ENB, Enbridge revisited

enb sept 25 2016

We have been wrong more than once on this stock, just to give proper disclosure!

This company is involved in all the aspects of “energy”, drilling, storing, transportation and distribution for both oil and gas as well as renewables. Given this diversity it is not altogether that surprising that it should have done relatively well. But this well??  It is almost back to the all time high, virtually the only one to do so in the energy sector. This after losing only perhaps 15% after years of going up in a fairly clear, 5 wave, EW cycle. Equally amazing is that the forward looking /E is presently, according to the G&M, at a mere 24.73X.

This brings us to accounting, always a touchy subject for most people. In this weekend’s “Report on Business” (again, from the G&M), there is a four page article mostly based on info and calculations provided by Veritas ( Investment Research Corp). The article starts off with the question if it matters if you the investor understood the /E ratio to be 22.7X on average for the stocks in the S&P/TSX composite index and you then find out it is in reality 48.9x. That is if you were to strictly apply the GAAP, General Accepted Accounting Principles as we used to do instead of the vastly more flexible adjusted accounting practices routinely used nowadays in much of the financial reporting, including that which is used to determine the P/E ratio. The objective is, of course, to present the reader with a more realistic and flattering description of what is actually going on. To what extent this is legitimate and with that to what extent the results are still “the Truth”, is the question. Also the use of non-GAAP accounting is increasing at an alarming speed. A study cited by the article had reported earnings for 308 companies in the S&P500 for 2015 at Us$804 bln., whereas the “real” earnings were $562 bln. implying that the earnings are overstated by no less than 43%. This would imply that if the S&P is trading at a fairly lofty 21X earnings, it is actually trading at about 30X earnings.

Veritas has calculated the absolute percentage difference between their non-GAAP and GAAP earnings for all the S&/TSX 60 companies. Gold and other miners feature prominently at the higher percentages, usually because of non-cash items such as write-downs of (inflated) acquisitions, but Enbridge takes the prize at 5,143%. Roughly speaking, if my math is correct, that means that the trailing p/e of 40x is actually more like 2040x.

Not sure what that all means but we do recall that once upon a time, just 16 years ago, there was this company Enron that did a few accounting liberalizing activities. Not only did that end with the largest bankruptcy in  US history but it also took down Arthur Anderson, one of the big 5 accounting firms then, in the process. The temptation to flatter results is always there and irresistible in a time when there are many practises but few principles.


.S  Just as the P/E ratio is derived from a division of two numbers, so is this Veritas metric. A very high number, as is the case here, does not necessarily mean that the company is one of the worst offenders. If the denominator is very small it will influence the outcome disproportionately! From Enbridge’s 2015 Annual report we extract the following reconciliation;

enbridge 2015 annual report pge 27

The number 5,143% is derived by 1,866/(37)=5,043+100=5,143%. If we were to do this for all three quoted years we get (1,866+1,574+1,434)/(-37+1,154+446) = 4,874/1,563 = 312%, which is substantially lower. However, the non-GAAP earnings are invariable higher on average and not by a small amount. Why is not entirely clear as the largest component seems to be unrealized derivative gains/losses, presumable as a result of “non-qualified” hedges. In contrast the differences with the gold miners most often stem from asset impairments/write-downs, that are non-cash items.