Bloomberg News

Enbridge Near 30-Year High on Earnings Growth

July 31, 2012

Enbridge Inc. (ENB), the largest transporter of Canadian crude to the U.S., is trading at its highest level in almost three decades as it shakes off criticism over oil spills, delays in new crude routes and valuation concerns.

Enbridge last week reached its highest point since Jan. 5, 1983, giving it a price-to-earnings ratio of 40, better than 81 percent of its global peers. With a market capitalization of C$33.1 billion ($33.0 billion), the Calgary-based company has the second-highest value among large stocks in the Standard & Poor’s/TSX Composite Index, behind only Crescent Point Energy Corp. (CPG), data compiled by Bloomberg show.

“There have been a couple of stumbles along the way with high profile leaks, but they have not stemmed the tide of strong earnings and strong dividend growth,” said Randle Smith, a Chicago-based portfolio manager with Duff & Phelps Investment Management Co. who helps manage $4.9 billion of global utilities and infrastructure investments, including more than 2 million Enbridge shares.

Enbridge’s shares have shrugged off a series of pipeline leaks, including a 2010 spill in Michigan that polluted the Kalamazoo River with more than 20,000 barrels of crude and cost $800 million to clean up and a more recent spill on July 27 that leaked 1,200 barrels near Grand Marsh, Wisconsin. The company is also facing opposition to its proposed C$5.5 billion Northern Gateway route to carry oil sands crude to the Pacific coast through British Columbia.

Largest Network

Enbridge already owns and operates Canada’s largest oil pipeline network spanning 24,600 kilometers (15,285 miles) that ships more than 2.3 million barrels of crude oil and liquids a day. It is counting on growing demand for the fossil fuel in Asia and Canada’s ability to supply the region from its oil sands reserves, the world’s third largest.

It has C$17 billion worth of secured projects in design or construction, including renewable energy development and pipelines such as its partnership with Enterprise Products Partners LP. (EPD:US) The companies are reversing and expanding the Seaway pipeline brings which oil from the Oklahoma storage hub to refineries on the U.S. Gulf Coast, President Al Monaco said in a presentation in Calgary on July 11.

Enbridge’s growth track record and its assets in North America, where new technologies have unlocked vast quantities of oil and natural gas that will need to move across the continent via pipelines, will keep investors loyal, Smith said in a telephone interview.

Sell Rating

“This is a company that has promised 10 percent earnings growth and 10 percent dividend growth every year, and they’ve been able to deliver that pretty consistently,” he said.

Darryl McCoubrey, an analyst at Vertias Investment Research Co. in Toronto, isn’t convinced of Enbridge’s growth prospects. The company may lose some pipeline customers to crosstown competitor TransCanada Corp. (TRP), which is proposing to build the Keystone XL pipeline to the Gulf coast while at the same time demand for oil is stagnating in the U.S., McCoubrey said.

“What has been driving growth over the past few years has been liquids pipelines and that growth is unlikely to be available in the coming years,” said McCoubrey, who has a sell rating on Enbridge shares and doesn’t own any. “The supply and demand alone of liquids is enough to make me skeptical.”

Enbridge shares have been over-priced for a while, said McCoubrey. “I’ve been on the wrong end of that call,” he said.

The shares have gained 9.2 percent this year, beating the 3.7 percent decline for the S&P/TSX Energy Index. (STENRS) The stock has 12 buy ratings, four holds and two sells.

Northern Gateway

Enbridge reports second-quarter results on Aug. 2 and is expected to say that adjusted earnings per share rose to 38 cents from 35 cents a year earlier, according to the average of 14 analysts’ estimates compiled by Bloomberg.

The Northern Gateway pipeline, a 1,177-kilometer conduit across the Rocky Mountains, has stirred controversy and provoked opposition among aboriginal groups living along the proposed route.

“How can we trust Enbridge to build two pipelines safely across nearly 800 rivers and streams in Alberta and British Columbia?” Nikki Skuce, a campaigner for environmental group ForestEthics, said in an e-mail. “This company cannot be trusted with our wild salmon rivers.”

The proposed pipeline will terminate in the town of Kitimat, on the Pacific coast of British Columbia. The area is home to killer whales, salmon streams and farms and other marine life. An oil spill on the coast would involve a complicated clean up, reminiscent of the Exxon Valdez disaster on the Alaskan coast in 1989, according to the Pembina Institute, a Canadian environmental research organization.

Other Projects

Graham White, Enbridge spokesman, referred questions over pipeline safety to Chief Executive Officer Pat Daniel at this week’s conference call on Aug. 2.

“People should not link the fortunes of Enbridge to Gateway by any means,” Daniel said in an April 12 interview with Bloomberg News.

The company is developing four other projects that will have comparable costs for Enbridge to the Northern Gateway pipeline, he said. Enbridge partners will help finance the cost of Northern Gateway.

The cost of Enbridge’s plan to ship crude from Canada’s oil sands and North Dakota’s Bakken formation to Texas refineries will cost $5.2 billion. The company’s plan to reverse and expand a network of pipelines extending east will cost $3.2 billion, and expansion plans in Alberta are expected to cost $3.7 billion, spokeswoman Jennifer Varey said.

Safety Play

Growth prospects aren’t the only factors driving the stock, said Juan Plessis, an analyst at Canaccord Genuity Corp. in Vancouver who has a buy rating on the stock. Enbridge and other utilities and pipeline companies often compete with fixed income and the company provides investors with stable dividends as well as growth, he said.

“It’s a very stable investment,” he said in an interview. “They have a great growth profile and track record of putting assets into operation. There’s also good growth going forward.”

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Susan Warren at susanwarren@bloomberg.net


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