Enbridge may face tougher fight for oil barrels, lower rates, after pipeline ruling

Canada Energy Partners

30/11/2021 11:00

By Rod Nickel
    WINNIPEG, Manitoba, Nov 30 (Reuters) - A Canadian
regulator's rejection last week of Enbridge Inc's   ENB.TO  plan
to sell space long-term on the country's biggest oil pipeline
dealt the company a double whammy that analysts say could hit
its bottom line.
    Enbridge lost a chance to secure shipping contracts for as
long as 20 years, and could lose volume to its rival, Canadian
government-owned Trans Mountain, which has sold space under
long-term contracts for its expanded capacity that is due for
completion in late 2022.  
    Enbridge may also end up charging lower tolling rates to its
shippers, after the Canada Energy Regulator (CER) found that
Enbridge's proposed toll was unreasonable.
    Calgary-based Enbridge's proposal, supported largely by U.S.
refiners that control most of the Mainline's volume, would have
allowed it to pre-sell 90% of space on the
3-million-barrel-per-day (bpd) Mainline, instead of rationing it
monthly. 
    CER rejected the plan https://www.reuters.com/business/energy/canadian-regulator-rejects-enbridge-plan-contract-oil-pipeline-space-2021-11-26
 on Friday, saying the change would have hurt customers without
the ability to strike long-term contracts.  urn:newsml:reuters.com:*:nL1N2SH28O
    Enbridge said it will now reopen discussions with shippers
on a new tolls agreement, after the previous one expired.
    But shippers hold the negotiating leverage after the CER
found Enbridge's proposed toll would generate greater returns
than it could justify, said Matt Taylor, analyst at investment
bank Tudor Pickering Holt & Co.
    "They've lost out on an opportunity to substantially
contract, and on the toll side it's been made known that they've
been earning really good rates of return that probably need to
be right-sized," he said.
    Many Canadian oil producers, who already have contracts for
Trans Mountain and TC Energy Corp's  TRP.TO  Keystone line,
cheered the regulator decision to leave the Mainline to ration
space on the spot market.
    Despite the loss, the Mainline remains crucial - it connects
Western Canada's crude with its top market, the U.S. Midwest.
Trans Mountain's expanded capacity will connect Canadian crude
to the U.S. West Coast and potentially Asia.
    Enbridge made its proposal two years ago when demand for
Canadian pipelines exceeded capacity, depressing oil prices and
prompting shippers to demand greater certainty about moving
crude.
    Taylor estimates the Mainline will lose an additional
130,000 bpd to the expanded Trans Mountain in 2023 without
contracts, and 10% of its tolling revenue under lower rates.
Those factors combined could cost Enbridge C$770 million 
($604.35 million) in annual EBITDA, or 5% of its total EBITDA,
unless the company can increase earnings in other ways, he said.
    National Bank of Canada sees some 400,000-500,000 bpd of
Mainline crude at risk of switching to Trans Mountain in 2023.
That volume would represent some 15% of Mainline capacity.
    RBC lowered its price target for Enbridge after the ruling,
saying it now expected to see lower earnings per share for the
next two years than it previously forecast.
    Enbridge shares fell 2.1% to a three-month low in Toronto on
Monday. The company is scheduled to hold its annual investor day
on Dec. 7.
    Enbridge said on Sunday that it expects to find an
alternative commercial model to the proposal that the CER
rejected, that does not materially affect its financial results.
It said it expects Mainline volume to remain strong.
    Enbridge is attractive to yield-hungry investors and it
plays a central role in an oil and gas industry in which demand
is expected to be strong for years to come as the energy
transition takes time, said Darren Sissons, portfolio manager at
Campbell Lee & Ross.
    Enbridge offers a dividend yield of about 6.7%, compared
with an industry average of 5.9%,  according to Refinitiv data.
    "We recognize the risk of what happened here," Sissons said.
"But when you think about the broader context of what is oil in
the global economy, you can't just shut it off." 
 ($1 = 1.2741 Canadian dollars)

 (Reporting by Rod Nickel in Winnipeg
Editing by Denny Thomas and Matthew Lewis)
 ((rod.nickel@tr.com; Twitter: @RodNickel_Rtrs;
1-204-230-6043;))