Enbridge Earnings: Capturing Upside From Recent Mainline Announcement and M&A

Enbridge’s ENB first-quarter earnings were reliably solid as usual. Adjusted EBITDA increased 8% to CAD 4.5 billion from last year’s levels, primarily driven by the increased economic interests in the Grey Oak and Cactus II pipelines. Full-year EBITDA guidance at a midpoint of CAD 16.2 billion was reaffirmed, compared with our CAD 16.3 billion forecast. We expect to maintain our CAD 52 and $39 fair value estimates and narrow moat rating.

We think the most impactful takeaways for the quarter relate to the recent Mainline announcements and M&A.

For Mainline, there are several incremental takeaways beyond our note on May 4. First, the performance-based component, with allowed returns on equity to drift between 11% and 14.5%, depending on volumes and optimization efforts, was new to the structure. The structure protects the downside for Enbridge in the case of lower volumes, which is likely more valuable as the competing Trans Mountain expansion enters service in early 2024. Second, locking in the agreement ahead of Trans Mountain startup ensures that more volumes will remain on Enbridge’s system, which it is actively making more attractive with downstream expansions allowing barrels to reach the Gulf Coast and export markets more effectively.

Management also flagged how it plans to exploit recent M&A transactions. The Gray Oak pipeline originally moved 900,000 barrels per day from the Permian basin to the Gulf Coast, and as part of a transaction with Phillips 66 in August 2022, Enbridge was able to increase its ownership stake to 58.5% from 22.8%. For Gray Oak, where Enbridge took over the operator role in April, it has already unlocked 25,000 barrels per day in extra capacity and is likely to pursue an incremental expansion of 200,000 barrels per day this summer. The Ingleside export center allows Enbridge to collect incremental fees while ensuring it has a secure source of demand already lined up for the expansions.