Acquisitions Will Create North America's Largest Gas Utility Franchise By 2024

Key Takeaways

• Strategic expansions in gas and renewables are expected to drive revenue and earnings growth through diversified projects and improved operational efficiencies.
  
• Major acquisitions and project expansions aim to strengthen Enbridge's market position and financial metrics, enhancing shareholder returns and sustainability.
  
• Political, regulatory, and economic risks, along with project delays and rising interest rates, could affect Enbridge's costs, revenues, and financial targets.

Catalysts

Operates as an energy infrastructure company.

• The acquisition of three premier U.S. natural gas utilities creates the largest gas utility franchise in North America, which is expected to significantly increase revenue and earnings through expanded market reach and customer base.
  
• Strategic tuck-in acquisitions in the Permian and Gulf Coast regions are anticipated to boost Enbridge's integrated oil and gas footprint, potentially increasing revenue and improving net margins due to economies of scale and enhanced operational efficiencies.
  
• The addition of over $8 billion in organic projects to Enbridge's backlog indicates robust growth potential and a diversified project portfolio, likely boosting future revenue streams and long-term earnings.
  
• The expansion of renewable projects, including significant solar and wind investments, is set to enhance Enbridge's revenue and earnings, leveraging high-quality power purchase agreements and supporting sustainability goals, potentially leading to higher margins.
  
• Full integration and operation of new assets acquired in 2024 are expected to positively impact financial metrics, with expected increases in EBITDA and improved debt-to-EBITDA ratios, which should enhance earnings and shareholder returns.

Enbridge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enbridge's revenue will decrease by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.4% today to 15.0% in 3 years time.
• Analysts expect earnings to reach CA$7.2 billion (and earnings per share of CA$3.24) by about March 2028, up from CA$5.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$5.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, down from 27.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 2.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Enbridge Future Earnings Per Share Growth

Risks

• The impact of potential tariffs on Enbridge's infrastructure and trade relations could increase costs and create uncertainties in demand elasticity, affecting future revenues and net margins.
  
• Increasing political and regulatory risks, such as the need for more indigenous consultation and regulatory approvals, might delay projects like new or revived pipelines, impacting capital allocation and potential revenue growth.
  
• Economic growth concerns due to tariffs possibly affect energy demand, which could negatively impact Enbridge's future revenues and earnings.
  
• Rising U.S. interest rates could lead to higher financing costs for Enbridge, potentially decreasing net margins and earnings.
  
• Delays in renewable energy projects, evident from later-than-expected timelines in Europe, could hinder Enbridge's ability to meet financial targets and revenue diversification goals.

Valuation

• The analysts have a consensus price target of CA$65.079 for Enbridge based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$75.0, and the most bearish reporting a price target of just CA$56.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$47.9 billion, earnings will come to CA$7.2 billion, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 8.4%.
• Given the current share price of CA$63.44, the analyst price target of CA$65.08 is 2.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.