These are interesting times in the energy patch. What are the consequences for investors of this mega-deal?

Chiradeep BasuMallick

Follow

Sep 8, 2016 9:15 AM EDT

With Canada's Enbridge (ENB) agreeing to acquire Spectra Energy (SE) in an all-stock deal valued at $28 billion, this is a tantalizing moment for investors.

The combined powerhouse of Enbridge and Spectra Energy will create North America's largest energy infrastructure company. News of the acquisition has propelled Spectra Energy's stock this year to a gain of more than 70%.

Investors should hold on and garner growth and safer dividends, once the deal goes through.

Given the palpable excitement about the news, it is likely that the Enbridge-Spectra Energy deal will go through smoothly. Once that happens, Enbridge's shareholders will own nearly 57% of the combined company, and Spectra Energy shareholders will own about 43%.

This re-envisioned entity will be called Enbridge Inc. with a $127 billion enterprise value. Master limited partnerships for the respective companies, Enbridge Energy Partners and Spectra Energy Partners will, however, continue as separate publicly traded firms.

Spectra Energy also owns a 50% stake in MLP DCP Midstream Partners, so there is also buzz that eventually the MLPs, too, may be merged.

There has been a degree of concern about the rise in Spectra Energy's stock, but Enbridge has suggested that it sees long-term value in the company.

Spectra Energy's balance sheet strength and dividend credentials have traditionally attracted investors. From a business point of view, its track record of winning pipeline building orders has pushed it ahead, making it one of North America's leading pipeline and midstream companies.

In total, the company boasts 21,000 miles of natural-gas and crude oil pipelines, nearly 300 billion billions of cubic feet of natural-gas storage and 4.8 million barrels of crude oil storage. Spectra Energy also offers natural-gas gathering, processing and local distribution operations.

Spectra Energy has managed to withstand the harsh business climate this year thus far. With energy prices tanking, there were concerns that midstream and pipeline MLPs were at risk.

Investors soon realized that only a fraction of MLPs service revenue was at risk even in a $40-per-barrel oil environment. Oil prices also rose.

Energy stocks Kinder Morgan gained more than 23% in the past three months, while shares of Williams rose nearly 23%.

Analysts at Bernstein have said that existing and continuing gas and crude infrastructure development should adequately manage forward production until 2025, a major headwind for pipeline stocks.

Is that also the case for Spectra Energy? Enbridge is clearly not convinced.

Spectra Energy's Access Northeast pipeline expansion project faced challenges when major customers Eversource Energy and National Grid showed little interest in buying capacity on the pipeline in Massachusetts.

This, however, doesn't cloud post-deal metrics.

By the sheer force of its combination, the two companies will have $20 billion worth of projects under execution and another $37 billion in projects under development.

The deal will also drive 10% to 12% annual dividend growth across the next couple of years.

Obviously, clarity and stability are essential at this juncture. And that is exactly why Spectra Energy's stock with a 5.13 price-earnings-growth ratio is at a premium with Enbridge in tow at a time the industry is trading at less than 1.

Direct competitors, big and small, are trading at a discount and for probably legitimate reasons. For instance, Enterprise Products Partners trades at a PEG ratio of 3.60, and it carries more than $22 billion in debt.

The $9.26 billion Sunoco Logistics Partners trades at a PEG ratio of just 0.46, depressed partly because of the $6.1 billion debt on its shoulders, exacerbating investor worries.

Finally, these are good times for Spectra Energy, which is already trading at a rich valuation without Enbridge. The deal has fundamentally changed the landscape.

The new diversified Enbridge conglomerate will be a rock-solid investment for long-term dividend growth and robust stock appreciation.

---

A crisis is coming. When it hits, weak companies and their investors will be washed away. Don't let that happen to you! I've found seven companies you should own no matter what the economy is doing. Each one of these powerful yet overlooked companies barely notices when the market tumbles. And they'll skyrocket when it rebounds. You can pick up all seven for pennies on the dollar right now. To get the names of these "seven survivor stocks," click here.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.