I’ve been writing about Enbridge (NYSE: ENB) and their process of re-acquiring their daughter entities, including EEP, EEQ and ENF. They already formalized the arrangement with Spectra Energy Partners (NYSE: SEP), which I wrote about earlier.
For EEP, I was anticipating a slightly higher exchange ratio (0.35 vs. the 0.335 offered).
I own call options in EEP. Valuation-wise they should trade like call options in Enbridge, with a minor dividend differential (EEP will declare one more $0.35 distribution for the quarter which option holders will effectively receive by virtue of the exchange arrangement, which will be offset by Enbridge’s quarterly dividend).
Enbridge is getting a steal of a deal on EEP – once the Line 3 expansion project becomes operational (scheduled for 2019 and unlike Trans-Mountain, the regulatory way has already been cleared for construction), the amount of cash flows available will be even more immense than the existing $6.6 billion/year they are currently doing (just eyeballing their June 30, 2018 financial statements). Once stripped of all the politics and drama of pipeline construction, it is a pretty boring company to analyze, but one that is a reasonably valued blue chip component in anybody’s portfolio. The fact that there is so much protection in the industry will assist, in addition to them being able to raise rates at the rate of inflation, while paying down their debt in nominal dollars.
Enbridge is also the type of company that would be able to survive an economic recession – as long as the oil flows. And oil will be flowing for a very long time.
I’m holding onto my call options in EEP. They expire in 2019 so I am in no rush to liquidate the position – as ENB appreciates (and it will), the call option position will also reflect this. I can see ENB heading to around CAD$48-50/share by the end of the year which would put EEP at around $12.60 with a 0.77 CAD/USD. Once I’ve squeezed another dollar out of the position I’ll probably sell the options.