Enbridge Q4 Earnings: Reasonable Results, Dividend Growth (NYSE:ENB)

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On Friday, February 11, 2022, Canadian midstream giant Enbridge Inc. (ENB) announced its fourth-quarter 2022 earnings results. The headline numbers were admittedly not particularly impressive as the company missed the earnings expectations that analysts held for it but bottom-line earnings figures are not particularly important for midstream companies anyway. Enbridge did manage to achieve a moderate year-over-year increase in distributable cash flow and raised its dividend, both of which will certainly appeal to those investors that are holding the stock for the dividend that it pays out. There are some reasons to believe that the company will be able to continue to grow its cash flows going forward, which could allow it to continue to increase its dividend. A growing dividend can be quite valuable today since it helps to protect us against the inflation that we have been seeing in our daily lives. Overall then, Enbridge continues to represent a reasonable choice for someone that desires to generate income from their portfolio.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Enbridge’s fourth-quarter 2021 earnings results:

  • Enbridge reported total operating revenues of C$47.071 billion in the full-year 2021 period. This represents a 20.43% increase over the C$39.087 billion that the company reported in the prior year.
  • The company reported an operating income of C$7.805 billion during the full-year period. This represents a slight decline from the C$7.957 billion that the company reported last year.
  • Enbridge brought approximately C$10 billion worth of growth projects into operation during 2021 and plans to continue bringing more projects online over the next few years.
  • The company reported a distributable cash flow of C$10.041 billion over the full-year 2021 period. This represents a 6.37% increase over the C$9.440 billion that the company reported for 2020.
  • Enbridge reported a net income of C$5.816 billion during the full-year 2021 period. This represents a 9.50% increase over the C$2.983 billion that the company reported during the 2020 fiscal year.

One of the things that most readers will notice by looking at these highlights is that most measures of financial performance saw improvements compared to the prior-year period. This was not driven by the steep increase in crude oil and natural gas prices that we saw over the course of 2021. The reason for this is the business model that the company uses. As is the case with all midstream companies, Enbridge makes its money based on the volume of resources that it handles and not their value. This model provides a great deal of insulation against changes in resource prices. This works quite well to protect the company during times when prices are declining as they did in early 2020. Enbridge’s financial performance that year was not significantly worse than 2019 because of this business model. Unfortunately, it also has the effect of preventing the company from benefiting much when resource prices are strong as they are today.

Fortunately, despite not benefiting from increases in resource prices, Enbridge still benefited from higher volumes this year than it had in 2020. The biggest reason for this is some of the new projects that the company brought online this year. As noted in the highlights, Enbridge brought a total of C$10 billion worth of growth projects online in 2021. As I have mentioned in numerous past articles, one of the characteristics of midstream growth projects is that the company will obtain contracts for the use of its new infrastructure from customers before the company begins construction of it. The primary reason that the company does this is to ensure that it will not be spending a large sum of money to construct infrastructure that nobody wants to use but this process also ensures that the project will begin handling resource volumes and generating money as soon as it enters operation. Thus, the fact that the company brought a number of new projects online over the year stimulated growth. These projects will also be a cause of growth for Enbridge over the course of 2022. This is because the projects that the company brought online during 2021 were not able to provide cash flow for Enbridge for the entire year. They will all be operating for the entire 2022 year, which should result in higher total revenues and cash flows going forward.

One of the most significant of these projects was the company’s Line 3 replacement project. This is a project that I have mentioned in many articles on Enbridge dating back several years. That is because this was one of the largest single growth projects in the company’s history and one of the largest private infrastructure projects in Minnesota history in terms of dollars spent. The project was intended to replace the aging Line 3 crude oil pipeline with a modern one featuring much stronger safety features and admittedly a higher capacity 36-inch pipe running through North Dakota, Wisconsin, and Minnesota. As can sometimes be the case with projects like this, the company encountered opposition from activists, environmental groups, landowners, and others, particularly in the state of Minnesota. This resulted in the project taking many years to complete but fortunately, Enbridge was able to begin construction on the final segment in Minnesota back in December 2020 and it was completed in October 2021. As the replacement pipeline is larger and has a higher capacity, Enbridge was able to begin carrying higher volumes through it beginning in the fourth quarter. This naturally resulted in a certain amount of incremental growth, which the company will be able to benefit from to an even greater degree in 2022 since the line will be operating in all four quarters of 2022 as opposed to just one.

The growth projects that the company brought online during 2021 are far from the end of its growth trajectory. In fact, Enbridge currently has a total of C$10 billion worth of new projects under construction that are scheduled to enter service between now and 2025:

Enbridge 2022-2025 Growth Projects

Enbridge Q4 2021 Earnings Presentation

One thing that we see here is that a sizable amount of the company’s planned capital spending is directed at renewable energy projects. This is something that may be surprising to many readers as it is certainly a departure from the company’s traditional business model of operating pipelines and other midstream infrastructure. Admittedly though, it is not something that has been particularly uncommon among large foreign energy companies, unlike American ones. It has also proven to be a cost center for many of the companies that have been making these investments. For example, Norway’s Equinor (EQNR) has yet to make a profit from its offshore wind and solar projects. Enbridge though has been seeing positive cash flows from the renewable projects that it has already deployed, which are exclusively offshore wind farms in Europe and various onshore wind and solar projects in the United States and Canada. With that said though, the profitability of this business unit is quite meager. The company’s renewable energy business unit reported an adjusted EBITDA of C$496 million in 2021, which was only 3.54% of the C$14.001 billion that the company generated as a whole over the year. What is more, the renewable energy business actually saw its adjusted EBITDA decline by C$11 million largely due to lower wind speeds in the United States and Canada compared to 2021. This highlights one of the problems with renewable energy generation as its dependence on the weather and lack of reliability makes it very unlikely that renewables will replace fossil fuels any time soon. It is thus very nice to see that, while Enbridge is devoting a considerable amount of resources toward the expansion of its renewable business, it is certainly not doing this at the expense of the much more profitable traditional business.

One of the biggest reasons that many people invest in Enbridge is because of the very high dividend yield that the company boasts. As of the time of writing, the company boasts a forward dividend yield of 6.30%, which is substantially higher than the 1.30% yield on the S&P 500 index (SPY). In a move that is likely to increase the company’s appeal to income-focused investors, Enbridge increased its dividend by 3% in conjunction with the earnings announcement. This is something that is quite nice to see today given the toll that the high inflation rate has been having on the budgets of many people. This is because dividend increases help to ensure that the dividend is able to still purchase the same quantity of goods and services that it could last year. Granted a 3% increase is nowhere near enough to keep up with today’s inflation rate but it is still nice to see. As is always the case though, it is critical that we ensure that the company can actually afford the dividend that it pays out. After all, we do not want the company to suddenly have to reverse course and cut the dividend since that will both reduce our income and cause the share price to decline. The usual way that we do this is by looking at the company’s distributable cash flow. The distributable cash flow is a non-GAAP metric that theoretically tells us the amount of cash that was generated by the company’s ordinary operations that is available for distribution to the common stockholders. As stated in the highlights, Enbridge reported a distributable cash flow of C$10.041 billion in the full-year 2021 period. This works out to C$4.96 per common share, which is enough to cover the newly-raised dividend 1.44 times over. Analysts generally consider anything over 1.20x to be reasonable and sustainable but I typically like to see this at 1.30x in order to add a margin of safety to the investment. As we can easily see, Enbridge manages to beat both of these requirements and when we consider that the company’s cash flow is likely to grow in 2022, we can see that the dividend appears quite safe.

In conclusion, the company’s results overall show the stability and reliability that we have come to expect from Enbridge. Although the company was not able to take full advantage of the surge in crude oil and natural gas prices that we have seen over the past year, it was still able to generate some growth. The company is also well-positioned to continue this growth trajectory over the coming few years in both its traditional and renewable businesses. The renewable business unfortunately is not particularly profitable despite the money that Enbridge is pouring into it but at least it is profitable, which is more than many companies will say. The strong cash flows also allowed the company to continue its track record of regular dividend increases, which any income-focused investor should be able to appreciate.

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