Enbridge's Take-or-Pay Contracts: Stability in Volatile Energy Market?

The minimization of commodity price volatility and volume risks in Enbridge Inc.’s ENB business model stems from regulated or take-or-pay contracts, which support 98% of its EBITDA. Further, more than 80% of this midstream energy firm’s profits are generated from activities where the company can automatically raise prices or fees. Thus, ENB, a leading midstream energy player, is keeping pace with rising costs, which, in turn, protects its earnings and dividend payments even in a high inflationary environment.

This stability in the business model is contributing to its investment-grade credit rating while providing long-term visibility into cash flows.

To get into details, Matterhorn Express Pipeline and Traverse Pipeline are getting particular attention. Both pipeline networks in which ENB is involved transport natural gas to the key end markets like the U.S. Gulf Coasts from the Permian, the most prolific basin in the United States. Since these pipelines operate under take-or-pay contracts, they are not vulnerable to volume risks.

Also, the shippers that reserve capacities on the pipelines are investment-grade counterparties, meaning they are both financially strong and creditworthy players. Hence, the take-or-pay contracts reflect ENB’s stable business model with steady fee-based revenues that are immune to the volatile and uncertain energy business.

Two Other Midstream Stocks With Stable Business Models: KMI, EPD

Like Enbridge, the business models of Kinder Morgan KMI and Enterprise Products Partners LP EPD are backed by stable fee-based revenues.

Kinder Morgan’s position as a leading midstream service provider is reinforced by a network of pipeline and storage assets that operate under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenues.

Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. Supported by its stable and resilient business model, EPD has achieved more than two decades of distribution hikes across various business cycles.

ENB’s Price Performance, Valuation & Estimates

Shares of Enbridge have gained 37.3% over the past year, outpacing the 35.9% rally of the composite stocks belonging to the industry.

From a valuation standpoint, ENB trades at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 15.36X. This is above the broader industry average of 13.95X.

The Zacks Consensus Estimate for ENB’s 2025 earnings hasn’t been revised over the past seven days.

ENB stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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