RBC Dominion Securities analyst Robert Kwan expects investors to be focused on the capital allocation plans for Enbridge Inc. (
) ahead of its annual Investor Day event on Dec. 7.
“The company has messaged having $5-6 billion of ‘annual investable capacity’, which it has conceptually split into approximately $3-4 billion per year in ‘high priority’ investments and $2 billion per year of ‘incremental capacity’,” he said. “At Enbridge Day, we think the company will strike a balance between highlighting opportunities it sees for investing in growth and explaining its framework for capital allocation overall, including how it is thinking about the return of capital to shareholders.”
“Over the past year, many of our discussions have centered around what Enbridge will do with its roughly $2 billion of remaining investable capacity once the Line 3 Replacement project is complete (and it came into service on October 1). We believe that share buybacks will feature in the plan for 2022 (possibly with a buyback target of $0.5-1.0 billion), particularly if Enbridge decides to moderate its dividend growth (i.e., the capital being returned to shareholders in a different fashion). We would also not be surprised if the company also looks to delever via ‘warehousing’ capital on the balance sheet so that it can quickly move on new opportunities should they arise.”
Following the release of largely in-line third-quarter results on Friday, Enbridge reiterated its guidance for 2022, including discounted cash flow of $4.70-5.00 per share (versus Mr. Kwan’s $4.88 projection) and an EBITDA range of $13.9-14.3-billion (versus $14.059 billion).
“Management commented that it is ‘anticipating tailwinds and headwinds to be roughly balanced for the rest of the year’, with solid system-wide utilization and the Moda acquisition being offset on an EBITDA basis by challenged Energy Services results, warmer weather, and a weaker U.S. dollar,” the analyst said. “On a distributable cash flow basis, management also cited trends in its interest expense, cash tax expense, and maintenance capex as being tailwinds to its guidance.”
Though he made a narrow reduction to his 2023 estimates to account for its guidance of Energy Services losses, Mr. Kwan raised his target for Enbridge shares to $61 from $57 with an “outperform” rating. The average is $55.47.
Elsewhere, National Bank’s Patrick Kenny raised his target to $54 from $51 with an “outperform” rating.