 Good day fellow investors. A company that I received a lot of questions about because a lot of people see it as cheap is Enbridge. So in this video I will show the risks that the company is running. There are two crucial risks that every investor in Enbridge should understand and know about. So I'll start with a company overview then we'll discuss the shale oil industry and the risks of the shale oil industry and how is that connected to Enbridge and then we'll give risk analysis of the fundamentals of the company and then you'll know much more about how to go about investing in this company that has a 6% yield. And something I will finish with is an option outlook as I'm looking for hedges for my portfolio. I'll dig more somewhere in the first months of 2019 into that. You will be able to see everything on my stock market research platform. So I'll also discuss a little bit the options and how you can hedge yourselves if the risks for Enbridge materialize. So let's start with the overview North America's leading energy infrastructure company crude oil and natural gas transport. They are executing on their 2018-2020 strategic priorities pipelines accelerate deleveraging reliable cash flow they want to push that dividend higher and higher and extend growth beyond 2020 and that's also crucial because it's very important to see where the capital will go. However if we look at the debt now it stands at 60 billion so 60 billion in debt 2014 it was at 22 billion now it is at 60 so they increased their debt three times in four or five years and that's a big big increase in risk that many perhaps are not perceiving because the dividend is there the cash flows is there etc. They're also focused on managing their debt and this is the first risk when it comes to Enbridge. How are they going to manage their 60 billion in liabilities because when you are highly levered every little small change in the business in the revenues has a big effect on EBITDA debt covenants etc. Nevertheless they are still doing very very well record financial performance and this is why people see it as very cheap as very strong as a very good company everything is growing EBITDA per share cash that's available for distribution is growing everybody is happy and this is the dream of every dividend investors his version of heaven 10 11% dividend growth over the past 20 22 years 10% growth over the past three years and they are really pushing to remain such a dividend aristocrat. However another thing that makes or breaks Enbridge apart from the debt is the North American oil and gas industry in C2 breakeven is 60 dollars so that's pretty much high on the cost curve for oil in the world so if oil prices go lower that's not good for Enbridge especially as the company will continue to invest to build on new opportunities gas pipelines oil pipelines Permian related pipelines whatever but if we look at the North American shale oil industry I found this article by Kurt Cobb discussing the oil industry and why it's so leverage so there is a cash problem for the US shale industry and I don't like to use data for articles so I really went to the source and looked at the energy market update forum the institute for energy economics and financial analysis and this is the summary please listen to this carefully despite two and a half years of rising oil prices and growing expectations for improved financial results the US fracking sector continued to spill alarming amounts of red ink during the first half of 2018 US oil production has explode thanks to the fracking and also if you look at Enbridge and their dividend also has explode when that happened so that's a big correlation and a big correlation risk especially and as they increase the leverage three times in the last four or five years these are the cash flows year per year for the complete industry free cash flow look at it and see how negative it is 14 billion 20 47 16 43 34 18 and 15 billion so negative free cash flows for the industry these oil and gas companies collectively spent 196 billion more on capital projects than they made selling oil and gas so nine 196 billion went into the ground the problem is that their oil gets depleted very fast and they need to drill more and more to find new wells and new oil sooner or later investors will stop throwing good money after bad money especially with rising interest rates production will consequently fall competition within the pipelines will fall and Enbridge will not have maximum utilization have trouble to pay its debt bridge debt kind of covenants impair 46 billion of goodwill and boom there you go there goes the dividend there goes the stock price so that's a risk for Enbridge here there is another table about the cash flows still quarter by quarter still in Q2 with extremely high oil prices the cash flows were negative and those were positive with only a few companies when you dig into the balance sheet you have to understand that they also went leverage themselves to make acquisition and what kind of utility has a goodwill balance of 34 billion a year ago it was at practically zero so that's what they bought a software of something and then they buy something and then increase the goodwill for 34 billion and they bought something when interest rates were low if they were waiting if they would have waited just a little bit then everything would have been cheaper but also their debt would have been more expensive total liability is 60 billion as i said three times higher also their balance sheet went from 60 billion to 160 billion so almost three times higher in what four years so that's extremely stretched extremely leveraged and that's a huge risk for whatever company especially a company that is working in a sector that is not doing that great so if we look at the balance sheet total equity is 58 billion remove the 34 billion in goodwill and you are already at 24 billion in equity make an impairment of 20 on the huge investments the company did in the last years so they have assets 90 billion 20 percent that's 18 billion so if there is lower demand then the equity is already down to 6 billion from the 24 billion so that's 6 billion of equity that's possible that it will happen in the next few years on 103 billion of liabilities and that's why ambridge is extremely risky and what i'm collecting in my hatchbook protection okay let's see if i can buy somewhere options that give me upside 1 to 10 so if i lose everything okay but i need 10 20 times upside if ambridge goes to let's say nine then these options on ambridge are something to watch if i buy out of the money put options 2021 so what is that two years from now two years from now on ambridge i pay 1.1 and ambridge goes to 10 or nine or even five then i make 10 15 times my money that's a risk that is there the options are not perhaps fairly priced have to calculate that but that's something i'll do more in the first months of 2019 so let's hope ambridge stays where it is until i buy my options in any case i got a lot of messages how ambridge is undervalued a good company dividend aristocrat and everything so i just wanted to point out the risk i don't know what will happen but you have the upside okay everything stays as it is interest rates stay low on the 60 billion of debt cash flows stay high oil prices stay high so that's the upside okay but there is also the downside if us shale doesn't deliver if people stop giving funds to that and withdraw their funds which is a normal real liquidity crunch in a crisis that might happen then you see a lower production there lower business for ambridge debt covenants get bridged dividends get cut and the stock price crashes down so that's the risk reward i don't know if i would accept that risk reward in a well diversified us portfolio for a six percent dividend i would accept it perhaps for a 12 percent dividend but that's just see how that fits how the risk reward fits your personal portfolio exposure that is the key thank you for watching please check my stock market research platform if you like this risk reward kind of analysis you have a lot of stock picks there where i look for value around the world see you in the next video