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Stay the Course Amid Enbridge's Volatility

The wide-moat firm's long and winding road should lead to significant upside.

Joe Gemino: Even though Best Idea and wide-moat Enbridge is trading near its 52-week high, the market still appears tentative. We think uncertainty surrounding long-term mainline utilization, the Line 3 replacement project, and the future of Line 5 is driving the concerns. However, in our view, the market underappreciates the long-term cash flows from these assets.

Although we anticipate that all three major pipeline expansion projects will be built by the end of 2022, we think advancements associated with solvent-assisted technology will lower oil sands breakevens, leading to long-term Canadian production that will surprise to the upside. As such, investors shouldn't expect mainline underutilization to last long, as we expect it to operate near full capacity as supply ramps up to our forecast levels over the next decade.

Additionally, Line 3 carries minimal federal and political risk, and we think that the increased safety standards and immense economic upside make it likely that the pipeline will be built. Accordingly, we expect the Line 3 replacement to be placed into service by the end of 2021.

Furthermore, Line 5 provides too many benefits and economic upside in Wisconsin and Michigan for the outstanding legal challenges to successfully decommission the pipeline.

Enbridge remains one of our top picks in the energy sector, as we think the market is mistaken about the future of the company's cash flows. However, we don't expect the market's concerns to be fully addressed for some time, which can lead to volatile swings in the stock. But we advise investors to stay the course while getting paid a handsome 6% (and growing) dividend, because in the end, we believe Enbridge's long and winding road will lead to 25% upside.