Enbridge (ENB) to Buy Spectra Energy (SE)

Canadian pipeline operator Enbridge Inc. (ENB) on Tuesday agreed to buy Spectra Energy Corp. (SE) based out of Houston in an all-stock deal valued at about $28 billion US. This deal would create a North American energy-infrastructure giant at a time when growth is challenged by lower oil and gas prices and more stringent regulatory rules. Enbridge mainly distributes gas but is also in the business of alternative energy and power transmission. Its dividend yield around 3.6% may not be as high as other utility companies but most of its growth comes from its appreciating stock price, which is up over 80% over the past 5 year period.

Enbridge has paid dividends for over 60 years to its shareholders, and often increases the dividend every year. The annualized dividend is currently $2.12 CAD per share, which represents the 21st consecutive year of increased dividends for the Company. These increases reflect strong year-over-year growth and the confidence the company has in their future outlook. Despite its strong dividend growth Enbridge continues to maintain its Adjusted Cash Flow from Operations (‘ACFFO’) coverage of their dividend by approximately two times.

A couple of years ago the Canadian government conditionally approved the Enbridge Northern Gateway pipeline project. That was great news for Enbridge investors. But unfortunately the Federal Court of Appeal has overturned the approval of the controversial pipeline project this year after finding the government failed to properly consult the First Nations affected by the pipeline.

“We find that Canada offered only a brief, hurried and inadequate opportunity … to exchange and discuss information and to dialogue,” the ruling says. “It would have taken Canada little time and little organizational effort to engage in meaningful dialogue on these and other subjects of prime importance to Aboriginal Peoples. But this did not happen.” Furthermore, according to some sources, 80% of B.C. residents are opposed to this project. Environmental concerns is another challenge pipeline companies have to deal with. Enbridge invested $925 million CAD in 2015 on pipeline fitness and leakage detection.

This is why Enbridge has decided to grow its business through other means such as acquiring Spectra Energy. The merger would create North America’s largest energy infrastructure company, valued at $127 billion, when it is completed in the first quarter of 2017, both companies said. Spectra Energy Corp is a natural gas infrastructure company. The Company owns and operates natural gas-related energy assets and a crude oil pipeline system connecting Canadian and the United States producers to refineries. It conducts its business in four segments: Spectra Energy Partners, Distribution, Western Canada Transmission & Processing and Field Services.

According to Enbridge, “over the past 20 years, the dividend has delivered average compound annual growth of 10.6%.”The company expects that its highly transparent growth outlook will translate into annual dividend growth of 10% – 12% through 2019. But there could even be more upside depending on the success it has in securing and funding new growth opportunities beyond those included in its $26-billion commercially-secured growth program. After the merger completes, Enbridge shareholders are expected to own about 57% of the combined company, which will be called Enbridge Inc., and the Spectra Energy shareholders will own the remaining 43% of the public company. 95% of all cash flow from the combined company will come from long term contracts that are unaffected by oil and gas prices. Investors of both Enbridge and Spectra seem to be liking the news. Spectra Energy (SE) shares are up 23% in the past 5 trading sessions, while Enbridge (ENB) is also up by 14%.

This author has 40 shares of Enbridge (ENB) shares as of writing this post, but does not own Spectra (SE) shares.