Spotlight: Enbridge, Inc. – Midstream Giant Continues Shift to Regulated Pipeline/Utility Business Model

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The recently concluded mid-year earnings season revealed that midstream earnings and forward guidance have been remarkably stable in the face of plunging oil demand, with 20 of 28 midstream firms maintaining or raising their original 2020 outlooks. These companies collectively decreased their 2020 EBITDA guidance by just 1.8% between January 1 and August 13, a vivid contrast with exploration and production companies and oilfield service firms, which reduced 2020 guidance by 60% and 30%, respectively. This near-term stability is provided by fee-based business models and contract protections such as minimum volume commitments. However, the midstream industry is not immune from the impact of Covid-19 and other market factors that could erode performance beyond the near term. These concerns are reflected in the volatility and weakness in midstream equity prices, with the Alerian Midstream Energy Index (AMNA) down approximately 25% for the year. The disconnect between near-term performance and longer-term fundamentals suggests a benefit for companies that implement strategies to shed as much risk as possible from their portfolios.

This Spotlight report focuses on Calgary-based Enbridge, Inc., the largest North American energy infrastructure firm, which since December 2017 has instituted the highly defensive strategy of transforming itself into a pure regulated pipeline and utility company. The report draws on the in-depth analysis and projections of East Daley Capital to forecast the future performance of Enbridge’s Liquids Pipeline segment considering the regulatory challenges it faces as well as the outlook for North American crude oil infrastructure.  East Daley’s conclusions include:

  • In the face of the Covid-19 pandemic, Enbridge’s 2020 Adjusted EBITDA is forecast to increase 4% to $13.8 billion. Earnings will rise to $15 billion in 2021 and $15.9 billion in 2020 before dropping back to $15 billion in 2023.
  • Driving the 2020-2022 growth is a 24% increase in Liquid Pipelines Adjusted EBITDA accelerated by the completion of the C$8.2 billion Line 3 Replacement, which we anticipate will be fully functional in late 2021 after Minnesota regulatory approval of the final uncompleted leg.
  • Assuming Enbridge does not receive approval for the switch to a contracted basis for the Canadian Mainline, Liquids Pipeline earnings will fall by nearly C$1 billion as the competing Trans Mountain Pipeline Expansion draws volumes from the Mainline and downstream systems.
  • Adjusted EBITDA for the remainder of the company’s assets, including Gas Transmission, Gas Distribution, and Renewable Power, will increase 5% from C$6.5 billion to C$6.8 billion in 2021, then remain stable through 2023.
  • The company is likely to seek buyers for its remaining non-regulated midstream assets, the largest of which is its 50% interest in its DCP Midstream joint venture with Phillips 66.

Spotlight: Enbridge Inc. is included in RBN’s Drill Down report series, a suite of reports covering many of the key issues expected to impact the markets for crude oil, natural gas and natural gas liquids. Spotlight reports are part of RBN Backstage Pass™ premium resources that also include Blog Archive Access, Spotcheck Indicators, Market Fundamentals Webcasts, Get-Togethers and more. Spotlight is a joint venture of RBN Energy and East Daley Capital Advisors.  By subscribing to RBN’s Backstage Pass™ Premium Services, you plug into our network and get direct access to our premium resources.

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