However, they warn the Canadian hydrocarbon shipping and utility giant must keep its debt in check while bankrolling a spree of acquisitions.
Calgary-based Enbridge announced a deal to purchase seven existing renewable natural gas facilities in Texas and Arkansas for US$1.2 billion last Friday, as it reported third-quarter financial results. At the same time, it revealed a 625 million euro deal to buy Canada Pension Plan’s stake in two German offshore wind farms. Other recent investments include 10 per cent ownership of a U.S. food waste management company aiming to produce renewable energy.
These pale in comparison to the US$14 billion transaction announced in September for a trio of U.S. natural gas utilities.
Described by CEO Greg Ebel as a “generational opportunity,” the size caught many investors off-guard. He had previously told analysts to expect smaller, “tuck-in” acquisitions. Credit rating agencies S&P Global Ratings and Moody’s cut their outlook on Enbridge following the announcement.
The scale of last week’s acquisition plans was unexpected as well, according to CIBC Capital Markets analyst Robert Catellier.
“If there is a surprise this quarter, it’s the magnitude of tuck-in acquisitions,” he wrote in a Nov. 5 note to clients. “While these deals were no doubt under consideration for some time, and part of the strategy, we were not expecting new investments of this magnitude in light of the remaining funding needs for the pending utility acquisition.”
Enbridge says it has addressed 75 per cent of the funding requirement to buy the three natural gas distribution companies from Dominion Energy (D). The deal is expected to close in phases by the end of 2024.
“The remaining financing needs are very manageable,” Ebel said on a call with analysts last Friday. “[They] can be satisfied with various tools available to us, including the issuance of senior unsecured notes, asset recycling, the reinstatement of Enbridge’s DRIP (dividend reinvestment program), or initiating at-the-market common-share issuance.”
RBC Capital Markets analyst Robert Kwan says details about where these billions of dollars come from will be closely watched by investors eager to hold Enbridge to its debt repayment guidance.
S&P has raised concerns about Enbridge pulling off its funding plan without taking on more debt. The company is targeting a debt-to-EBITDA ratio - a measure of a company's ability to repay debt - in the 4.5x to 5.0x range, at the end of 2023.
“Many investors appear to be taking a cautious approach to the company continuing to deploy capital into tuck-in acquisitions in light of the remaining funding needed for the acquisition of the utilities from Dominion,” Kwan wrote in a Nov. 6 note to clients. “Funding execution is a key focus.”
He cut his price target on Toronto-listed shares to $55 from $60, reflecting a more bearish view on Canada's regulated utility sector at large, while maintaining an “outperform” rating.
CIBC’s Catellier bumped his 12 to 18-month price target to $57 from $56, while also maintaining an “outperform” rating.
Enbridge shares were largely flat in Wednesday’s trading session, falling 0.14 per cent to $46.24 as at 3:25 p.m. ET. The stock has lost about 12.5 per cent in 2023.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.