Is Enbridge Inc.'s Dividend in Trouble?

Enbridge (NYSE: ENB  ) , Canada's largest midstream operator, recently reported its first quarterly loss in the 2013 fourth quarter. But despite the quarterly hiccup, the company's future looks bright, as a wave of new projects should underpin low double-digit growth in both earnings per share (EPS) and dividend per share (DPS) over the next several years. Let's take a closer look.

Source: Wikimedia Commons.

Fourth-quarter highlights
Enbridge reported a fourth-quarter net loss of C$267 million ($243 million), or C$0.32 per share, down from a profit of C$146 million, or C$0.18 per share, a year earlier. The main culprit behind the plunge in earnings was a C$337 million loss recorded by its gas pipelines, processing and energy services unit due to a plunge in the fair value of its unrealized derivatives contracts.

On the plus side, however, the company's fourth-quarter sales jumped 18% to C$8.29 billion, handily surpassing analyst estimates of C$8 billion, while full-year 2013 adjusted earnings jumped 11% over the previous year to $1.4 billion, or $1.78 per common share. Going forward, investors can expect continued strong growth in earnings per share thanks to a wave of new growth projects.

Over the period 2013-2017, Enbridge has some $36 billion of projects slated to go into service, with $5 billion having gone into service last year. These projects are strategically positioned in areas primed for high growth, such as Canada's oil sands and North Dakota's Bakken shale, and will help significantly expand Enbridge's presence across North America.

Strong positions in oil sands and Bakken
In North Dakota, Enbridge's proposed Sandpiper Pipeline will ship growing supplies of Bakken crude oil to an existing terminal owned by an affiliate of the company in Superior, Wisconsin. Marathon Petroleum Corporation (NYSE: MPC  ) has been named anchor shipper in the $2.6 billion project and will fund 37.5% of the project's cost.

In Canada's oil sands, the company plans to move forward with $3.2 billion of projects, including the $1.6 billion extension of the Wood Buffalo Pipeline, the $1.4 billion Norlite Pipeline System, and the $0.2 billion Sunday Creek Terminal Expansion. These projects provide oil sands producers with crucial access to midstream infrastructure and will be fundamental in driving oil sands growth over the next few years.

For instance, the Sunday Creek Terminal Expansion project will add facilities at Enbridge's Sunday Creek Terminal to support production from Cenovus Energy (NYSE: CVE  ) and ConocoPhillips (NYSE: COP  ) . Meanwhile, Enbridge's proposed Northern Gateway pipeline, a 730-mile long pipeline that will run from Alberta to Kitimat, British Columbia, on Canada's west coast, will provide oil sands producers with much-desired access to markets in Asia, where gas fetches a higher price.

What's next for Enbridge?
With these and many more projects on the way, Enbridge is set to continue its trajectory of peer-leading EPS and dividend growth, which have grown at an average annual rate of 12% over the past 10 years. Further, the fact that more than 75% of the company's earnings are tied to long-term, fee-based contracts provides a great deal of earnings certainty.

Over the period 2012-2017, Enbridge forecasts both EPS and dividends to grow at an annual rate of 10%-12%. And beyond 2017, growth will be driven by projects generating so-called "tilted returns," which means they will generate lower growth in early years before accelerating to much stronger growth in later years.

Though project delays and cost overruns could result in lower-than-expected EPS and dividend growth, Enbridge's excellent track record suggests this should be a relatively low risk. For instance, of the 11 projects Enbridge brought online last year, 10 were on or below budget and on or ahead of schedule.

The bottom line
All told, Enbridge has one of the strongest growth profiles among midstream companies. Major projects serving high-growth areas such as Canada's oil sands and the Bakken should underpin extremely strong earnings growth in 2015 and beyond, which should allow the company to continue increasing its dividend at an annual rate of about 10%-12%.

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