Enbridge (NYSE: ENB) is the largest energy infrastructure company in North America. It operates a diverse set of businesses including oil and gas pipelines, utilities, renewable power plants, and a whole host of other assets. That said, despite the diversity of its asset base, at its core Enbridge is an oil pipeline company, which is how it makes most of its money. Here's a closer look at that segment and what to expect from it in the future.
The oil superhighway
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Last year Enbridge generated 7.5 billion Canadian dollars ($5.9 billion) in earnings before interest and taxes (EBIT) on a pro forma basis that includes the recently closed acquisition of Spectra Energy. Of that amount, 50% came from its liquids pipelines segment. That percentage had been over 75% as recently as 2015, but has come down thanks to the addition of the gas-focused Spectra to its portfolio.
One reason why Enbridge makes so much money operating oil pipelines is that it runs the longest and most sophisticated crude oil and liquids transportation system in the world, with 17,511 miles of active pipe. For perspective, that's enough pipe that if laid end-to-end could stretch from the company's headquarters in Calgary to Perth, Australia, with enough pipe left over to go from Calgary to Mexico City and back again. The company currently transports an average of 2.8 million barrels of crude per day across that network, which is 28% of the oil produced in North America. Furthermore, Enbridge supplies about 64% of U.S.-bound Canadian oil exports, which amounts to about 28% of America's total oil imports.
Enbridge collects relatively steady income by operating these pipelines because long-term take-or-pay and cost-over-service agreements underpin the bulk of its assets. As a result, the company has minimal exposure to volume fluctuations since its contracts mandate that it gets paid whether or not customers use the contracted capacity. In fact, only 4% of the company's total EBIT has any direct exposure to volumes.
Building more toll booths
While Enbridge already holds the title of North America's largest energy infrastructure company, it has no plans to stop expanding. In fact, the company has already secured CA$31 billion ($24.5 billion) of growth projects that should enter service through 2020. The company currently has nine liquids-focused projects underway that account for about half of the value of its backlog. About CA$5.2 billion ($4.1 billion) of its projects should enter service by the end of this year, including Norlite and the Wood Buffalo Extension, which it's building to support Suncor Energy's (NYSE: SU) Fort Hills oil sands project in Canada. The 277-mile Norlite pipeline will ship diluent -- which is a product that makes heavy oil lighter and easier to ship -- to the region so that Suncor can mix it with the bitumen it produces at Fort Hills and then ship the diluted bitumen out of the area via the 66-mile Wood Buffalo Extension.
Meanwhile, Enbridge's largest liquids pipeline project is its Line 3 Replacement, which will return the line up to its original capacity of 760,000 barrels per day after having operated at about 50% for the last several years. The Canadian segment will cost it CA$5.3 billion ($4.2 billion) while the U.S. portion should run it $2.9 billion. If construction goes as planned, the company should finish the project by the middle of 2019.
Enbridge's current slate projects have the potential to generate more than CA$3.5 billion ($2.8 billion) of earnings on an annualized basis by 2020. The liquids pipelines projects represent about half that growth, with Line 3 alone supplying more than half of the segment's increase. Suffice it to say, liquids pipelines should remain Enbridge's biggest moneymaker unless it makes another significant gas-focused deal.
A key cog supporting the dividend
Enbridge's liquids pipeline segment is vital to the company given that it supplies half of its earnings and is on pace to support a similar share of its growth over the next several years. If everything goes according to plan, then the company should have no problem achieving its long-term dividend growth target to expand the payment by a 10% to 12% compound annual growth rate through 2024. That said, if Enbridge runs into issues along the way, especially with its important Line 3 Replacement project, then it could impact the company's dividend growth forecast. Income investors should keep a close eye on that project.
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