Enbridge's Strengthening Balance Sheet Provides Additional Support for Dividend

Nearly a year ago, Enbridge completed the Line 3 Replacement Project after overcoming various regulatory challenges and delays.

Line 3 represented the largest project in the company's history as Enbridge replaced the aging 1,097-mile pipeline and doubled its capacity to connect crude oil from Canada to pipelines that head to the U.S. Gulf Coast.

Thanks largely to the cash flow contributed from this multibillion-dollar project, Enbridge is on track to exit 2022 near the bottom of its 4.5x to 5.0x debt-to-EBITDA leverage ratio range, down from 6.0x at the end of 2016.

In recognition of Enbridge's continued progress strengthening its balance sheet, we are upgrading the midstream company's Dividend Safety Score from Borderline Safe to Safe.

Looking ahead, Enbridge sees potential to invest up to $6 billion per year in organic growth opportunities, including modernizing its regulated utility and gas transmission businesses.

While this spending rate is much less than the $14 billion of projects Enbridge placed into service in 2021, it should support 5% to 7% distributable cash flow per share growth over the next few years and ensure the firm remains in solid financial shape.

Enbridge will fund the majority of this spending using retained cash flow, made possible by the company's healthy payout ratio which sits in the middle of management's 60% to 70% target range.

With a self-funding business model requiring no need to issue equity and a diverse set of moderately sized growth projects, Enbridge appears well positioned to execute on its plans.

Income investors can expect Enbridge's dividend to track underlying growth in the firm's distributable cash flow. A 4% or 5% dividend increase seems like a reasonable bet in early December when Enbridge has historically announced changes to its payout.

Overall, Enbridge remains one of the fundamentally strongest companies in the midstream space, with minimal direct exposure to commodity prices, a strong credit rating, diversified cash flow streams, and essential infrastructure responsible for moving about 25% of oil produced in North America and 20% of the natural gas consumed in the U.S.

While fossil fuels demand may face a downward trajectory over the long term, Enbridge's midstream assets seem likely to remain utilized for many years to come as the energy transition plays out gradually.
 
We will continue monitoring Enbridge's position as the industry evolves and provide updates as needed.