The Enbridge company logo is seem at its annual meeting in Calgary on May 12, 2016.Jeff McIntosh/The Globe and Mail
For the past few weeks, the burning question swirling around Enbridge Inc. has not been whether to raise cash, but how: Sell assets or sell new shares?
The surprising answer came from management late Wednesday: We'll do both.
Enbridge shares jumped 6 per cent Thursday after the company announced plans to shed $3-billion in assets in 2018 and said it would sell $2-billion in shares immediately – $1.5-billion by the parent company and $500-million by subsidiary Enbridge Income Fund Holdings Inc.
The company is also throttling back dividend growth. Enbridge said the quarterly payout would jump by 10 per cent next year, and by the same rate through 2020. It had previously targeted annual increases of 10 per cent to 12 per cent through 2024.
The financial moves are aimed at allaying concern about the company's ability to fund increasing payouts to investors while at the same time completing $22-billion in major growth projects.
Before releasing results of its strategic review, shares of the Calgary-based company were down 7 per cent since its last earnings release in early November.
The stock had dropped about 19 per cent since it acquired rival Spectra Energy for $37-billion in September, 2016.
The megadeal marked an expensive bet by chief executive officer Al Monaco to diversify the company away from its main oil-pipeline business by adding more natural gas infrastructure to its portfolio – at a time growth prospects in the oil sands have slowed considerably.
Early on, investors appeared to like the deal, but they grew concerned about the dividend and cash flow, especially as big-ticket projects in the company's hefty backlog face pushback from environmentalists and regulators.
Delays to its marquee pipeline projects could undermine rosy cash-flow projections, making it harder to sustain future dividend increases through organic growth alone, said Samir Kayande, analyst at RS Energy Group.
In September, the company said costs for just the U.S. portion of its Line 3 oil pipeline replacement have jumped 12 per cent from earlier estimates to $2.9-billion (U.S.). The project is awaiting final clearances from regulators in Minnesota.
"The one thing that I would be concerned about is: What is the line of sight to the cash-flow harvest that's going to be coming?" Mr. Kayande said Thursday. "If you need to issue equity in order to increase your dividend, that's just a little bit weaker than counting on internally generated cash flow."
Enbridge had also diluted existing shareholders a number of times in the past few years, mostly with the all-stock purchase of Spectra, but also with equity raises. The company sold $2.3-billion (Canadian) of new shares in early 2016.
The alternative was to divest more assets. As of early November, Enbridge had already unloaded $2.6-billion of them this year. Some research analysts believed more could be sold, a preferred option over raising more equity because the assets have been getting premium prices.
"We continue to believe that selling mature assets at elevated multiples and redeploying that capital into growth initiatives is an attractive way to drive 'per share' growth," RBC Dominion Securities analyst Robert Kwan wrote in early November.
"We prefer asset sales over a large equity issuance at [Enbridge]," BMO Nesbitt Burns analyst Ben Pham wrote a few weeks ago, adding that recent weakness in the stock price presented a "once in a multi-year buying opportunity."
As part of its strategic review, Enbridge is taking their advice, putting a for-sale sign on $10-billion in assets it deems "non-core" to its business. They include unregulated onshore renewable-energy projects and some natural gas processing infrastructrue.
But management decided asset sales weren't enough, adding in the big equity issues. The parent company is now selling new shares at a weaker level, making the deal more dilutive than it would have been a few months back.
Yet if there's one thing energy companies have had to learn since the oil price started to crash in September, 2014, it's the need to get ahead of any foreseeable problems. Investors will hammer them if they don't.
Indeed, debt is starting to form a bit of a cloud over Enbridge, and it isn't some theoretical problem. DBRS Ltd. pegs consolidated debt, including Enbridge's subsidiaries, at $62.5-billion. The company said Wednesday it is targeting debt reduction of $4-billion in coming years.
But delays to major pipelines or hiccups selling assets could slow those plans, said Michael Rao, managing director with the rating agency. "One of the biggest issues with Enbridge is the size of their capital program and how much funding they need to do over a relatively short period of time," he said.
"To the extent that projects get delayed, obviously that would not be helpful [in terms of] getting the balance-sheet reduction at the end."
Such concerns were spelled out by Moody's Investors Service in October. It downgraded subsidiary Enbridge Income Fund to Baa3 from Baa2, reflecting "very high levels of leverage and ongoing execution risk on the Line 3 Replacement project," the agency wrote. "The negative outlook remains in place until the company achieves a ratio of debt-to-earnings before income, taxes, depreciation and amortization below six times on a sustained basis." The ratio at the time of the downgrade was 6.7 times.
Moody's also has a negative outlook on the parent company, partly because debt was added through the Spectra acquisition. Although this outlook doesn't necessitate a looming downgrade, it's enough to make management concerned – especially because Enbridge really values its investment grade rating.
"We fully appreciate the cost of capital benefit that comes with four strong investment-grade credit ratings at the parent company," chief financial officer John Whelen said on a conference call in early November.
Now, Enbridge is selling $1.5-billion in new shares by way of a private placement to three institutional investors, and the subsidiary income fund is also raising $500-million in equity. Maybe it isn't necessary in the long-run, but the deals will help to stave off any short-term fears, as the company takes the steps necessary to keep those dividend increases coming.