Al Monaco must convince Enbridge (ENB.TO) shareholders the financial state of his company is far stronger than Bay Street believes.

“This is really a company that is built on a house of cards,” Agilith Capital portfolio manager Patrick Horan – who has been betting against Enbridge shares via a large short position for the past five years – told BNN Bloomberg via telephone on Thursday. “There is just a tremendous amount of leverage, both financial leverage and operational leverage underneath it.”

Calgary-based Enbridge closed its massive $37-billion acquisition of U.S.-based Spectra Energy last year. That pushed its total debt load past $65 billion, but kept the promise of juicy dividend growth alive.

That big pile of cash owed to creditors has since become a growing millstone around Monaco’s neck, causing the stock to lose nearly a fifth of its value since the start of 2018, extending the downward slump that’s been underway since the takeover was announced.

Monaco has a plan for dealing with all that debt, but that plan hinges on the most expensive pipeline project in Enbridge history moving ahead without any hitches. Given the immense political opposition facing any new pipelines today – combined with recent U.S. tax policy changes that a key Enbridge rival called “profound” earlier this week when it slashed its distribution – it will be hard for Monaco to claim his strategy is any stronger than cardstock when he faces investors in Calgary on May 9 unless he provides more details in the coming days.

Right now, Enbridge has what industry analysts call a debt-to-EBITDA ratio of 6.5x. In plain English, that means for every dollar Enbridge makes, it holds six and a half dollars in debt.

Selling roughly $3 billion worth of assets this year is part of the debt reduction plan, though no major sales have so far been announced. Replacing Line 3 – one of six pipes that together ship more than two million barrels of Canadian oil south of the border every day – is also central to bringing that debt ratio down.

The $9-billion project would see the company replace the existing 50-year-old pipeline with new steel along a slightly different route through Minnesota. Several delays have already pushed the project back more than two years from its original late-2017 startup date, and last month the timeline was dealt another blow when an administrative law judge in Minnesota recommended the state’s Public Utilities Commission force Enbridge to pull the existing line out of the ground and replace it along the current route.

Doing so would add more than a billion dollars to the project’s cost and would also require Enbridge to take Line 3 out of service entirely for as long as 16 months as opposed to the company’s preferred plan of keeping the current pipeline running at about half its rate of capacity until its replacement can be brought online. The Commission is expected to issue a decision on Line 3 next month.

Enbridge needs that project complete by the start of 2020 in order to keep its debt under control. Fitch Ratings believes Line 3 can be done by the second half of 2019 if the Commission approves Enbridge’s preferred route.

“If the Commission re-routes the project, Fitch believes that there would probably be a delay to this timeline,” the ratings agency said in an April 25 statement.

Indeed, Line 3 remains a “key component of balance sheet management,” Ted Durbin, who covers Enbridge with a neutral weighting at Goldman Sachs, told clients in an April 19 research note. Failing to get the project online by 2020, Durbin estimates, would cost the company more than $1 billion in annual EBITDA by 2020.

“As the biggest project in the company’s backlog, [Line 3] remains the largest driver of its earnings growth and de-leveraging plan,” Durbin wrote. “[The Minnesota judge’s ruling and the Commission’s decision in June] could serve as significant tailwinds or headwinds for this project and the stock.”

Getting Line 3 done is also a necessary precursor for other growth projects. JP Morgan’s Jeremy Tonet, who also holds a neutral rating on Enbridge, told clients on April 24 that “successful completion of [Line 3] would allow Enbridge to announce several attractive projects downstream well into the 2020s.”

Adding to the uphill battle for Monaco is the decision made by the U.S. Federal Energy Regulatory Commission (FERC) in March to close a key tax loophole used by master limited partnerships (MLPs). While Enbridge said shortly after the decision came out that it did not expect any material impacts on its MLPs like Enbridge Energy Partners or Spectra Energy Partners, the same was said by TransCanada’s MLP – TC Pipelines – before it blamed FERC for having to cut its payout by 35 per cent earlier this week.

“Enbridge is certainly exposed” to the FERC ruling, Darryl McCoubrey, who covers Enbridge with a Buy rating at Veritas Investment Research, told BNN via email this week.

“MLPs gave up the cost of capital advantage held over corporations, which largely defeats the purpose of having these sponsored entities [like Enbridge Energy Partners and Spectra Energy Partners] and the immediate read-through is that raising capital in the U.S. will be more costly than before, which is particularly frustrating for [Enbridge].”

Facing uncertainty on its largest project and new challenges raising capital puts the dividend, which Enbridge has pledged to raise by roughly 10 per cent every year at least through 2020, under pressure. Its yield has nearly doubled since the Spectra deal was announced in September of 2016.

Regular income via dividends is one of the main reasons people own Enbridge stock in the first place and recently rising bond yields have already been making dividend-paying stocks less attractive.

That, Agilith Capital’s Horan argues, is the core of his short thesis.

“I look at Enbridge the old fashioned way by looking at their dividend and their earnings,” Horan said. “Their dividend is massively higher than their earnings right now. Their dividend keeps growing but their earnings have not grown.”

There is one way Monaco can convince even the most ardent Enbridge skeptics like Horan to turn positive on the stock, but it is hardly one the company’s income-focused investors are going to like.

“I would close out my short if management got real about their dividend policy and cut their dividend because that would make me believe they are taking their cash flow issues seriously,” Horan said.

“Companies that cannot afford their dividends do not do well.”

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