, for $690 million.