Company Reports

In June 2024, TC Energy shareholders approved the spinoff of the firm’s liquids pipelines business. The spinoff will be called South Bow Corporation. We reduce our fair value estimate to CAD 53 from CAD 67 and maintain our narrow moat rating for the remaining TC Energy firm. South Bow has a lower-risk growth profile as compared with the overall TC Energy business, so divesting this liquids pipelines segment will allow TC Energy to focus on segments that are generating strong returns on capital, such as renewable energy.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in US light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

After refreshing US/Canadian dollar exchange rates across our Canadian midstream models, we've made some very minor changes to our fair value estimates. For Enbridge, our Canadian-dollar-denominated fair value estimate falls to CAD 56 per share from CAD 57, while our USD 41 fair value estimate is unchanged. For Pembina Pipeline, our Canadian-dollar-denominated fair value estimate remains at CAD 55 per share, but our US-dollar-denominated fair value estimate increases to USD 41 per share from USD 40. For TC Energy, our Canadian-dollar-denominated fair value estimate of CAD 67 per share is unchanged, while our US-dollar-denominated fair value estimate increases to USD 50 per share from USD 48.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in US light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in US light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge's second-quarter results were solid, in our view. We expect to maintain our CAD 57 and USD 41 fair value estimates, aside from any exchange-rate-driven changes. Our narrow moat rating is also unchanged. Overall EBITDA improved 8% year over year to CAD 4.3 billion, primarily because of earnings from the acquired utilities and other recently completed deals (Hohe See, Albatros, Aitken Creek, Tomorrow RNG), offset by the absence of earnings from the sold Alliance and Aux Sable assets. Enbridge has refreshed its 2024 EBITDA guidance to a midpoint of CAD 18 billion from CAD 16.9 billion. The guidance now includes both utilities already acquired and assumes the final one (PNSC) closes in the third quarter. The guidance is lower than our expectations because of timing assumptions, but not enough to change our fair value estimate.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in US light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

The complexity of OPEC’s meeting outcome from June 2 should not obscure our view that it continues to operate from a position of weakness in an oversupplied market, pointing to near-term oil price weakness. We anticipate oil prices are more likely to hit $70 a barrel (WTI) and perhaps below $65 by the end of 2024. OPEC has three separate cuts in progress at the moment, totaling 5.86 million barrels per day. A groupwide cut of about 2 million barrels per day was originally set to expire at the end of 2024 but was extended to the end of 2025. Similarly, a 1.7 million barrels per day voluntary cut by certain members was also extended to the end of 2025 from the end of 2024. Finally, a second 2.2 million barrels per day voluntary cut by certain members was extended in full for another quarter, as it was due to expire at the end of June, before gradually being phased out by September 2025. Undervalued options have been harder to find in the energy space recently, but we favor SLB, Enbridge, TC Energy, APA, and Exxon Mobil.

We think AI and data center demand offers a potentially sizable growth opportunity across our US E&P and US & Canadian midstream coverage list. We consider Chart Industries, Energy Transfer, Enbridge, Kinder Morgan, and TC Energy as undervalued ways to play this trend. Cheniere Energy and Williams are more fairly valued, while Antero, Range, and likely EQT (not covered) are obvious direct opportunities and appear expensive.

Enbridge’s first-quarter results generally met our expectations. Base EBITDA guidance was reaffirmed for 2024, excluding the impact of the utilities transactions that Enbridge is still in the process of completing. We anticipate the two remaining utilities will be acquired by the end of 2024. Base EBITDA was up 8% year over year to CAD 4.8 billion, or 11% to CAD 5 billion including the impact of the Ohio utility deal already completed. The biggest contributors were higher volumes on existing assets and volumes from newly acquired assets. First-quarter results are usually among Enbridge’s strongest for the year, as gas consumption for its Ontario utilities and pipelines typically increases during the winter.

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

Enbridge has entered into a joint venture with WhiteWater/I Squared and MPLX to form a Permian-focused joint venture. We see this as a smart move to expand Enbridge’s opportunity set in the basin for a reasonable cost, but it is too small to affect our CAD 56/USD 41 fair values estimates and narrow moat rating. Enbridge is contributing its Rio Bravo pipeline while retaining a 25% economic interest, $350 million in cash, and will fund $150 million in capital spending to complete the Rio Bravo pipeline in exchange for a 19% interest in the joint venture. In return, the joint venture will control the Whistler pipeline, the Rio Bravo pipeline, a 70% interest in the ADCC pipeline, and a 50% interest in the Waha Gas storage assets. Broadly, these assets serve as critical components to supply NextDecade’s Rio Grande LNG project and Cheniere’s Corpus Christi LNG export facility.

Enbridge’s analyst day largely reaffirmed our views and teased the pending completion of the East Ohio Gas Company acquisition, which was completed March 7. We expect the remaining two utility acquisitions—Questar Gas Company and Public Service Company of North Carolina—from Dominion Energy to be completed by the end of 2024. After refreshing our model for the pulled-forward East Ohio deal, our CAD 56 and USD 41 fair value estimates are unchanged, as is our narrow moat rating. East Ohio makes up more than 40% of the expected EBITDA contribution from the three utilities.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge’s fourth-quarter results were above our expectations, primarily due to strength in Mainline volumes. Full-year EBITDA of CAD 16.45 billion was ahead of our CAD 16.2 billion forecast. After updating our model, we increased our fair value estimates to CAD 56/USD 42 per share from CAD 52/USD 39. Our narrow moat rating is unchanged.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex U.S. refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in U.S. light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

We think Pembina's acquisition of Enbridge's interests in the Alliance, Aux Sable, and NRGreen assets for about CAD 3.1 billion is a material strategic win for both parties. We consider the valuation paid at about 9 times 2024 EBITDA or 8 times including expected synergies to be reasonable. This breaks down into about 11 times 2024 EBITDA for the Alliance pipeline, and 7 times for the Aux Sable assets. As a result, we do not expect to change our CAD 41 or USD 29 fair value estimates for Pembina, or our CAD 52 and USD 38 fair value estimates for Enbridge. Our narrow moat rating for Enbridge and our no moat rating for Pembina are also unchanged.