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Enbridge investors cheer Mainline overhaul despite Canadian producer protests


Enbridge Inc’s plan to overhaul contracts on its Mainline pipeline system has outraged many Canadian shippers but is cheered by investors who see monetizing existing infrastructure as a safer bet than trying to build new pipelines.

The Mainline is North America’s largest pipeline network, transporting nearly 3 million barrels per day, or 70%, of crude from western Canada to the U.S. Midwest.

Many shippers opposed say Enbridge is abusing its market power and the changes will hurt Canadian producers by imposing unfair terms and tolls. The proposed revamp comes at a time when export pipeline capacity is so constrained the Alberta government has curtailed production to support crude prices.

Regulatory hurdles and well-organized environmental opposition are clogging up North American pipeline projects. Enbridge is facing U.S. court challenges on its aging Line 3 and Line 5 pipelines, and delays dog the proposed government-owned Trans Mountain expansion and TC Energy’s Keystone XL.

Contracting out the Mainline would be a smart move to lock in revenue while the Trans Mountain (TMX) and Keystone XL (KXL) projects are still uncertain, investors said. If those projects go ahead and the Mainline remains a so-called “common carrier” system relying on monthly nominations, it could see volumes dip.

“Under scenarios in which KXL is going to be built and TMX, the Mainline is going to be the pipe of last resort,” said Ryan Bushell, president of Newhaven Asset Management, which holds shares in Enbridge and Canadian Natural Resources Ltd .

“Given how hard it is getting (new pipelines) done, Enbridge should be able to contract the Mainline out as they see fit.”

Enbridge proposes switching to long-term fixed-volume contracts instead of monthly nominations on 90% of Mainline capacity in 2021 when its current tolling arrangement expires.

OPEN SEASON DISPUTE

The Mainline contributes 30% of Enbridge’s adjusted earnings before interest, tax, depreciation and amortization, according to the latest quarterly report.

“We are confident that Mainline contracting is supported by shippers representing a majority of our volumes,” Enbridge spokesman Jesse Semko said, adding the company makes decisions in the best interest of customers and shareholders.

The company launched a two-month open season to solicit bids for capacity on Aug. 2. Since then, some of Canada’s biggest producers, including Canadian Natural and Suncor Energy , have complained about the plan and dozens of shippers wrote to the Canada Energy Regulator (CER) last week about whether it should intervene in the open season.

Some shippers argue the Mainline should remain a common carrier pipeline open to all customers, as legislated in Canada’s 1949 Pipelines Act. Other shippers and investors say it is Enbridge’s asset to monetize as it wants.

A number of investors also own shares in Canadian oil producers.

“If you’re Enbridge, why wouldn’t you try to make this as profitable for you as possible? I’m rooting for (any compromise) to be bended toward Enbridge, just because it’s relatively more important to them,” said Bruce Campbell, chairman of Campbell, Lee & Ross, which holds Enbridge and Suncor.

Enbridge has already lowered oil-shipping requirements on the Mainline contracts by two-thirds. The move came after smaller producers complained they would struggle to meet the initial volume requirements.

Enbridge shares have gained 8% year-to-date, and Newhaven’s Bushell said they would be stronger if not for ongoing uncertainty about Line 3 and Line 5 legal challenges. Rival TC Energy is up 39% over the same period.

GMP FirstEnergy analysts said so far the dispute over the Mainline changes had not impacted Enbridge stocks.

“When you’re investing in a utility, you’re looking for contracted revenue and therefore contracted cash flow. As an investor from the Enbridge perspective, we like it,” said Stephen Kallir, vice-president of investments at BlueSky Equities.



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