Spectra Deal Fortifies Enbridge

The deal positions Enbridge to diversify its operations toward natural gas while protecting the company’s dividend growth. Currently, 70% of Enbridge’s earnings are derived from crude-oil operations. Under the announced deal, less than half of the combined company’s earnings are expected to come from crude operations. The majority of the remainder is expected to be derived from natural gas operations, primarily focused in the fast-growing Marcellus basin. In addition, approximately 95% of the company’s cash flow will be derived from take-or-pay contracts with shippers, resulting in guaranteed payments that are not dependent on the quantity of commodities shipped. As such, investors can expect annualized dividend growth of 10%-12% through 2024 compared with Spectra’s previous target of 7%-8% and Enbridge’s target of 10%-12% through 2019.

At this time, our fair value estimates and moat ratings for Enbridge and Spectra remain unchanged.

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