Olivia Woods
Last week, a Canadian regulator rejected Enbridge Inc’s plan to sell long-term space on the country’s largest oil pipeline, which analysts believe might harm the company’s success.
The Canadian government-owned Trans Mountain pipeline company, which has sold space under long-term contracts for its enlarged capacity and is scheduled to be completed in late2022, may increase market share from Enbridge, which missed the opportunity to obtain shipping contracts for up to 20 years.
As a result of the Canada Energy Regulator’s (CER) decision that Enbridge’s proposed toll was excessive, Enbridge may now charge lower toll rates to its shippers.
As a result of Enbridge’s proposal, which was supported by U.S. refiners, it would have been possible to pre-sell 90 percent of the Mainline’s 3 million barrels per day (bpd).
Due to the expiration of the existing toll agreement, Enbridge will reopen conversations with shippers.
However, the CER concluded that Enbridge’s planned toll would create more returns than it could justify, and as a result, shippers now have the negotiating leverage, according to Tudor Pickering Holt & Co. analyst Matt Taylor.
“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 companies, who already have contracts for Trans Mountain and TC Energy Corp’s Keystone line, welcomed the regulator’s decision to leave the Mainline to ration space in the spot market.
Enbridge proposed its plan two years ago when demand for Canadian pipelines surpassed capacity, lowering oil prices and forcing shippers to demand greater assurance about the movement of crude oil.
Matt Taylor believes the Mainline will lose 130,000 bpd to the extended Trans Mountain in2023, and 10% of its tolling revenue. Those variables might cost Enbridge C$770 million ($604.35 million) in yearly EBITDA, or 5% of total EBITDA, he said.
A transition to Trans Mountain could affect up to 400,000-500,000 bpd of Mainline crude in 2023. That’s 15% of Mainline capacity.
On Monday, Enbridge stock dropped 2.1% to a three-month low in Toronto. The company’s annual investor day is scheduled for Dec. 7
Enbridge indicated on Sunday that it hopes to find an alternative business model to the plan rejected by the CER that will have no meaningful impact on its financial results.
According to Refinitiv data, Enbridge pays a dividend yield of approximately 6.7 percent, which is slightly higher than the industry average of 5.9 percent.
“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.”
Original source material for this article taken from here
GIPHY App Key not set. Please check settings