Enbridge Inc.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

Enbridge is a leading North American energy infrastructure company, involved in liquids pipelines, gas transmission and midstream, gas distribution and storage, and renewable power generation.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Enbridge operates a vast network of energy infrastructure assets, primarily focusing on oil and natural gas transportation and storage. The business model centers on long-term, take-or-pay contracts, providing a relatively stable and predictable revenue stream, coupled with moderate growth.

Business Overview

Enbridge’s operations are segmented into four main business units, each playing a distinct role in the North American energy value chain:

Liquids Pipelines: This segment is Enbridge’s largest, consisting of pipelines that transport crude oil and other liquids from supply basins to refineries and other end-markets. These pipelines act as critical infrastructure for the North American oil industry.
Gas Transmission and Midstream: This segment owns and operates natural gas pipelines and gathering and processing facilities, primarily in Canada and the U.S. It also includes export facilities, enabling access to global markets for Canadian and U.S. natural gas.
Gas Distribution and Storage: Enbridge owns and operates natural gas utilities, particularly in Ontario, serving commercial, residential, industrial and public-sector clients. This business focuses on natural gas transportation and distribution.
Renewable Power Generation: This segment involves investments in renewable power projects, including solar, wind, and waste heat recovery. These assets are increasingly important to the company’s strategy to help meet future energy demand while targeting its net zero targets.

Competitive Landscape

The energy infrastructure sector is characterized by both intense competition and high barriers to entry.

Liquids Pipelines: This business is dominated by a few major players, due to the high capital expenditure needed to build and maintain pipelines. The competition is less about product differentiation and more about scale, operational expertise, and transportation agreements.
Gas Transmission & Midstream: Similar to liquids pipelines, the capital-intensive nature of pipelines and the existing infrastructure, combined with the regulatory environment, create a high barrier to entry. The competition includes other pipeline and midstream companies and large integrated energy firms.
Gas Distribution & Storage: Due to the nature of providing gas to end-customers, distribution is subject to more regulatory oversight, giving operators local dominance within their territories and competition tends to be less than the other segments.
Renewable Power Generation: The renewable energy market is becoming increasingly competitive, with many companies entering the space. However, the regulatory environment and availability of project land may limit expansion to new participants.

Enbridge aims to diversify revenue streams and improve resilience. The company’s strategy rests on growth in its core businesses, expanding into adjacent sectors, and accelerating new technologies with a focus on low emissions fuels. They aim to reduce operational expenses and drive innovation through technology, automation, and digitalization.

Moat Analysis: 2.5 / 5

Enbridge has a narrow, solid moat. It’s not a clear wide moat because of several factors:

Cost Advantage: There are some network aspects to the pipelines which have an inherent cost advantage (as it is not economical for multiple companies to build pipelines on the same routes). The network in its pipelines and storage facilities provides a narrow advantage against competitors. Although the low cost of pipelines over other transportation can be considered, it can easily be replicated and so should not be considered a permanent competitive advantage.
Scale Advantage: The sheer size and scale of Enbridge’s infrastructure present an advantage to competitors who would have to undergo extreme costs in order to reach a competitive scale. This provides them some advantage.
Regulatory Environment: the regulations are generally quite friendly for incumbents, as new entrants have to face regulatory hurdles, permitting processes, and often lack the same relationships with regulatory bodies as incumbents, leading to an advantage.

However, on the other hand:
Lack of Pricing Power: Due to regulatory structures, and contracts with companies that pay fixed tariffs, it’s very unlikely that Enbridge will be able to substantially increase its tariffs to customers, meaning their pricing power is limited.
Limited Growth in core segments: Although volume is expected to grow, it might not grow at a massive scale, and may not be enough to drive high enough profitability numbers that can create wide economic moats.
Dependence on Debt: They may have problems generating cash in the future with so much debt.

Based on all of this, we are giving a rating of 2.5 out of 5 as the business does have a moat, but its durability is not completely clear as it can’t command pricing power and there’s intense competition in the segments that it operates.

Risks and Business Resilience

Enbridge’s moat can be harmed by several factors, including:

Regulatory Changes: Changes in government regulation can affect transportation contracts, as well as the overall profitability of their business. They face uncertainty when it comes to regulation and may have to bear heavy losses.
Technological Disruption: Shifts in technology might reduce demand for traditional energy infrastructure, impacting long-term outlook of the company. Transitioning to new energy sources might also require significant capital investment, and might erode the moat.
Commodity Price Volatility: As a commodity business, Enbridge’s cash flows are affected by volatility in commodity prices. This includes fluctuations in price of natural gas, oil, etc. These may result in a need for more capital expenditures and might hurt overall returns.
Environmental concerns: There are growing concerns about climate change and environment, leading to more scrutiny on energy companies. This can lead to regulations on emissions, potentially increasing costs.
Operational Risks: The nature of pipelines is that they could have accidents, leaks, or spills. This might be costly for the company in terms of lost revenue and cleanup and also damage its goodwill.
Counterparty Risk: Due to fixed rate contracts with shippers, any financial issues that these shippers face can damage Enbridge’s business prospects.

Despite those risks, Enbridge has several factors that add to its business resilience:
Contractual Arrangements: Most of Enbridge’s revenues are secured through long-term contracts that offer stable cash flows.
Strategic Investments: The company has increasingly invested in lower emissions technologies and renewable power that position it well for the future.
Diverse Business: By having different segments across different sectors, it’s able to maintain stable revenues.

Financials In-Depth

Enbridge’s most recent financials are from their Q3 2024 report. It revealed a decline in profit. Key points are as follows:

Operating Segment Results: In the first nine months of 2024, Enbridge saw positive growth in its Liquids Pipelines, Gas Transmission, and Renewable Power Generation segments, all three achieving higher EBITDA YoY. However, Gas Distribution and Storage operations reported a decline in EBITDA YoY.
Revenues: For the three months ended Sept 30, 2024, total revenues stood at 15038 million CAD vs 16,482 million CAD in the same period last year.
EBITDA: Enbridge’s EBITA for the three months ended September 30, 2024 was 4490 million CAD which was considerably lower than 5126 million CAD for the same period last year.
Net Earnings: For the three months ended Sept 30, 2024, the total Net Income attributable to common shareholders was 777 million CAD as compared to 1293 million CAD in the same period last year. There was a major decrease in earnings YoY.

As for previous years we have seen significant increases in total revenues for Enbridge. In 2022 it did 59,800 million CAD in revenues vs 43,039 million CAD in 2021, showing significant growth. However, the cost of sales has increased at a faster pace, from 34,574 million CAD in 2021 to 48,807 million CAD, leading to less profitability and lower net income. This means the company has been able to generate higher sales, but cost increases have offset profit gains.

On a more concerning note, their debt levels have ballooned in recent years. For example, total debt reached 95,160 million CAD in December 31, 2022 as compared to 80,360 million CAD in 2021. High debt also means they have to pay high interest costs, which will affect the future profitability. Enbridge did acknowledge during the Q3 earnings call that they are working to deleverage their balance sheet and improve debt levels.

Given this data, we can see that there’s potential profitability issues for the future, and high debt might also negatively affect future growth prospects.

Understandability Rating: 3 / 5

The business is moderately complex.

While pipelines are easy to comprehend, understanding the complex interplay of regulations, environmental compliance, and contractual arrangements can be challenging. The company’s multiple segments add to the complexity.
Although there is not too much that a person needs to know about the company, following the multiple segments, different geographies, and regulatory requirements will add some complexity to it.

Balance Sheet Health Rating: 3 / 5

Enbridge’s balance sheet health is somewhat concerning due to its debt levels:

The company has a high debt-to-equity ratio, which makes them vulnerable to rising interest rates. As discussed earlier, their debt has ballooned over recent years.
However, they also have a huge amount of tangible assets which can be liquidated if they were ever in financial trouble.
Their strong cash flows do give some cushion, as the debt payments are easier to manage given stable cashflows.

Given the above points, the balance sheet health is a 3 / 5.

Recent Concerns / Controversies and Problems

There are a couple concerns that were highlighted during the latest earnings call,

Rate Hikes and Debt Reduction: The management stated that they are working to reduce debt and improve balance sheet health, especially given the higher interest rate environment, which is something that they want to focus on. However, they also said they are confident that their long term plans and strategies will continue to help achieve future growth prospects.
Volatile Commodity Prices: As a pipeline and transmission business they are exposed to fluctuating commodity prices in the energy sector. They mention they use derivative contracts to manage the risk.

They have also faced criticism that they are not going as fast as their peers towards greener energy sources. However, they did stress they are continuously looking for renewable power generation projects and are investing heavily in them, and hope to transition into a lower carbon economy.