Enbridge Inc. shares skidded 4.2 per cent Thursday, adding to the frustration of shareholders who have seen more than a quarter of the company's market capitalization wiped out in just the past year.
Investors have been worried about Enbridge's high debt load – which sits at around $60-billion after the $37-billion acquisition of Spectra Energy Corp. that closed last year. The stock has also been pressured by a move out of dividend-paying stocks in a rising interest rate environment.
On Thursday, investors found a new concern. The U.S. Federal Energy Regulatory Commission ruled that master-limited partnerships (MLPs) can no longer receive a credit for income taxes they don't pay. It came in response to an earlier court ruling that found the agency's long-standing tax policy could result in double recovery of costs for MLPs.
Several pipeline stocks plunged on the decision, which could result in lower rates and therefore lower cash flows for pipelines owned by MLPs, analysts said.
Enbridge has MLP exposure primarily through Enbridge Energy Partners and Spectra Energy Partners. "It is unclear at this point if the ruling will be challenged," commented Michele Robitaille, a portfolio manager with Guardian Capital Group. "We are still determining the impact, but it definitely poses a modest headwind to earnings growth." (Enbridge Friday morning issued a news release, saying it "does not expect a material consolidated financial impact" as a result of the FERC revised policy statement on interstate pipeline tax allowance recovery MLPs.)
The news was undoubtedly welcomed by investors who are short the stock and betting it will fall further. But there have been plenty of investors who have seen Enbridge's stock fall in recent months as a buying opportunity. Enbridge's steadily rising dividend, which is now yielding about 6.5 per cent, is offering a temptation for investors.
The Globe and Mail earlier this month talked to three portfolio managers with different views of Enbridge, as well as with the company about investors' concerns.
Adding: Michele Robitaille, a portfolio manager and managing director at Guardian Capital Group
Ms. Robitaille describes 2017 as a "transformative and tumultuous year for Enbridge" owing to its Spectra acquisition. While the acquisition was considered a good move, she says investors were concerned in part about the funding overhang and complex structure that Enbridge took on as a result. A recent financing and plans to sell billions worth of assets could give investors more confidence that it's on the right track, Ms. Robitaille says. Enbridge said it has identified about $10-billion in non-core assets it can sell through to the end of 2020 – at least $3-billion of which could be sold this year.
Ms. Robitaille's firm has been adding Enbridge in recent weeks, based in part on its underperformance relative to other companies in the energy infrastructure group. That's despite concerns about the company's debt load in a rising interest rate environment. (She also believes the market's current assessment of the number of rate hikes coming in the United States and Canada this year is too high.)
"We think [Enbridge] represents good value and we do think they have a very sizeable portfolio of very sellable, high-quality, high-value assets and so we don't see as much of a funding issue," Ms. Robitaille says.
The Spectra acquisition gives Enbridge an "irreplaceable, cross-continent footprint with exposure to both oil and gas," she says.
Ms. Robitaille believes Enbridge has strong earnings and cash flow growth and expects adjusted cash flow from operations (ACFFO) – which the company now describes in its books as distributable cash flow (DCF) – to increase at a minimum of 10 per cent a year in 2018 and 2019, "a rate that will underpin its target of 10-per-cent annual dividend growth through that time."
Shorting: Patrick Horan, partner and portfolio manager at Agilith Capital
Mr. Horan has been short Enbridge since 2016, citing the company's debt load in a rising interest rate environment and growth in dividends per share that has outpaced earnings in recent years. He even goes so far as to suggest the company could go bankrupt if it doesn't get its balance sheet under control.
"I'm not saying it's definitely going to go bankrupt. I'm saying, the course that they're on, that's what I see … Dividends increases without proper return on equity and growth in their assets … and higher interest rates going forward spell only one thing – more pressure on the equity," he says.
Mr. Horan acknowledges the company could avoid this by selling more assets, trimming its dividend growth or cutting it altogether. "Yes, those are all possibilities that stop or slow the cash bleed. My statement assumes further increases in the dividend, higher interest rates, and credit spreads that back up and force the company to refinance their debt at higher rates," he says, adding that asset sales "depend greatly on the price/valuation of disposition versus total enterprise valuation. So until it's done, assets are sold, it's debatable whether value is added."
Holding (and adding to new accounts): Anish Chopra, managing director and portfolio manager at Portfolio Management Corp.
Mr. Chopra joined Portfolio Management Corp. about a year ago but says his firm has held Enbridge for a number of years and is still buying it for new client accounts.
"Our clients tend to be long-term investors who have some income need as well," says Mr. Chopra, citing Enbridge's "reasonably high" dividend.
Mr. Chopra believes the company can also boost its earnings and cash flow, which should help support its goal to increase its dividend over time. He also says the valuation is a lot more reasonable today than in the past, trading at about 16 times next year's earnings before the recent FERC announcement, compared with almost 30 times in 2015.
Risks for the stock include its debt load and whether it can sell certain of its assets, as planned, at a good price. The company's complex corporate structure can also be confusing to some investors.
"It's not as simple a story as it was a few years ago, which adds to the complexity," he says.
"There are just more moving parts."
John Whelen, chief financial officer, Enbridge Inc.
In an interview on Wednesday, Mr. Whelen says the company's lower stock price is "something of a frustration for us," and the investor concerns are "well understood" around areas such as project execution and funding.
"We have a clear plan," Mr. Whelen says, citing the initiatives announced last year to sell billions in non-core assets and raise capital. The company also put $12-billion of new projects into service in 2017, including Sabal Trail, a greenfield natural gas system serving the southeastern U.S. Mr. Whelen says these projects "are driving out steady growth in … distributable cash flow." The company is also planning $22-billion in new projects over the next three years, including the proposed Line 3 Replacement project between Hardisty, Alta., and Superior, Wis.
Mr. Whelen also said there were broader macro trends weighing on the stock, including rising interest rates, which tend to put pressure on more defensive stocks across sectors.
"Valuations have come down a bit but, generally, we think in our case that's offset by the steady, reliable growth that we are going to continue to deliver. We think, even in a market like this, and particularly right now, Enbridge offers pretty good value relative to a lot of other investment options that are out there."
He also says the company has hedges in place against rising rates on its short- and long-term debt. "We are feeling pretty comfortable there in terms of the actual impact on the cost of debt."
Mr. Whelen also brushed off suggestions the company is at risk of going bankrupt, calling it "a very odd statement for people to make given the nature of the business we have." He also said the company has various options to pay down its debt.
"There isn't a risk of insolvency. The real question is, I think, how quickly we bring our credit metrics back in line with our longer-term targets – and we have a very well-defined plan under way."
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