Why Enbridge Should Trade Higher

Like many other oil and gas companies, Enbridge (ENB) has been doing well for more than a few months, with its shares up more than 15% this year, helped by a supportive environment for crude oil and natural gas. I am bullish on this stock.

About Enbridge

Enbridge Inc. is a leader in operating hydrocarbon infrastructure in North America.

The company says that its liquid pipelines transport about 30% of all North American crude oil production.

Its gas transmission and midstream operations enable the transportation of approximately 20% of all U.S. natural gas consumption.

Through its gas distribution and storage segment, the company serves nearly four million retail customers located and operating in the Canadian provinces of Ontario and Quebec.

In addition, Enbridge is engaged in renewable energy sources, as it has nearly 1,800 megawatts (net) capacity for renewable energy generation.

This renewable energy resource is available throughout North America and Europe.

Higher Fossil Fuel Prices Will Drive Enbridge Stock Up

Undoubtedly, higher oil and gas prices are good for the Enbridge stock.

Therefore, it is no coincidence that the year-to-date jump in Canadian midstream energy shares went hand in hand with the subsequent rally in the fossil fuel market.

Year-to-date, crude oil WTI futures expiring July 2022 and natural gas futures expiring June 2022 are up astonishingly, increasing 46% to $109.85 price per barrel (ppb) and up 113.4% to $7.980 metric million British thermal units (MMBtu).

Since the main factors behind high oil and gas futures are related to the war in Ukraine, these commodities will continue to trade higher in the financial markets as long as the geopolitical crisis continues. That gives Enbridge momentum, so the stock price should continue to climb. This is also technically possible as the 14-day Relative Strength Index (RSI) of 50 indicates that the upside potential has room to unfold. When the RSI is above 70, the stock is generally considered overbought, while below 30 is considered oversold.

As this war could last for several months (many western countries and Japan are increasing their annual military spending budgets), many of the following factors will continue to fuel rising oil and gas markets.

Crude Oil and Gas Prices Outlook

Many are worried about the flow of Russian fossil fuels to European countries, as Russia threatens to halt transmissions in response to sanctions by G7 governments to curb its aggression in Ukraine. This has been the main reason behind the very rapid rise in energy prices.

Relevant economies in the EU, like Germany and Italy, are highly dependent on Russian energy, and won’t be able to find appropriate fuel replacements for the next 18 months or so.

In addition, the OPEC countries (siding with Russia) are reluctant to supply the market with more barrels of crude oil, exacerbates pressure on commodity prices.

This trend will most likely continue compounding as the summer holiday season kicks off around June. Increased plane travel is expected, and hotter weather will require more energy for air conditioning, further straining power grids.

Based on the above factors, economists expect crude oil to trade at $127.43 ppb ahead of May 2023 (up 16% from current levels), while natural gas to trade at $9.40 MMBtu ahead of May 2023.

Enbridge’s Balance Sheet

The firm’s balance sheet is on track to improve as an expected increase in infrastructure utilization, coupled with favorable commodity prices, should reflect higher cash flow.

After an upgrade of the pipeline infrastructure in and around Minnesota, and the start of operations from the Ingleside Energy Center in Texas, the company is now better equipped to handle the expected increase in energy demand from Europe. In addition to Bulgaria, Poland and Finland, Russia is likely to exclude other countries from its deliveries. These countries will compete for fossil fuel availability in the U.S.

Enbridge is poised to meet some of this market demand as the Ingleside Energy Center in Texas is the largest complex by volume, connecting basin and shale in the U.S. Southwest to international markets.

Some Figures

Driven by the aforementioned improvement in the asset base, net income for the first quarter of 2022 increased 1.5% year-over-year to Canadian dollars (C$)1.93 billion, adjusted EBITDA increased 150% year-over-year to C$4.14 billion and the distributable cash flow increased by 11.23% to C$3.07 billion (or C$1.52 per share).

As of March 30, 2022, the balance sheet was heavily indebted, with only $413 million in cash and short-term securities for a total debt of $76.5 billion.

However, an Interest Coverage Ratio of 3.4 indicates that the company has no trouble paying the interest due on the outstanding debt as operations remain profitable (EBITDA margin of 23.74% versus the industry median of 22.06% indicates this).

Full Year 2022 Guidance

Looking ahead to full-year 2022, the company is forecasting EBITDA in the range of $15 billion to $15.6 billion and distributable cash flow per share in the range of $5.20 to $5.50.

Earnings Growth Estimates

Analysts are forecasting Enbridge’s earnings per share to grow 7.4% annually this year, 5.2% in 2023, and 7.76% annually over the next five years from 2023 to 2027.

Wall Street’s Take

In the past three months, eleven Wall Street analysts have issued a 12-month price target for ENB. The company has a Moderate Buy consensus rating based on six Buy and five Hold ratings.

The average Enbridge (ENB) price target is $49.43, implying an 10.98% upside potential.

Conclusion

Enbridge is well positioned to take advantage of higher crude oil and gas prices and increased European energy demand, as Russia cuts supplies to countries in the EU. Shares will likely continue to rise.

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