BMO Capital Bets on a Rebound for Enbridge (ENB)

Enbridge Inc. (NYSE: ENB ) has declined by around 17% since hitting its record high in May, likely as a result of rising bond yields, lack of visibility on the company's 5% growth guidance through the end of the decade, and the recently closed equity offering intended to fund the midstream operator's strategic acquisitions.

However, BMO Capital sees this pullback as an opportunity and on September 15, the firm upgraded ENB from 'Market Perform' to 'Outperform', while also slightly raising its price target from C$79 to C$79.50. The target boost implies an upside of 18% from the current levels.

The analyst believes that Enbridge's scale, limited commodity exposure, and diversified assets are underappreciated. BMO also cited the company's improving visibility on growth, robust backlog, opportunistic acquisitions, and improved balance sheet as reasons behind the upgrade.

Enbridge's aggressive expansion strategy adds significantly to its bull case. The company announced on September 9 that it would acquire Tallgrass Energy's crude oil business for $2.55 billion in ​cash, expanding its US liquids pipeline network by buying a majority ‌stake in the Pony Express Pipeline and other assets. The midstream operator expects the acquisition to be accretive to distributable cash flow per share in the first full year of ownership.

Similarly, Enbridge announced last month that it had agreed to acquire Salt Creek Midstream's crude oil gathering business ​for $600 million in cash, further bolstering its presence in the prolific Permian Basin. The acquired assets have an average ​remaining contract life of about 10 years, ​providing ⁠stable long-term cash flows.

The company's C$41 billion of secured growth ​backlog also provides a substantial base of projects already identified for future investment. Enbridge has already approved approximately C$9 billion of projects this year, and has sanctioned up to C$20 billion in projects to drive revenue and earnings growth through the end of the decade.

Lastly, it needs mentioning that Enbridge has a low-risk, utility-like business model, with 98% of its cash flow coming from long-term, inflation-protected, rate-regulated contracts. It also has an attractive dividend yield of 5.78% and has grown its quarterly payout for 31 consecutive years. This makes it a strong option for income-oriented investors.

The primary concern is that Enbridge's improved growth visibility comes with substantial capital requirements and some dilution. The company recently closed a C$3 billion equity offering, with the proceeds going towards partially funding its announced acquisitions and creating financial flexibility to fund potential future growth opportunities. While the offering reduces the company's reliance on incremental debt, it dilutes the per-share cash flows unless the acquired assets and new projects can generate sufficient returns.