Analyst Note| Stephen Ellis |
We are downgrading Enbridge’s moat to narrow from wide, primarily due to concerns regarding the durability of midstream returns earned from serving Canadian oil and gas oil sands efforts. Our narrow moat is based on an efficient scale moat source. While we remain very confident in demand for Canadian oil (approximately 1.8% growth CAGR through 2030) and gas (9% CAGR over the same time frame) in the near to medium term, we are far more uncertain around long-term demand in the latter stages of our forecast due to the high carbon emissions intensity associated with the full cycle of oil sands production, which is a primary source for Enbridge’s assets. Oil sands carbon intensity is among the highest among all the basins we cover, and it is disproportionately exposed to threats if countries and governments continue to seek ways to reduce greenhouse gas emissions. We expect material stakeholder challenges from legal, regulatory (Enbridge already pays carbon taxes for instance), and community perspectives for any new major Enbridge project, and likely new oil sands projects from producers, challenging the investment case for new pipes and boosting costs for existing assets. Beyond stakeholder issues, we believe refineries that run a heavy crude slate that requires Canadian heavy are increasingly looking to renewable diesel (produced from food waste), raising significant questions around the sustainability of long-term demand. Finally, while the nascent hydrogen and other renewable opportunities offer ways for Enbridge to manage the energy transition, we believe at best, they could become narrow-moat businesses, further reducing our confidence in an overall wide moat rating.