Enbridge dives as market frets over funding for $14 billion Dominion deal

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Enbridge dives as market frets over funding for $14 billion Dominion deal © Reuters. The logo of Calgary-based Enbridge, one of North America’s largest energy infrastructure companies, is displayed during the LNG 2023 energy trade show in Vancouver, British Columbia, Canada, July 12, 2023. REUTERS/Chris Helgren/File Photo

By Mrinalika Roy

(Reuters) -Enbridge shares tumbled nearly 7% to an over four-year low on Wednesday, as some analysts questioned the financial impact of the Canadian pipeline operator’s surprise $14 billion bid for three utilities from Dominion Energy (NYSE:).

The move to acquire East Ohio Gas, Questar Gas, and Public Service Co of North Carolina would double Enbridge (NYSE:)’s gas distribution business and make it the largest gas utility by volume in North America, with the unit accounting for a bit less than a fourth of the company’s overall business mix.

The deal is seen as a bet on the future of in a regulated market even as energy companies and consumers transition to a greener future by phasing out fossil fuels.

But some analysts were surprised at the timing, the scale and impact such a deal would have on the company’s already leveraged balance sheet.

Enbridge said the deal would deploy some of its near-term balance sheet capacity, making the company more selective on how it carries out investments.

Late on Tuesday, Moody’s (NYSE:) cut Enbridge’s outlook to negative.

“I do think the market was caught a bit off guard, as this wasn’t on my bingo card,” Morningstar analyst Stephen Ellis said. “Management had a realistic approach towards allocating capital, so a smaller transaction (perhaps a deeper investment in Canadian LNG?) would have been more expected,” Ellis said.

Separately, pipeline operator Williams Companies (NYSE:) CEO Alan Armstrong said the company was not interested in the three utilities Enbridge has offered to buy as the return rate would be too low.

“We have this rate base that’s investable at a higher return than those local distribution companies offer in terms of incremental returns … that kind of lower return doesn’t make a whole lot of sense for us,” Armstrong said at the Barclays CEO Energy-Power Conference in New York.

Enbridge announced the deal just over a month after CEO Greg Ebel told analysts the company saw “tuck-in” acquisition opportunities “across the board”.

In a note, analyst Ellis called the acquisition a “defensive move” and said despite the size of the deal, Enbridge left its 5% annual EBITDA growth expectation over the medium term unchanged, which suggests that the earnings contribution is “replacing weaker results on the liquids side of the business”.

By late morning, Enbridge shares were down 5.5% at C$45.50, while the benchmark Canadian share index was off 0.5%. Rival TC Energy (NYSE:) was down 2.8%. Enbridge is selling new shares at a discount of 7.2% to its Tuesday close to part-fund the transaction.

“While Enbridge paid a reasonable price, high leverage and funding gap could act as overhang,” Wells Fargo analysts said in a note.

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