Enbridge May Face Tougher Fight for Oil Barrels, Lower Rates, After Pipeline Ruling

WINNIPEG, Manitoba (Reuters) — A Canadian regulator's rejection last week of Enbridge's 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 on Friday, saying the change would have hurt customers without the ability to strike long-term contracts.

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 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." 

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