It's amazing to watch Bay Street embrace boring with so much gusto. Touting "diversification" as a business strategy used to put people to sleep. The very word has so many syllables it even sounds dull.
Come 2016, investors suddenly love the strategy – prompting Enbridge Inc. to make it the grounds for Canada's largest merger proposal in a decade.
"Combined, we'll have the largest, most secure program of diversified growth projects in the industry," chief executive Al Monaco said on a conference call Tuesday to explain his proposed $37-billion acquisition of Spectra Energy Corp.
Spectra CEO Greg Ebel offered similar praise, promising that "becoming larger, stronger and more diversified" is a good thing.
They won't say it, but there's more to the deal than this. Enbridge is struggling to expand, because public and regulatory opposition to pipelines has grown so fierce. The same was true for TransCanada Corp., and the company scooped up Columbia Pipeline Group for $13-billion (U.S.) in March.
But the diversification angle is real, nonetheless. Enbridge has an extensive collection of oil pipelines, while Spectra has natural gas ones. Even better, Spectra's long-haul pipes are primarily located in the U.S. Northeast, running through the prized Marcellus and Utica regions known for their shale gas. If the merger is approved, roughly half of the combined company's earnings will come from natural gas.
This new-found love for diversification doesn't make either company an outlier. Actually, it puts them with the cool kids, like Canada's biggest banks and life insurers who love talking about their "four pillar" strategies and business mixes.
One of the biggest lessons from the Great Recession is that diversity matters. It can be geographical; it can be by business line. Maybe even both. If capital-markets revenue dries up at a bank, money made from residential mortgages and chequing accounts soften the blow.
The solid performance of institutions such as Canadian banks during that era is forcing rivals in other countries to try to mimic their structure. With fixed-income revenue disappearing, even Goldman Sachs is trying to become a retail bank, offering personal accounts online.
That this happened in financial services isn't all that surprising. The crisis taught us that the world's largest financial institutions are systemically important, and one of the best ways to protect them is to let them spread their tentacles into different businesses.
That this is now happening with resource companies is all the more impressive. In gold mining, investors used to punish producers for too much diversification. There used to be an old rule of thumb: Gold miners shouldn't have a second commodity amount to more than 20 per cent of their cash flow, or else they'd lose their premium valuation to net asset value.
In energy, Encana went through a famous corporate divorce and split into two companies in 2009 because pure plays were supposed to be the answer. The company used to own both unconventional natural gas and oil sands assets, but it split them in two – creating Cenovus Energy to house the crude.
The theory back then, espoused by Encana's former CEO Randy Eresman, was that investors would see more value in each individual entity. That didn't turn out to be true. Cenovus and Encana have been two of the hardest-hit Canadian energy companies, largely troubled by debt woes. Meanwhile, rival Suncor Energy has been heralded, at least comparatively, for its diversified business model, which includes everything from oil extraction to refining.
Diversification does have it limits. Barrick Gold Corp. tried it by expanding into copper in 2011 through its acquisition of copper miner Equinox for $7.3-billion (Canadian). That didn't work out. But there were a lot of variables at play. Chiefly, Barrick paid all cash at the height of the mining supercycle.
Better yet, there's also the argument that moving into copper isn't really diversifying. Most metals prices are correlated and that hurt the entire industry when the bubble burst.
That can be extended to Enbridge and Spectra. Natural gas pipelines are all the rage now, but what if oil and gas ultimately face the same fate? They're both energy resources, after all.
At the moment, that doesn't seem to matter. Boring, rather miraculously, is the new black. You know why? Because boring has proven to be profitable.