Why Enbridge's new CEO isn't sweating inflation
Company aims to spend $18 billion on projects through its secured multi-year capital program
The new boss at Canadian pipeline giant Enbridge (ENB.TO)(ENB) is not among the executives wringing their hands over stubbornly high inflation as rising costs rip through balance sheets.
Greg Ebel, who replaced Al Monaco as Enbridge's chief executive officer on Jan. 1, struck a reassuring tone on the topic as the Calgary-based energy infrastructure company reported fourth-quarter financial results earlier this month.
Enbridge, he says, is in "a good spot from an inflationary perspective," bolstered by long-term contracts, favourable commodity prices, and the ability to grow without spending on costly new projects.
A self-described "glass-half full" guy, Ebel's comments come as Canada's central bank takes a "conditional pause" to decide if more rate hikes are needed to tame rising prices. On Tuesday, Statistics Canada said the inflation rate eased to 5.9 per cent in January, still well above the Bank's two per cent target.
For Ebel, this is no time to build from scratch.
"In an inflationary environment, when it comes to infrastructure, you want to do brownfield projects, not greenfield. In other words, going over ground that you've gone over before. You want to be building on your existing right-of-way," he told Yahoo Finance Canada in an interview. "That's what we're doing for a lot of our projects."
Enbridge's vast footprint includes the world's longest crude oil and liquids transportation system, a pipeline that moves roughly 20 per cent of all natural gas consumed in the U.S., a growing portfolio of renewable energy assets, and a gas distribution and storage business. Ebel aims to spend $18 billion on projects through Enbridge's secured multi-year capital program, with planned in-service dates stretching into 2028.
Energy and resource-related projects in Canada were notorious for delays and cost overruns prior to the current inflationary flare-up. Today seems no different.
The Trans Mountain project, which by the way isn’t built yet, was supposed to be in-service in December of 2019 . . . We’ve got the best lane out of town.Enbridge CEO Greg Ebel
Earlier this month, TC Energy (TRP.TO)(TRP) upped the expected price tag for its Coastal GasLink pipeline project to $14.5 billion, more than double its original estimate from 2018. Upon completion, the artery will feed the Shell-led LNG Canada plant on the British Columbia coast. More cost increases have not been ruled out.
Last February, the government-owned Trans Mountain pipeline expansion project announced the new cost of the project to boost the flow of oil from Alberta to the West Coast was an estimated $21.4 billion, up from an earlier estimate of $12.6 billion.
For infrastructure players like TC Energy and Enbridge, the revenue side of the balance sheet is far more predictable than controlling costs and managing construction timelines. Each benefits from nearly all of their revenue flowing through cost-of-service or contract agreements largely shielded from inflation.
However, Enbridge is locked in negotiations with shipping customers on a new tolling plan for its Mainline pipeline. The system is Canada's largest oil conduit, moving western Canadian crude to markets in eastern Canada and the U.S. Midwest.
Two options are on the table. The first, a negotiated agreement somewhat similar to the one that expired in 2021. The second, a cost-of-service structure that would shift inflation and other risks onto customers. Ebel told analysts on Feb. 10 the shippers continue to prefer the former option. Enbridge says each option is acceptable.
RBC Capital Markets analyst Robert Kwan believes Enbridge could build an even stronger moat against inflation under a cost-of-service scenario. However, he notes that would likely mean lower tolls overall.
"A cost-of-service framework would de-risk the company's largest asset," he wrote in a November research note. "If costs go up, whether via inflation or otherwise, tolls go up. Rising interest rates (tolls would rise to recover higher interest expense), or changes in tax rates (tolls increase to recover higher taxes)."
The massive Mainline system factored into a recent downgrade from Credit Suisse analyst Andrew Kuske. He raises the prospect of "fading returns" once the Trans Mountain Expansion Pipeline comes into service, adding more than half a million barrels per day of pipeline exit capacity from Canada's energy patch. The project is expected to begin operations in the final quarter of this year. Enbridge says its Mainline system currently moves 2.85 million barrels a day.
As with inflation, Ebel is confident that Enbridge's size will again shield it from potential threats.
"The Trans Mountain project, which by the way isn't built yet, was supposed to be in-service in December of 2019. So we have long prepared for any changes in volume. I don't see that as problematic for us from a longer-term perspective," Ebel said. "We've got the best lane out of town."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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