Equitrans & Enbridge: Least And Most Expensive C-Corp Midstreams


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Equitrans Midstream Corporation (NYSE: ETRN) is a natural gas company that has a footprint worthy of a moat in the Appalachian Basin. In addition, it offers investors a very attractive 7.93% dividend yield that is expected to be. covered by almost 3.7 times the distributable cash flow this year.

However, its biggest rising catalyst is also its biggest risk: its MVP project has been constantly plagued by excessive costs and regulatory hurdles. Management is still committed to the project and still believes it will be completed. If successful, ETRN is extremely cheap and should offer a massive advantage to shareholders. However, if it is not successful, the company will suffer a major setback and long-term shareholders could suffer further disadvantages. Given the uncertainty here, it’s no surprise that ETRN is possibly the cheapest C-Corp average opportunity out there.

Similarly, Enbridge (NYSE: ENB) also has an impressive range of medium-sized assets that give it a significant scale and diversification through oil and natural gas, making it an indispensable part of the US energy industry.

Unlike ETRN, however, ENB has a much lower upward and downward profile, as its cash flow profile is much more stable and its growth projects are less significant relative to its existing assets. than those of ETRN. Given its strong position in the industry and the state of growth of elite dividend growth with 27 consecutive years of growth in its dividend payment, it is not surprising that C-Corp’s average opportunity is more expensive in this moment.

In this article, we’ll take a closer look at these two medium-sized companies and share why we consider ENB as a hold and ETRN as a strong speculative buy right now.

Asset portfolios

ETRN has a high-quality collection, transmission and water infrastructure in the region and is in fact one of the largest natural gas collectors in the United States. In addition, it benefits from a symbiotic relationship with EQT Corporation (EQT) that provides it with significant capital and operational efficiencies, including economies of scale in the Appalachian Basin for its collection and processing assets.

More than half of its current revenue comes from fixed-term acquisition or payment contracts with an average duration of 14 years in its collection assets and 13 years in its transmission and storage assets. As a result, its current cash flow profile is quite solid. If / when the MVP is completed and put into service, its revenue from fixed fee collection or payment contracts should exceed 70%.

Meanwhile, ENB has an even more impressive asset profile. It owns the largest crude oil pipeline network in North America through which it moves 25% of the crude oil consumed by the continent. The company also has a growing portfolio of renewable energy generation and plans to expand it in the coming years as part of its energy transition efforts.

In addition to its oil and renewable energy portfolios, ENB is a major player in natural gas. It has the second longest natural gas transmission network in the United States through which 20% of US natural gas moves. It also has the distinction of being the largest distributor of natural gas on the continent.

The result of all this is that ENB not only has huge economies of scale and well-positioned and diversified infrastructure, but also generates extremely stable cash flows. 98% of its cash flows are backed by purchase or payment contracts, based on commissions or hedges, and 95% of its customers are investment grade or equivalent.

Although ETRN has a solid average portfolio, ENB clearly has a higher collective asset portfolio.

Balance sheets

Although the MVP’s extra costs have tightened the balance sheet and forced the company to reduce its dividend, the company is currently generating a free cash flow above the dividends it uses to pay off debt and also has more of $ 2 billion in liquidity available in his revolver. line. Therefore, it should have a solid financial shape in the foreseeable future.

Once again, however, ENB is in much better shape with an industry-leading BBB + credit rating, is on track to achieve a net debt of adjusted EBITDA of less than 4.7x and has plenty of liquidity.

Dividend profiles

The ETRN dividend yield of 7.93% is 199 basis points higher than the ENB dividend yield of 5.92%. ETRN’s dividend coverage of 3.7x is also significantly better than that of ENB, although ENB’s dividend coverage is still quite conservative at 1.56x.

The security profile of ENB’s dividends is further strengthened if its very stable cash flow profile and a much stronger balance sheet with respect to ETRN are taken into account. In addition, ENB has recently achieved 27 consecutive years of dividend growth, while ETRN has no streak of dividend growth and in fact has reduced its dividend and had to significantly reduce its dividend by 2020:

Equitrans dividend
Data by YCharts

As a result, we consider the ENB dividend to be safer than the ETRN dividend. In terms of dividend growth, ENB is likely to achieve better dividend growth in the short term, but if ETRN can successfully complete its MVP project, it could see a big advantage in its dividend payment.

Growth profiles

Similar to the prospects for their respective dividend growth profiles, ETRN’s overall cash flow growth profile depends largely on the MVP’s outcome. If successful, it should increase its EBITDA by 30% ($ 315 million in annual incremental adjusted EBITDA), making it an excellent medium-growth investment. However, if this project falls short, growth is likely to dry up, as the company will have to dump its withheld cash flow to pay off debt at the right balance sheet size.

ENB, meanwhile, has very promising growth prospects with plenty of capital and opportunities to invest in growth as well as incremental mergers and acquisitions. Management has proposed a CAGR of 5-7% DCF per share until 2024, which we consider very achievable.

Risks

ETRN is clearly a much riskier bet right now given its heavy reliance on the outcome of the MVP project.

Beyond this significant risk, both companies face the usual operational risks involved in the execution of pipelines and other medium-sized infrastructure. Because ENB is a much larger player and is involved in both Canada and the United States, its risk of political or regulatory issues is likely to be greater than that of ETRN (apart from the MVP project).

A final consideration when comparing risk factors is the impact of the exchange rate between the Canadian dollar and the US dollar. ENB, as a Canadian company, declares its dividends in Canadian dollars, while ETRN declares its dividends in US dollars.

However, as ENB’s cash flows come from a much more diverse variety of sources, its balance sheet is more solid and its terms of contract and counterparties are stronger than those of ETRN, ENB. it is certainly less risky.

Ratings

The valuation is the only point where ETRN really stands out in relation to ENB. In addition to its 199 basis point higher dividend yield, ETRN is trading at an EV / EBITDA multiple of 2.78 turns lower and also has a DCF multiple price of only 3.44x compared to the ENB, which is significantly higher at 8.29x.

Takeaway inverter

Comparing these two stocks is hard to do because ETRN is extremely cheap and has a much higher return than ENB, but it also has a considerable risk between its less solid balance sheet and the uncertain outlook for its massive MVP project. Meanwhile, ENB generates profit as cash flows and has very stable growth prospects along with a decent return. That said, its rating multiples make it seem a bit stretched right now.

For investors looking to get a home run in the middle space and are optimistic / cross management’s narrative about ETRN’s chances of getting the MVP completed and in service relatively close to the schedule and the current cost estimate, ETRN is a good buy here. However, we would warn investors that it is still a speculative investment and that not putting MVP into service at a reasonable cost and time could result in an additional dividend cut.

ENB, on the other hand, seems like a safe place to hide during the current macroeconomic and geopolitical storm, but the assessment is not very attractive. As a result, we see it as a hold, but a worthwhile portfolio for conservative investors of dividend growth.



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