Please ensure Javascript is enabled for purposes of website accessibility

Where Will Enbridge Be in 5 Years?

By Matthew DiLallo - Apr 29, 2020 at 10:14AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The energy infrastructure giant appears poised to double down on its current strategy.

Enbridge (ENB 0.95%) has undergone a significant portfolio shift over the past few years. In 2016, the Canadian energy infrastructure giant generated 7 billion Canadian dollars of EBITDA ($5 billion), 75% of which came from its liquids pipeline segment, compared to 20% from gas infrastructure and 6% from power and energy services. It has grown and diversified that mix over the past few years via acquisitions and organic expansion so that 53% of its CA$13 billion ($9.3 billion) in EBITDA came from liquids last year, compared to 42% from gas infrastructure and 5% from power and energy services.

That pivot toward cleaner energy will likely continue over the next five years. It's one of many changes investors should expect from the energy company in the future.

An offshore wind farm.

Image source: Getty Images.

Cleaning up its portfolio

Enbridge currently anticipates that it can invest between CA$5 billion and CA$6 billion ($3.6 billion to $4.3 billion) annually on expanding its energy infrastructure business over the next several years. This spending level should support cash flow per share growth of 5% to 7% per year.

Its liquids business will remain an important driver for the company, given Enbridge's view that it could invest around CA$2 billion ($1.4 billion) per year to grow these operations. Opportunities include expanding its pipelines and building out export infrastructure.

However, it sees even greater growth potential in cleaner energy sources like natural gas and renewables. In the company's view, it could invest CA$2 billion per year on gas transmission projects, CA$1 billion annually on expanding its natural gas utility businesses, and another CA$1 billion per year on renewables, particularly offshore wind. This outlook suggests that a larger supply of Enbridge's cash flow will come from clean energy in the future, including a much more meaningful contribution from renewables, powered by several offshore wind projects in Europe it has under development.

A financial fortress

The energy industry has endured two devastating downturns over the past several years. Because of that, the sector is increasingly focusing on reducing risk. Enbridge has done this over the past few years by selling non-core assets to help pay down debt. These moves have improved its leverage ratio from around six times debt-to-EBITDA in 2016 to 4.6 times last year, which is within its current target range of 4.5 to five times.

However, with market conditions deteriorating again this year, companies like Enbridge will likely become even more conservative in the future. The company already expects its leverage ratio to decline toward four times by 2022 as more expansions come online. However, it could aim to push it even lower by 2025 via additional non-core asset sales. By strengthening its already top-tier balance sheet, Enbridge will be in an even better position to withstand the next energy market shock.

In addition to reducing leverage, Enbridge will likely take other steps to ensure it has a fortress-like financial profile. One potential option is that it could grow its dividend at a slower rate than its cash flow in the coming years, which would reduce its payout ratio over time. Last year, for example, it paid out 65% of its cash flow, which was at the midpoint of its 60% to 70% target range. However, it could aim for an even lower level in the future, especially since rivals like Kinder Morgan (KMI 1.31%) and TC Energy (TRP 1.54%) only pay out 52% and 40% of their cash flow, respectively.

Stronger and cleaner in five years

Enbridge's strategy over the next five years will likely share many similarities to its plan during the past few years. The company appears poised to continue its strategic pivot toward cleaner energy by investing the bulk of its expansion capital into natural gas and renewables. Meanwhile, it will undoubtedly continue to shore up its balance sheet through non-core asset sales while also potentially slowing the pace of dividend growth so that it can improve its coverage ratio. These moves will put the company in an even stronger position to weather the energy market's volatility in the coming years so that it can continue creating value for investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Enbridge Inc. Stock Quote
Enbridge Inc.
ENB
$42.66 (0.95%) $0.40
TC Energy Corporation Stock Quote
TC Energy Corporation
TRP
$52.61 (1.54%) $0.80
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.98 (1.31%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.