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Enbridge's Take-or-Pay Contracts: Stability in Volatile Energy Market?
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Key Takeaways
ENB generates 98% of EBITDA from regulated or take-or-pay contracts, minimizing market volatility
More than 80% of ENB's profits come from assets wherein it can raise fees, helping offset rising costs.
New pipelines like Matterhorn and Traverse add stable revenues via contracts with investment-grade shippers.
The minimization of commodity price volatility and volume risks in Enbridge Inc.’s (ENB - Free Report) business model stems from regulated or take-or-pay contracts, which support 98% of its EBITDA. Further, more than 80% of this midstream energy firm’s profits are generated from activities where the company can automatically raise prices or fees. Thus, ENB, a leading midstream energy player, is keeping pace with rising costs, which, in turn, protects its earnings and dividend payments even in a high inflationary environment.
This stability in the business model is contributing to its investment-grade credit rating while providing long-term visibility into cash flows.
To get into details, Matterhorn Express Pipeline and Traverse Pipeline are getting particular attention. Both pipeline networks in which ENB is involved transport natural gas to the key end markets like the U.S. Gulf Coasts from the Permian, the most prolific basin in the United States. Since these pipelines operate under take-or-pay contracts, they are not vulnerable to volume risks.
Also, the shippers that reserve capacities on the pipelines are investment-grade counterparties, meaning they are both financially strong and creditworthy players. Hence, the take-or-pay contracts reflect ENB’s stable business model with steady fee-based revenues that are immune to the volatile and uncertain energy business.
Two Other Midstream Stocks With Stable Business Models: KMI, EPD
Like Enbridge, the business models of Kinder Morgan (KMI - Free Report) and Enterprise Products Partners LP (EPD - Free Report) are backed by stable fee-based revenues.
Kinder Morgan’s position as a leading midstream service provider is reinforced by a network of pipeline and storage assets that operate under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenues.
Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. Supported by its stable and resilient business model, EPD has achieved more than two decades of distribution hikes across various business cycles.
ENB’s Price Performance, Valuation & Estimates
Shares of Enbridge have gained 37.3% over the past year, outpacing the 35.9% rally of the composite stocks belonging to the industry.
Image Source: Zacks Investment Research
From a valuation standpoint, ENB trades at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 15.36X. This is above the broader industry average of 13.95X.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for ENB’s 2025 earnings hasn’t been revised over the past seven days.
Image: Bigstock
Enbridge's Take-or-Pay Contracts: Stability in Volatile Energy Market?
Key Takeaways
The minimization of commodity price volatility and volume risks in Enbridge Inc.’s (ENB - Free Report) business model stems from regulated or take-or-pay contracts, which support 98% of its EBITDA. Further, more than 80% of this midstream energy firm’s profits are generated from activities where the company can automatically raise prices or fees. Thus, ENB, a leading midstream energy player, is keeping pace with rising costs, which, in turn, protects its earnings and dividend payments even in a high inflationary environment.
This stability in the business model is contributing to its investment-grade credit rating while providing long-term visibility into cash flows.
To get into details, Matterhorn Express Pipeline and Traverse Pipeline are getting particular attention. Both pipeline networks in which ENB is involved transport natural gas to the key end markets like the U.S. Gulf Coasts from the Permian, the most prolific basin in the United States. Since these pipelines operate under take-or-pay contracts, they are not vulnerable to volume risks.
Also, the shippers that reserve capacities on the pipelines are investment-grade counterparties, meaning they are both financially strong and creditworthy players. Hence, the take-or-pay contracts reflect ENB’s stable business model with steady fee-based revenues that are immune to the volatile and uncertain energy business.
Two Other Midstream Stocks With Stable Business Models: KMI, EPD
Like Enbridge, the business models of Kinder Morgan (KMI - Free Report) and Enterprise Products Partners LP (EPD - Free Report) are backed by stable fee-based revenues.
Kinder Morgan’s position as a leading midstream service provider is reinforced by a network of pipeline and storage assets that operate under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenues.
Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. Supported by its stable and resilient business model, EPD has achieved more than two decades of distribution hikes across various business cycles.
ENB’s Price Performance, Valuation & Estimates
Shares of Enbridge have gained 37.3% over the past year, outpacing the 35.9% rally of the composite stocks belonging to the industry.
From a valuation standpoint, ENB trades at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 15.36X. This is above the broader industry average of 13.95X.
The Zacks Consensus Estimate for ENB’s 2025 earnings hasn’t been revised over the past seven days.
ENB stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.