Company Reports

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

Enbridge has entered into a joint venture with WhiteWater/I Squared and MPLX to form a Permian-focused joint venture. We see this as a smart move to expand Enbridge’s opportunity set in the basin for a reasonable cost, but it is too small to affect our CAD 56/USD 41 fair values estimates and narrow moat rating. Enbridge is contributing its Rio Bravo pipeline while retaining a 25% economic interest, $350 million in cash, and will fund $150 million in capital spending to complete the Rio Bravo pipeline in exchange for a 19% interest in the joint venture. In return, the joint venture will control the Whistler pipeline, the Rio Bravo pipeline, a 70% interest in the ADCC pipeline, and a 50% interest in the Waha Gas storage assets. Broadly, these assets serve as critical components to supply NextDecade’s Rio Grande LNG project and Cheniere’s Corpus Christi LNG export facility.

Enbridge’s analyst day largely reaffirmed our views and teased the pending completion of the East Ohio Gas Company acquisition, which was completed March 7. We expect the remaining two utility acquisitions—Questar Gas Company and Public Service Company of North Carolina—from Dominion Energy to be completed by the end of 2024. After refreshing our model for the pulled-forward East Ohio deal, our CAD 56 and USD 41 fair value estimates are unchanged, as is our narrow moat rating. East Ohio makes up more than 40% of the expected EBITDA contribution from the three utilities.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge’s fourth-quarter results were above our expectations, primarily due to strength in Mainline volumes. Full-year EBITDA of CAD 16.45 billion was ahead of our CAD 16.2 billion forecast. After updating our model, we increased our fair value estimates to CAD 56/USD 42 per share from CAD 52/USD 39. Our narrow moat rating is unchanged.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

We think Pembina's acquisition of Enbridge's interests in the Alliance, Aux Sable, and NRGreen assets for about CAD 3.1 billion is a material strategic win for both parties. We consider the valuation paid at about 9 times 2024 EBITDA or 8 times including expected synergies to be reasonable. This breaks down into about 11 times 2024 EBITDA for the Alliance pipeline, and 7 times for the Aux Sable assets. As a result, we do not expect to change our CAD 41 or USD 29 fair value estimates for Pembina, or our CAD 52 and USD 38 fair value estimates for Enbridge. Our narrow moat rating for Enbridge and our no moat rating for Pembina are also unchanged.

Enbridge’s 2024 guidance update was probably more notable due to the lack of drama compared with peer TC Energy’s more high-profile struggles with Coastal GasLink recently. The lack of surprises is reflected in the firm’s guidance toward a midpoint of CAD 16.9 billion in 2024 EBITDA compared with our CAD 17.1 billion forecast. We consider our forecast realistic, as it is within the top end of Enbridge’s guidance range, which is up to CAD 17.2 billion (about 4% growth year over year) and largely reaffirms what was presented at the firm’s analyst day earlier in 2023. The dividend is also expected to be increased 3% year over year, matching our expectations. As such, we plan to leave our CAD 52 and USD 38 fair value estimates and narrow moat rating unchanged.

Enbridge stands out among North American midstream operators with a utility-like earnings profile. The firm's most important asset, its Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, meaning demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge’s third-quarter results were solid as the company reaffirmed its guidance range for 2023 EBITDA between CAD 15.9 billion and CAD 16.5 billion. Our forecast is also unchanged at CAD 16.4 billion. We don’t expect to change our CAD 52 or $38 fair value estimates or our narrow moat rating. Third-quarter EBITDA increased 3% year over year to CAD 3.9 billion, helped primarily by higher economic interests in the Gray Oak and Cactus II pipelines, as well as higher Mainline pipeline volumes.

Enbridge stands out among North American midstream operators with a focus on oil pipelines and a utility-like earnings profile. The firm's most important asset, its Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, meaning demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge stands out among North American midstream operators with a focus on oil pipelines and a utility-like earnings profile. The firm's most important asset, its Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, meaning demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge is acquiring East Ohio Gas Company, Public Service Company of North Carolina, and Questar Gas natural gas distribution utilities for CAD 19 billion (USD 14 billion), including USD 4.6 billion in debt from Dominion Energy. Separately, Enbridge announced it plans to issue CAD 4 billion in shares to help fund the deal. The transaction implies a 16.6 times 2024 earnings multiple and 1.5 times rate base, which is in line with natural gas distribution utility market valuations, and we think it implies a fair deal for Enbridge. We do not expect to change our CAD 52 per share (USD 39) fair value estimate or narrow moat rating.

Enbridge’s second-quarter results met our expectations. The firm reaffirmed its 2023 EBITDA guidance of a midpoint of CAD 16.2 billion, whereas we continue to think there's some volume and fee upside to our forecasted CAD 16.3 billion. After updating our model, our CAD 52 and USD 39 per share fair value estimates and narrow moat ratings remain unchanged.

Enbridge stands out among North American midstream operators with a focus on oil pipelines and a utility-like earnings profile. The firm's most important asset, its Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, meaning demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

The Trans Mountain pipeline expansion, once seen as a savior for Canadian oil by offering a key export channel for Canadian producers to reach Asian markets, is now looking like it will be remembered very differently and negatively by investors and the Canadian government. A loss between CAD 15 billion and CAD 20 billion (based on a CAD 10 billion-CAD 15 billion valuation) is likely, with the potential for a higher loss still if the pipeline sees further cost increases. We continue to see Enbridge’s Mainline system as the best alternative for the Trans Mountain expansion, as struggles by the Trans Mountain expansion mean more barrels remaining on the Mainline. As it stands, a vicious cycle of higher costs and higher tariffs for the Trans Mountain expansion serves as further fuel for shippers to commit to the Mainline (a major reason behind our narrow moat for Enbridge) and related U.S. expansions as it would likely be cheaper to ship Canadian barrels down to the Gulf Coast for export as it stands now, completely undermining the original purpose of the Trans Mountain expansion.

Canadian wildfires in the Western Canadian Sedimentary Basin have shut in likely in excess of 300,000 barrels per day of production, per Rystad Energy, primarily across the Montney and Duvernay plays. The number of wildfires are about 17% above 10-year averages year to date with 944 fires, but the area burned is nearly 10 times 10-year averages year to date with nearly 500,000 hectares, according to the Canadian Interagency Forest Fire Center. The impact on our Canadian midstream firms (Enbridge, Keyera, Pembina, and TC Energy) is likely to be notable for second-quarter earnings but not material enough to result in fair value estimate or moat changes at this time.