Canadian Stock Series: Enbridge's Oil Pipeline Transportation Surges, Yielding Rich Returns for Shareholders

Enbridge is a Canadian-headquartered giant in energy transportation, primarily engaged in energy infrastructure operations, especially with a broad business layout in the transportation of natural gas and liquid fuels in North America. According to the financial report disclosed by Enbridge for the first quarter of 2024:

(1) Total revenue was 11.038 billion Canadian dollars, a year-on-year decrease of 8.59%. Among them: liquid pipeline transportation business revenue was 6.882 billion Canadian dollars, a year-on-year increase of 117.44%, natural gas transportation business revenue was 1.572 billion Canadian dollars, a year-on-year increase of 5.43%; natural gas distribution and storage business revenue was 2.131 billion Canadian dollars, a year-on-year decrease of 18.82%; renewable energy business revenue was 131 million Canadian dollars, a year-on-year decrease of 9.03%.

(2) Gross profit was 6.038 billion Canadian dollars, a year-on-year increase of 3.3%, adjusted net profit was 1.955 billion Canadian dollars, a year-on-year increase of 13.27%; EBITDA was 4.954 billion Canadian dollars, a year-on-year increase of 10.88%.

(3) Adjusted earnings per share rose from 0.85 Canadian dollars in the same period last year to 0.92 Canadian dollars, a year-on-year increase of 8.24%.

Next, let's take a look at the specific financial performance of the company's main business and the potential comprehensive investment value of the company.

Enbridge is a midstream transportation company in the energy industry. Before 2024, the company's business mainly included five segments: liquid pipeline transportation, natural gas transportation, natural gas distribution and storage, renewable energy, and energy services.

Starting in 2024, the company integrated its energy services business into the liquid pipeline transportation business, seeking a more effective management model. Therefore, the company's main business now consists of 4 segments. Among them:

Liquid pipeline transportation: operates a network of crude oil and liquefied petroleum gas pipelines, ensuring the safe transportation of oil products from production sites to refineries and markets.

gas transportation: builds and manages long-distance natural gas pipelines, supplying natural gas to the North American region.

gas distribution and storage: responsible for the final distribution of natural gas to users and owns storage facilities to balance supply and demand, ensuring a stable supply.

Renewable energy: invests in wind and solar energy projects, committed to the development of clean energy and promoting environmental sustainability.

Chart: Composition of Enbridge's Main Business (%)

It is not difficult to see from the business structure that the total revenue from Enbridge's liquid pipeline transportation business and natural gas distribution services accounts for about 97% of the company's total revenue, which is the company's revenue base. The three have an important impact on revenue and are worth our close attention.

In the first quarter, Enbridge's revenue in this business was 6.882 billion Canadian dollars, a year-on-year increase of 117.44%, more than double the revenue of the same period last year, injecting strong momentum into the company's development. The significant growth in the liquid pipeline transportation business is due to:

(a) Increased utilization of liquid pipelines. According to the earnings announcement, in the first quarter, the company's pipelines transported more than 3.1 million barrels of oil per day, creating considerable transportation revenue for the company; the company also acquired two docks near Ingleside for 200 million Canadian dollars to transport crude oil to overseas markets.

Additionally, in the oil-rich Permian Basin, the company increased the capacity of the Gray Oak oil transportation pipeline to 120,000 barrels per day.

Chart: Number of Liquid Pipelines (lines)

(b) Increased liquid pipeline transportation fees. The company's executives stated that Enbridge's mainline toll agreement has been approved by the Canadian Energy Regulator, allowing the company to increase the fees it charges for liquid pipeline transportation.

(c) The company integrated part of the revenue from its original energy services business into the liquid pipeline transportation business, setting a new historical high in year-over-year growth for this business.

Given that the current market oil prices remain high, we reasonably believe that the upstream crude oil extraction volume will not experience a large-scale decline in the short term, and thus we speculate that the company's liquid pipeline transportation business will continue to perform excellently in the future.

As disclosed in the earnings call, in the first quarter, the company acquired natural gas storage facilities at Tres Palacios and Aitken Creek and plans to increase its natural gas pipeline transportation volume by 60% in the second half of 2024.

Since Enbridge has maintained a leading position in the natural gas transportation and distribution market in North America, we expect the company's natural gas business to have a good long-term development trend; however, due to the recent low prices of natural gas, the growth rate of the natural gas transportation business is mainly driven by the increase in transportation volume.

Chart: Growth of Natural Gas Transportation Business (million Canadian dollars)

In addition to pipeline and gas transportation businesses, Enbridge is also a natural gas distributor in the Canadian region. Leveraging its developed natural gas transportation pipelines in Canada and the United States, the company delivers natural gas to various provinces in Canada for distribution and storage.

The first quarter financial data showed that the company's natural gas distribution and storage business revenue was 2.131 billion Canadian dollars, a year-on-year decrease of 18.82%, which had a significant negative impact on the company's overall revenue. According to the company's earnings announcement, the significant decline in this business revenue was due to:

(a) Significantly warmer weather in Ontario, leading to a noticeable decline in consumer demand for natural gas heating, and consequently, a drop in Enbridge's natural gas sales in the region. According to guidance in the earnings call, the warmer weather had a nearly 80 million Canadian dollar negative impact on the company's performance for the first quarter.

Chart: Comparison of Ontario's high Temperature with Historical Data (°C)

(b) The average price of natural gas in the North American market in the first quarter fell by more than 10% compared to the same period last year, directly leading to a decline in the company's revenue from selling natural gas, while also significantly reducing the value of the company's natural gas reserves, having a substantial negative impact on the company's receivables.

Chart: Natural Gas Futures Prices in Major Global Markets

Overall, although the company's liquid pipeline transportation business has seen an astonishing increase, a large part of the reason is due to the consolidation of the previous energy services division. Meanwhile, as the natural gas distribution and storage business suffered significant setbacks, the company's total revenue showed a declining trend. According to financial data, the company's total revenue in the first quarter was 11.038 billion Canadian dollars, a year-on-year decrease of 8.59%.

It is worth noting that the company is very optimistic about the development prospects of the natural gas business, having completed the acquisition of Enbridge Gas Ohio on March 6 and made significant progress in acquisitions in the U.S. natural gas utility sector. At the same time, the company is also continuously expanding its liquid pipeline transportation network, further increasing transportation volume. If natural gas prices rebound thereafter, the company's performance is likely to see significant growth.

In terms of expenses, the company's operational expense rate in the first quarter decreased by 4% compared to the same period last year. The company's gas distribution expense rate dropped from 13.2% in the same period last year to 9% this quarter, and inventory management expense rate also decreased from 38.4% in the same period last year to 36.3% this quarter, indicating strong cost control in natural gas distribution and storage.

Additionally, the company's sales and administrative expenses saw a slight increase of about 3%, mainly due to increased administrative expenditures resulting from the consolidation of the company's main business.

At the same time, in the first quarter, the company's acquisitions of East Ohio Gas and several docks led to an increase in non-recurring expenses. According to the earnings call guidance, the one-time expenses incurred by the company's acquisitions exceeded 1.5 billion Canadian dollars, resulting in a decline of about 13% in the company's unadjusted net profit. Since the impact of acquisitions on earnings will not persist, we will mainly analyze the adjusted EBITDA and net profit here.

Thanks to excellent cost control and the reduction of the liquid pipeline transportation tax rate in North America from 4.27% to 2.57% starting from the previous quarter, the company's adjusted net profit for the first quarter was 1.955 billion Canadian dollars, a year-on-year increase of 13.27%; EBITDA was 4.954 billion Canadian dollars, a year-on-year increase of 10.88%. Furthermore, the company's EPS also rose from 0.85 Canadian dollars in the same period last year to 0.92 Canadian dollars this quarter, a year-on-year increase of 8.24%.

Chart: Enbridge's Net Profit Trend (Adjusted)

According to the financial report, the company's free cash flow in the first quarter rose from 1.58 billion Canadian dollars in the previous quarter to 1.97 billion Canadian dollars this quarter, an increase of about 400 million Canadian dollars, with fast growth. Sufficient free cash flow ensures generous dividends to shareholders for the foreseeable future.

From a shareholder return perspective, over the past five years, Enbridge has distributed 34 billion Canadian dollars in dividends to shareholders. In the first quarter's conference call, company executives stated that they plan to increase the dividend payout amount to about 40 billion Canadian dollars over the next five years while maintaining a payout range of 60% to 70% of DCF.

Based on Enbridge's current market capitalization of 1096.78 billion Canadian dollars, the expected dividend yield for the company in 2024 is estimated to be around 7.28%, which is significantly higher than the risk-free rate in the United States, making it very attractive.

In the long term, the company's earnings growth opportunities still depend on the market trends of natural gas and oil: (1) Although natural gas prices have recently been low, the company has acquired Enbridge Gas Ohio and made progress in acquisitions in the U.S. natural gas utility sector. If natural gas prices rebound subsequently, the company's performance is very likely to experience strong growth. (2) Considering the continued high oil prices, the company's increased efficiency in pipeline transportation, coupled with the United States lowering tariffs on liquid pipeline transportation, it is expected that the future development of this business will continue to show a positive trend.

The company's shareholder returns are generous and attractive. The company plans to increase its dividend payout to 40 billion Canadian dollars over the next five years, with an expected dividend yield of around 7.28% for 2024. The company's free cash flow is continuously growing, ensuring substantial shareholder returns.