The business
Canada's Enbridge (NYSE: ENB) delivers energy by myriad ways and means through owning and operating energy delivery infrastructure within North America.
The company has two major business divisions, energy transportation and energy distribution. Enbridge is Canada's largest transporter of crude oil, with over 15,000 miles of pipeline with capacity to deliver 2.5 million barrels per day. Enbridge's system transports nearly two-thirds of western Canada's crude oil exports, including 13% of America's daily crude imports, making it, on any given day, the No. 1 importer of oil to America.
Enbridge is dug deep in the Canadian oil sands, which hold the world's third largest oil reserves (after Saudi Arabia and Venezuela). For a country seeking to improve its energy security while still having copious energy demand, I say look north. Canadians are generally eager to do business with their American cousins and, except perhaps during Olympic hockey tournaments, you won't find a friendlier nation toward America among the world's 10 top oil reserve countries.
Aside from oil transport, Enbridge is also heavily into gas, with its transmission network, gas gathering, and offshore assets in the Gulf of Mexico. They process roughly half of current Gulf deepwater gas production. Enbridge also owns a 69% economic interest in Enbridge Income Fund, which holds several pipeline assets, "green power" assets like wind and other nascent green technologies (such as electrical generation from waste heat), as well as a 26% interest in Enbridge Energy Partners (NYSE: EEP), your basic MLP type structure with a juicy 6.4% yield.
On the energy distribution side of the business, consider this your monthly gas bill. Enbridge owns gas distribution in parts of the provinces Ontario, Quebec, New Brunswick, and in the states of Vermont and New York, serving over two-million customers.
Why it's a core holding
Energy transportation is your classic tollbooth type business. Resource prices are largely irrelevant; where there is demand, goods will flow, and for the foreseeable future that mainly means south. Energy prices are famously volatile -- but Enbridge's business is largely inured to the whims of oil and gas prices for the simple reason that they make their bones from delivery of oil and gas products to the users of those products. No matter how high the price of oil may go, or how deep the current "cheap" price for natural gas might be, if America's buying, Canada's selling, and Enbridge is transporting.
Meanwhile, energy distribution is a de facto regulated utility monopoly. If Enbridge has the distribution rights in your neighbourhood, you're writing them a monthly check. There are no alternate gas distribution pipes running to your house.
Enbridge's history is one of consistency. Perhaps you don't expect a utility-like energy distribution company to be a shoot-the-lights-out multi-bagger, but over time, that's what investors have discovered. The company has paid an uninterrupted dividend for 59 years. More importantly, it has raised the dividend each of the past 17 years. Over the past 20 years, Enbridge investors have had annualized returns, with dividends reinvested, of 19%. During the past go-nowhere decade for equity markets they've done even better, clocking in 23% annualized returns. Dividend yield for 2012 is 3% (dividend paid in Canadian dollars, divided by Canadian share price). There is a U.S. resident participatory dividend reinvestment plan.
Using a simple dividend growth model, Enbridge today is approximately fairly valued assuming an 8% dividend growth rate going forward. Before you scoff at that number as being unattainable, realize that the trailing 59-year annualized dividend growth rate is north of 10%. Relative valuation multiples are at the higher end of recent history; however, the company is in the midst of an asset build out. I believe future revenues, earnings, and cash flows will be higher, and that the valuation multiples will catch up to today's price.
Finally, while there's no getting around the fact that handling oil can be a dirty business, the socially responsible investor should consider Enbridge's growing wind and alternative generation assets, corporate responsibility ethos (it gets its own website), and greenhouse gas reduction commitment.
Risks to watch
Growth of the past four years has been, unsurprisingly, in a low-rate environment, largely debt-financed. Enbridge today carries debt of $15 billion (Canadian dollars) against less than $9 billion total equity. That said, the finance office at Enbridge has also been a model of consistency, keeping total debt at about two-thirds of total capital and pairing their former growth plans with prudent capital raises and long-term financing.
Enbridge has been on an asset acquisition and build-out spree for the past few years. Watch for overrun risk in terms of both time and money.
Finally, as the recent plugging of the TransCanada (NYSE: TRP) spearheaded Keystone XL pipeline should suggest, there are groups opposed to Enbridge's core business of energy transportation, and that opposition can translate into potentially deleterious regulatory decisions. I believe the scale of Enbridge's contribution to America's energy interests should somewhat insulate it, but there's always risk that government demands will usurp corporate interests.
The bottom line
Enbridge has truly been one of those stocks you can buy and forget. The company is well-run, cash gushing, and vital to national interests. Consider strengthening your core with Enbridge.
Keep an eye on Enbridge by adding it to your Watchlist.
