ENB's Valuation Remains Premium: Is the Stock Worth Overpaying for?

Enbridge Inc. ENB is trading at a 15.36x trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), which is at a premium compared with the broader industry average of 14.05x. In the past year, the stock has continued to trade at a premium valuation as compared to the industry.

Is it worth overpaying for the leading midstream energy giant? Before coming to the investment conclusion, let’s analyze ENB’s fundamentals and overall business environment.

ENB Secures Incremental Cashflows From its C$28B Project Backlog

Enbridge is a leading midstream energy player in North America, operating an extensive crude oil and liquids transportation network spanning 18,085 miles — the world's longest and most complex system. ENB’s gas transportation pipeline network spans 71,308 miles, covering 31 U.S. states, four Canadian provinces and offshore areas in the Gulf of Mexico.

Enbridge’s pipelines transport 20% of the total natural gas consumed in the United States. The company generates stable, fee-based revenues from these midstream assets, as they are booked by shippers on a long-term basis, minimizing commodity price volatility and volume risks.

The midstream energy major will generate incremental cash flows from its C$28 billion backlog of secured capital projects, which include liquids pipelines, gas transmission, gas distribution and storage, and renewables. The maximum in-service date is 2029.

ENB’s Take-Or-Pay Contracts & Investment-Grade Credit Rating

The minimization of commodity price volatility and volume risks in ENB’s business model stems from the fact that regulated or take-or-pay contracts support 98% of its EBITDA. Moreover, more than 80% of the midstream energy firm’s profits are generated from activities where the company can automatically raise prices or fees. Thus, ENB 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 leading to its investment-grade credit rating while providing long-term visibility to cash flows.

Like ENB, 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. This structure allows KMI to generate stable earnings, primarily insulated from fluctuations in the volume of natural gas transported, offering significant stability to its bottom line.

Similarly, Enterprise Products, a top-tier North American midstream service provider, is set to generate additional fee-based earnings from $7.6 billion worth of major capital projects either currently in service or under construction. These project backlogs will not only secure stable cash flows but also generate handsome returns for unitholders.

Supported by its stable and resilient business model, Enterprise Products has achieved more than two decades of distribution hikes across various business cycles.

Should You Overpay for ENB Stock?

The positive developments are reflected in ENB’s price chart. Over the past year, the stock gained 42.6%, outpacing the 38.3% improvement of the composite stocks belonging to the industry and EPD’s 21.2% improvement. KMI has jumped 47.2% over the same time frame.   

One-Year Price Chart

However, there is a factor that remains an overhang for the stock. Enbridge bought several large U.S. gas utility companies, and these new operations are performing well so far. However, investors should note that they’re still very new to ENB, with some having been part of the midstream energy player for less than a year. This means the process of fully integrating them into its operations is still ongoing. This reflects the possibility that things might not work as per expectations.

Thus, it’s better to wait and not overpay for the stock. However, those who have already invested should hold onto the shares of ENB. Currently, it 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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