Enbridge's Economic Moat Widens
Shifting economics and supply dynamics provide growth opportunities.
As one of two dominant Canadian pipeline companies, and with a strong U.S. presence, Enbridge (ENB) (ENB) has assembled a strong network of pipelines collecting toll-like revenue. Its regulated returns on equity have consistently exceeded its cost of capital, helping secure a narrow moat rating. However, last month we raised our economic moat rating to wide, in recognition of a structural shift in Enbridge's economics and in response to a secular shift in supply/demand dynamics. We believe Enbridge is the best-positioned pipeline operator to service the Canadian oil sands and Bakken shale, by constructing and operating a reliable network of feeder pipelines. These unregulated pipelines tend to provide returns in excess of the regulated rate pipelines to which they connect. The company's dominant position, existing assets, recent acquisitions, and plans to expand capacity will shift Enbridge's revenue mix more strongly in favor of its higher-return liquids pipeline business.
Making the Case for a Wide Moat
Enbridge's wide economic moat is a result of the regulated nature of its assets, its ability to lock out competing pipelines from an area, its significant growth opportunities, and our belief that the firm will continue to develop projects that achieve a return on capital in excess of its cost of capital (beyond our 2012-16 projection).
David McColl does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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