Post by
Obscure1 on Jan 08, 2024 12:14am
A bit of a deep dive on ENB's "generational opportunity"
This post will be a bit abstract to many but important to my decision making process.
The guys on both sides of the Dominion acquistion by ENB are smart so it is not like I'm inventing the wheel here. The price of the assets is a bit mind boggling imo.
Dominion has clearly stated in the past that they want out of the hydrocarbon business. Their first sale of gas pipeline assets was to Berkshire Hathaway in 2020 for $4 billion cash plus an assumption of another $5 billion in debt. It took Dominion 3+ years to find a buyer of their other 3 hydrocarbon assets.
When the the two parties agreed to the deal, Dominion announced that they are selling ENB 78,000 miles of pipeline plus a big storage facility in Ohio plus 3 million customers for $14 billion. Is that a fair price?
According to FERC, the average cost of adding new gaslines in the USA in 2023 was $10.7 million per mile. Multiply $10.7 million per mile by 78,000 miles and you get US$842 billion.
Lets think about that for a moment. ENB is buying $842 billion of assets in the ground for $14 billion. That equates to $0.02 on the dollar. Actually, the assets were valued at ZERO because the $14 billion number was arrived at by calculating the the Net Present Value of future cash flows at some agreed upon discuount rate. To get to the $14 billion figure, the number crunchers must have attached a very short termination point to useful life of the assets. If I remember correctly, the deal was done at 16 times earnings which means nobody thinks that ENB will be selling ANY natgas to customers after 2040 or so.
My house is heated by natgas. In southern Ontario, a very high percentage of homes and businesses are heated by natgas. The acqusition assumes that natgas will not be used in the near future.
One thing we have learned from the EV story is that it takes a great deal of time to ramp up the transition for a new technology.
GM produced the EV1 from 1996 to 1999 before shuttering the project. Tesla sold its first car in 2008. Toyota initially owned a chunk of Tesla but sold its interest as the company determined the EV's were not a viable product. Almost 30 years after GM produced the first EV was produced, EV sales only made up 7.2% of all auto sales in October 2023 despite the obvious cost advantages of owning an EV vs an ICE vehicle (let's leave the environmental debate out of this).
Converting natgas to power the grid and to heat homes and businesses is going to be a much bigger problem than reinventing the automobile.
It currently costs about $20k to be in a position to power a small house (a shack). Doing the same for a sub-division sized house is $50k plus. In 2022, the average gas bill for homes in Canada was $1,332 for the year. Not many people are going to make the change voluntarily. Therefore, no significant reduction in demand for nat gas will take place until nat gas is legislated out of homes and businesses.
New York city has banned the use of natgas in new homes. Regardless, the demand for natgas in NYC will remain strong for decades as new construction each year only affects a very small percentage of the total users. In the States that ENB is going to be distributing natgas, there are laws in place preventing the "ban natural gas homes" that NYC is incorporating.
Sorry for the long explanation. The bottom line is that the $14 billion pricetag that ENB is paying for the acquistion is based upon a very rapid and complete transition to renewable energy for home and business heating. I don't see how that is going to happen in the next 20 or maybe even 50 years. If the Republicans win the election in November, all bets are off for renewable energy.
After thinking all of the above through, I now see why Greg Ebel continues to tell the world that the deal the ENB made to acquire the 3 Dominion assets is a "generational opportunity"