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ENB AT A GLANCE

P/E ► 13.0 AVG EV/EBITDA ► 10.9 AVG ROA ► 7% AVG ROE ► 18.4% AVG Debt to Equity ► 2.78 AVG Current Ratio ► 0.824 LOW Interest Coverage Ratio ► 4.26 AVG

 

 

 

 

 

 

Enbridge Inc. (NYSE:ENB) is a Canadian energy delivery company that also operates as Canada's largest gas utility company. Enbridge builds and maintains pipelines for the transportation of crude oil and natural gas, most of which comes from either the Gulf of Mexico or the Alberta oil sands. Enbridge is heavily affected by the demand for oil and gas, as the need to move both is what fuels the company's revenue stream. Because a few, key clients account for much of its sales, customer relations are also extremely important to Enbridge. The Canadian government's regulation of the energy market tends to guarantee Enbridge steady income, but it essentially limits its growth potential at the same time. As a player in the energy delivery market, Enbridge is one of the largest and strongest, though it faces increasing competition going forward, especially in Alberta.

Company Overview

Enbridge's 2004-2006 revenue and profit, in millions of Canadian dollars (CAD-USD exchange rate)

Enbridge is heavily involved in the fossil fuels industry. It earns its revenues by delivering oil and natural gas to business customers via its pipeline systems, and it is also a major natural gas utility company in Canada, providing residential service to customers in several areas. Enbridge constructs and maintains a system of pipelines that deliver crude oil and natural gas all over North America, and it owns and operates the largest natural gas distribution network in Canada. As a utilities company, Enbridge is subject to government regulations that limit growth potential but simultaneously guarantee steady returns.

Segment Breakdown

• Liquids Pipelines: Enbridge's liquid pipelines are used primarily for the transportation of oil. The principal source for Enbridge's are the oilfields of the Alberta oil sands; Enbridge is currently the only operator of a pipeline connecting these oilfields to Chicago, and recently announced that it would be building another pipeline out of the Fort Hills sands. TransCanada may, however, convert one of its pipelines to deliver oil to Chicago as well, increasing competitive pressure in the region. Enbridge is also considering building new pipelines to transport oil from Alberta to the West Coast and from Illinois to Texas. Competitor Kinder Morgan is also considering a pipeline to the West Coast.
• Gas Pipelines: Enbridge's main gas pipeline runs from the natural gas fields in the Gulf of Mexico all the way to Canada, where the natural is further distributed. Currently, about 1.5 trillion cubic feet of natural gas is harvested every year, but increased exploration is projected to double this amount by 2015. Since adding pipelines to its existing network is relatively easy for Enbridge, increased production of natural gas would be highly beneficial for the company.
• Gas Distribution and Services: Enbridge runs the largest gas utility company in Canada, Enbridge Gas Distribution, as well as a number of other distribution companies. Though gas distribution in Canada is subject to a degree of regulation, capping profits, government intervention also essentially guarantees a steady revenue stream.
• International: Enbridge holds extensive investments in a number Colombian energy distribution companies as well as a 25% share in Spain's largest distributor of refined products like oil and gas. The company uses international investments to supplement domestic activities.
• Sponsored Investments: To increase its reach in the U.S., Enbridge owns 15.7% of Houston-based Enbridge Energy Partners L.P., a partnership that gives Enbridge a stake in various energy operations all over the U.S. Enbridge is also a major shareholder in the Enbridge Income Fund. Through the fund, Enbridge holds a 50% stake in the Alliance Pipeline, a 100% stake in the Enbridge Pipeline, and a 50% stake in NRGreen Power Limited Partnership, a wind energy company.

Strategy

Enbridge uses a three-tiered expansion strategy that aims to maintain growth, both organic and inorganic.

Acquisitions

• Enbridge has the potential to reduce competition by acquiring smaller energy transport companies; in the past, the company has used this strategy as a primary source of growth. As an example, Enbridge bought Shell's Gulf of Mexico natural gas pipelines in 2004, increasing capacity, decreasing competitive pressure, and creating another source of revenue for the company. As the industry consolidates, however, there will be fewer opportunities for Enbridge to acquire competitors. Since acquisitions are a limited resource, an increasingly larger portion of Enbridge's growth will have to be organic in nature, occurring within the company itself.

New Pipelines

• Higher levels of oil and natural gas production are only beneficial if Enbridge has the capacity to deliver the larger amounts. The company is planning to build a new oil pipeline running from Alberta to the West Coast of the U.S., though competitive pressure could easily halt the project. The increasing production of natural gas in the Gulf of Mexico region is a boon to Enbridge, as it can easily expand its existing distribution network in the South, increasing both capacity and returns. Potential obstacles to pipeline expansion include the construction competing pipelines and failing to ensure sufficient supplies of oil or gas to utilize the increased capacity; in the Gulf region, however, neither appear to be problems as of yet. Recently, the company announced a capacity-expanding project with a cost of $14 billion going into 2012. With net fixed assets of only $12 billion, the expansions could prove extremely risky, especially given the recent negative publicity over the company's history of pipeline ruptures and a November 2007 explosion.

New Energy Sources

• Enbridge, through the Enbridge Income Fund and other sponsored investments, is making ventures into new energy fields to expand its revenue base and hedge its bets on other oil and natural gas companies. For example, Enbridge has been venturing past energy transportation and into energy creation through wind power, natural gas power, and other alternative energy types. The company is also researching new energy storage technologies. Depending on how oil prices and demand for alternative energy sources fare, these could become much larger markets for Enbridge and provide significant room for expansion. In the short term, however, new energy sources could decrease revenue from oil and natural gas, Enbridge's primary source of income.

Trends and Forces

Enbridge's success is heavily leveraged to the success of the fossil fuel industry, especially oil and natural gas. Its revenues are also subject to government regulation and, because it is an international company, exchange rates.

Demand for oil should remain steady

Fossil fuels are hydrocarbons; they are called "fossil" fuels because they come from decayed plants and animals that have been buried for millions of years. When burned, fossil fuels are highly efficient sources of energy and have been the primary source of power, worldwide, since the Industrial Revolution. The main fossil fuels used for energy include oil, coal, and natural gas. Since Enbridge is in the business of transporting and distributing both oil and natural gas, its overall success is highly correlated with the demand for these fuels. As of yet, no truly viable alternatives to fossil fuels have been discovered; this fact, combined with rising energy consumption worldwide, suggests that the demand, and therefore prices, of both oil and natural gas should remain high for the foreseeable future.

Oil and gas prices are rising over time

Crude oil prices over time

Oil and natural gas prices have fluctuated heavily over the past few years, reflecting any number of political and economic factors; the most recent trend, however, has been an overall rise in prices, with a barrel of oil selling for as much as $75. Because both oil and natural gas take millions of years to form, they are considered nonrenewable energy sources, meaning our current supplies will eventually run out. In addition, the discovery of new oil and natural gas reserves has been less and less frequent, leading to higher prices as people anticipate the future depletion of global energy supplies. As these traditionally cheap forms of energy become more and more expensive, the demand for cheaper, renewable energy sources has risen. While Enbridge dabbles in some other forms of energy production, like wind energy, its primary inputs are oil and natural gas; rising oil and gas prices can increase Enbridge's operating expenses and result in higher prices for its customers. In either case, profitability could be impacted either positively or negatively, depending on how the company manages to pass the costs along to customers without driving them away.

Environmental concerns could harm Enbridge's oil business

Fossil fuels, though highly cost-efficient forms of energy, produce significant amounts of "greenhouse gases" when burned. Increasing concern about the role of these gases in environmental degradation and global climate change has spawned a growing movement promoting the development of "cleaner" energy using wind or solar power. The "green" movement has grown quite large, with numerous politicians, lobbyists, and consumer groups all pushing for tougher environmental legislation and more emphasis on alternative energy research. If they were to succeed, the increased regulations would likely drive fossil fuel prices up. Since oil and natural gas make up the vast majority of Enbridge's business, this would be detrimental to the company's bottom line.

Enbridge depends on a small number of customers

Enbridge produces pipelines for only a few companies, so its revenue is highly dependent on its relationships with these key customers. Additionally, there isn't much room for differentiation in the fossil fuel transport industry (pipelines are pretty similar, regardless of who made it), further highlighting the significance of Enbridge's maintaining good customer relationships. Such substantial dependence on the spending whims of a few companies can make Enbridge's revenues somewhat volatile.

Canadian energy regulations could cap profits

Enbridge's Canadian utilities business is subject to heavy government regulation. Like most utilities companies, the government prevents Enbridge from raising prices above a certain level, putting a cap on the company's overall profitability. On the other hand, the government also gives Enbridge monopoly rights for the area in which it provides gas; it blocks new companies from entering the market, allowing only minimal competition. This almost guarantees Enbridge a steady revenue stream, though at the cost of potentially higher profits.

Satellite image of Hurricane Katrina

Most of Enbridge's customers pay in U.S. dollars

Since Enbridge is based in Canada but does a large portion of its business in the U.S., exchange rate between the Canadian and U.S. dollars can have a considerable effect on revenue translation. Most of the revenue generated from Enbridge's pipeline business is denominated in USD, and a large portion of the company's assets are held in the U.S. As such, the current appreciative trend of the Canadian dollar against the USD could potentially devalue earnings from the U.S., raise costs incurred in the U.S., and lower overall profitability.

Enbridge's pipelines at risk of natural disasters

Natural disasters, especially hurricanes, can damage large portions of Enbridge's pipeline systems and other infrastructure. With its acquisition of Shell's natural gas operations in the Gulf of Mexico, Enbridge tapped into a valuable energy-producing and region. At the same time, the Gulf of Mexico is commonly hit by hurricanes; the season, lasting from June 1 until November 30 of every year, is probably one of Enbridge's least favorite times of year, since a major hurricane could inflict severe damage on its equipment in the area. In 2005, the devastating Hurricane Katrina forced at least eight Gulf refineries to close (which represents about 10% of the U.S.'s capacity). A repeat of such a powerful storm would spell trouble for Enbridge and other companies with operations in the region.

Competition

Enbridge faces competitive pressure from Kinder Morgan Energy Partners, L.P. (KMP), Transcananda Pipelines (TRP), and Enterprise Products Partners L.P. (EPD). In the energy transport industry, there are very few opportunities for product differentiation. The primary method of competing in the industry is through building relationships with oil and gas producers. While Enbridge has strong ties to Exxon Mobil and Royal Dutch Shell, relationships with smaller producers also matter, and the commodity nature of the pipeline makes customer security both volatile and necessary. For example, Kinder Morgan and Enbridge both see revenue potential from a Alberta-west coast pipeline. Building a pipeline would be useless without customers to put oil in the pipes; whoever has a better relationship with oil companies that want to send their oil to the west coast will end up building the pipe. In this case, Kinder Morgan is probably going to end up building the pipe, as they have more support for the venture. If Enbridge were also to build a pipe, both companies would suffer from the competitive pressure of overcapacity.

In Alberta, Enbridge has heavy competition. Aside from Kinder Morgan's west coast pipe dream (pun intended), TransCanada wants to build a pipe to Chicago. Though extra capacity in Enbridge's already-established Alberta-to-Chicago pipe makes TransCanada's project less cost-effective, the fact that ConocoPhillips is supporting the project means that it is very likely to go through in the future. If this were to happen, the pressure would make Enbridge's revenues fall and crunch profits.

Enbridge faces little pressure in the Gulf of Mexico. Because it is already a well-established carrier in the region, and has a large pipe network, Enbridge can add infrastructure to new fields relatively cheaply, giving them a cost-advantage over existing competitors and new entrants. There is little government price regulation in the area (though there are more environmental considerations), making potential profitability high but the risk of companies entering the market high also.

As a utilities company, Enbridge has a huge advantage over competitors because it is the largest gas utility in Canada. Business in this area is highly stable because government utility regulations, though they put caps on profitability, guarantee steady revenues by blocking competing firms from entering the market.

References