Varcoe: Amid a tough year, two pieces of good news arrive for Enbridge

It’s been a rough and tumble year, but a decidedly good week, for Enbridge Inc.

The Calgary-based pipeline giant saw two pieces of welcome news come its way with the approval of the Line 3 replacement project in Minnesota last week, and the announcement of a major asset sale on Wednesday.

Combined, these steps should provide more certainty about the company’s growth prospects and strengthen its balance sheet.

On the sales front, Enbridge agreed to unload an array of natural gas gathering and processing assets in Western Canada for $4.3 billion to Brookfield Infrastructure and its institutional partners.

The deal includes 19 natural gas processing plants and liquids handling facilities and 3,550 kilometres of natural gas pipelines.

The assets are located in the prolific Montney basin, as well as the Peace River Arch, Horn River and Liard areas of Alberta and British Columbia.

In a statement, Enbridge CEO Al Monaco said the company remains focused on becoming a “pure play” regulated pipeline and utility business, while the deal ensures “the continued strength of our balance sheet and funding flexibility.”

Paying down debt and deleveraging Enbridge’s balance sheet have become key issues for analysts and investors.

The company has been selling non-core assets following its blockbuster purchase of Houston-based Spectra Energy for $37 billion in September 2016.

However, the stock has been under pressure in 2018. One year ago, Enbridge’s shares traded near $52 on the Toronto Stock Exchange, but tumbled below $38 earlier this spring.

Last November, the company unveiled a strategic plan to emphasize growth in three core areas — liquids pipelines and terminals, gas transmission and storage, and gas utilities — while identifying $10 billion in non-core assets to put on the auction block.

However, Moody’s Investors Service downgraded the company’s rating in December, saying its credit strengths were “offset by high leverage, a persistently large capital investment program and material corporate and capital structure complexity.”

Monaco directly addressed the disappointing share price at the company’s annual meeting in May, pointing out some investors were rotating out of the sector, while a rising interest rate environment wasn’t favouring infrastructure stocks.

As well, difficulties getting regulatory approval for projects like Line 3, and a U.S. decision earlier this year to change tax rules surrounding master limited partnerships (MLPs) were weighing on the company.

“This is a bit of new territory for us. I’m usually up here talking about how we outperformed peers and outperformed the broader market,” he told shareholders at the meeting.

Monaco pledged the company would deliver on an ambitious $22-billion capital program through 2020, while targeting further asset sales.

The company has certainly been busy since spring.

Enbridge announced in mid-May it will acquire the stakes in four MLP subsidiaries it doesn’t already own to streamline its corporate structure.

The company sold off a 49 per cent stake in some renewable energy assets to the Canadian Pension Plan Investment Board for $1.75 billion the same month.

It also unveiled a US$1.1-billion deal in May to sell its Midcoast Operating LP gas midstream business to an affiliate of ArcLight Capital Partners.

With Wednesday’s announced sale, the company has unloaded about $7.5 billion of assets this year, more than double its original $3 billion target.

“From a valuation standpoint, it looks like they got a good price for it,” said analyst David Galison of Canaccord Genuity.

“It helps with their deleveraging and to fund some of their future growth projects.”

Among those initiatives is Line 3.

Last week’s decision by the Minnesota Public Utilities Commission to approve Enbridge’s preferred route for the pipeline through the state — with some modifications — was significant.

Once built, the $9-billion replacement project will boost the capacity of the company’s existing oil pipeline running from Alberta to Wisconsin by about 370,000 barrels per day.

In a recent report, GMP FirstEnergy analyst Ian Gillies called it “one of the more important regulatory decisions regarding the Canadian oil and gas industry.”

Like most new pipeline projects, Line 3 will undoubtedly face further opposition from critics. However, the Minnesota decision removes an element of uncertainty from the largest project in the company’s history.

“The ability to move forward with the project is a clear positive,” analyst Jennifer Rowland with Edward Jones said in an e-mail. “2018 is a big year of execution for Enbridge, and they are indeed executing on key items … that should restore investor confidence.”

The stock moved up 45 cents to close at $46.84 on Wednesday, its highest point since January.

Concerns about the overall level of debt and complexity of Enbridge’s corporate structure have been hanging over the company, but some investors believe the string of recent announcements mark real progress.

“They’re doing all the things they need to do to extricate themselves from the penalty box, so I just think we need the market to recognize that,” said Jennifer Stevenson, vice-president and energy portfolio manager at 1832 Asset Management, which owns Enbridge stock.

Martin Pelletier, a portfolio manager at TriVest Wealth Counsel, which also owns shares in the pipeline company, said the latest sale will provide Enbridge with cash for growth projects, while Brookfield obtains high-quality energy assets in Western Canada.

“They’re taking steps to mitigate some of the concerns people have had about them in the past about  their balance sheet and their dividend and other areas,” he added.

“It’s been a fantastic week for Enbridge.”

Chris Varcoe is a Calgary Herald columnist.

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