Will Pipeline Projects Take a Toll on Enbridge?

Joe Gemino: Best idea and wide-moat Enbridge remains one of our top picks in the energy sector, but the stock has underperformed over the past 18 months. The stock declined 16% last year, and even though is up 14% year to date, its lagging its major peer, TransCanada. We think the market is underestimating cash flows due to the uncertainty associated with future mainline utilization and the Line 3 replacement project.

We continue to anticipate that all three major takeaway pipelines from Canada will be built by the end of 2022. Naturally, there will be some underutilization of Enbridge's mainline system, but with the breakthroughs in oil sands extraction technology, we expect Canada's supply to grow by 1.3 million barrels of oil per day in the next decade. Accordingly, we don't expect the mainline underutilization to last long, as we expect it to operate near full capacity as supply ramps up to our forecast levels by 2025--whereas the market expects a lower long-term utilization rate of the mainline system.

And even though crude pipeline projects continue to experience delays, we expect the Line 3 replacement project to be placed into service by the end of next year. The project carries minimal federal political risk, and we think that the increased safety standards and immense economic upside to the state of Minnesota will make it likely that the Court of Appeals in Minnesota will uphold the project's prior approval. And we're differing from the market here because the market remains skeptical that this project won't be built.

However, we don't expect the market's concerns will be fully addressed for some time, which can lead to some volatile swings for the stock. However, we advise investors to stay the course while getting paid a handsome 6% (and growing) dividend. In the end, we believe Enbridge's long and winding road will lead to 25% upside.