Internal analysis of Enbridge Inc.
Introduction
Enbridge Inc. a distribution and transportation of energy company operating in the United States and Canada. The company is divided into five segments to facilitate its operations and achieve its long-term corporate objectives. The sections include Liquids Pipelines; Gas Distribution; Sponsored Investments and Corporate and Gas Pipelines, Processing and Energy Services (Finance.yahoo.com, 2016). The company operates a common carrier through the Liquids Pipelines segment by contrasting natural gas liquids, refined products, and crude oil pipelines as well as terminals. The Gas Distribution Segment is a natural gas utility serving industrial, commercial and residential customers in Quebec, New York, Brunswick and Easter Ontario. The company is also engaged in generating renewable and alternative power, transportation and storage of liquid petroleum and crude oil, through its Sponsored Investments Segment. The Pipelines of gas, Energy Services Segment and production deals in natural gas pipelines (Finance.yahoo.com, 2016). The company founded in 1949 with its headquarters in Calgary, Canada. This paper provides a comprehensive internal analysis of Enbridge Inc. including the resource-based view, value chain analysis, core competence analysis as well as the analysis of the primary success factors.
The section analyses the company’s strategic assets that contribute to its competitive position and success in its operations. It explores the company’s tangible resources such as physical, financial and human resources as well as intangible resources such as employee morale, company culture, innovation, reputation, intellectual property, among other resources.
TANGIBLE RESOURCES
Physical resources
Enbridge Inc. has a portfolio of assets/infrastructure to enable it to conduct its businesses efficiently. At the end of the year 2015, the company’s plant, property, and equipment amounted to 64,434 million Canadian Dollars. It has invested in pipelines, pumping equipment, buildings, tanks, solar panels, wind turbines and power transmission equipment. Other facilities include gas mains, midstream gas gathering and processing facilities and land and right-of-way. It also several facilities under construction to improve its energy distribution as well as for expansion purposes.
Technology
Over the last few years, Enbridge Inc. has invested heavily in enhancing its technological resources. In its energy distribution business, the safety of workers, customers, and the public is critical. The company has improved its technical resources to enhance the efficiency of its operations. It has also developed its technical prowess through regularly training its workers. Professional training provided by Enbridge Technology Inc. It has advanced in technology, and the company offers advisory services, technology transfer, and training to oil and gas companies around the world. Training areas include operations and maintenance, trenchless technology, engineering standards, control centre operations, pipeline optimization, pipeline commissioning, among other sectors.
In order enhancing technological progress, the company established a state of the art Maintenance and Operations Centre in 2012. The centre is located in Markham, Ontario and provides both theoretical and practical training programs for several workers. The training of employees is comprehensive and has helped the company in enhancing the staff expertise and improves the firm’s ability and reliability in delivering energy products safely to consumers. Its technological advancement in the design of the centre. The building meets the Leadership in Energy and Environmental Design standards. Features of the building include LED (Light Emitting Diode) lighting, solar panels for water heating system, thermally efficient walls, roofs, and windows, among other features. The centre is efficient in energy consumption and saves about 78% of natural gas, 50% of water and over 60% electricity.
Millions of people depend on Enbridge’s services for the safe delivery of oil and other energy products. As a result, the company is always seeking and investing in innovative ideas to enhance safety and operational efficiency. Leak detection and prevention are critical in promoting safety and effectiveness in the business’s operations. It has, therefore, invested in several emerging technologies and enterprises to achieve this goal. These include corporate equity investments in companies that offer technology solutions. Enbridge has invested in N-Solve Corporation that uses Steam Assisted Gravity Drainage technology that separates the useful bitumen from the asphaltenes. It has also acquired corporate equity in Sea NG a company that is developing a system that will transport compressed natural gas by sea. This technology will enable the company to transport natural gas to small markets where LNG transportation is not economically feasible due to small gas quantities.
The company has also invested in technologies to help it produce environmentally friendly energy. It acquired equity in Genalta Power. Genalta Power runs power plants that use waste energy sources to generate green electricity. These green energy solutions enhance the efficiencies of plants, cut carbon dioxide emissions as well as reducing operating costs. Other investments in emerging technology companies include Morgan Solar, Hydrogenics Corporation, Temporal Power, Smart Pipe Company, and US Geothermal Inc. among other investments.
Financial analysis
Profitability analysis
In the year 2015, Enbridge’s net profit margin was -0.6669% indicating that it made a net loss of $0.00669 for each dollar of total revenue earned in the year. It shows that the company’s operations were not profitable in 2015. In 2014, the net profit margin was 5.686%, up from 1.897% in 2013. The trend shows that the profitability of Enbridge improved in 2014 and declined rapidly in 2015. Market-wide factors caused the poor performance in 2015. The year 2015 saw a reduction in oil and gas prices to historically low levels. It adversely affected the businesses of Enbridge’s customers leading to revenue losses. The fall in oil and gas prices caused by the imbalance between demand and supply in the energy market, among other reasons. The profits of the Company were also negatively impacted by the resistance to energy infrastructure investments in North America making it difficult for potential customers to access the North American market. As shown in the financial statements, the company’s revenues fell from $28,281 million in 2014 to $23,842 million in 2015. This rapid drop in total revenues by slight decreases in operating expenses hence leading to a net loss.
The company’s return on assets increased from 0.8581% in 2013 to 2.207% in 2014. However, the ratio fell rapidly to -0.1878% in 2015. The decline was due to a reduction in net income and total revenues in 2015. It coupled with an increase in the company’s total assets owing to its increased investments in property, plant, and equipment. The return on assets for 2015 shows that Enbridge made a loss of $0.001878per of total assets used in the company.
Enbridge’s return on equity for the year 2015 was -0.8413 implying that its shareholders earned a loss of $0.008413 for each dollar of equity. The ratio was 9.579% in 2014 and 3.66% in 2013. The decline in the return on investment in 2015 caused by a fall in net income resulting from a decrease in total revenue. Total revenue fell because of the oil and gas prices in 2015 which affected the company’s customers. Net income reduction accompanied by an increase in Enbridge’s total shareholders’ equity thus worsening the return on investment.
The overall analysis indicates that the company was not profitable in 2015. Its profitability declined in 2015 as a result of the falling oil and gas prices that adversely affected its customers thereby lowering the demand for oil and gas transport services. If oil producing companies do not agree on balancing supply and demand, oil prices may fall further in future considering the lifting of economic sanctions against Iran.
Short-term Liquidity analysis
Enbridge’s current ratio as on 31 December 2015 was 0.7025 indicating that its existing assets could only meet 70.25% of its total current obligations. It implies that Enbridge’s current assets were insufficient to repay its existing obligations. The ratio increased from 0.6478 in 2013 to 0.8632 in 2014 showing the Enbridge’s liquidity improved in 2014. The decline in Enbridge’s current ratio in 2015 was due to an increase in its present liabilities coupled with a decline I n current assets such as cash and cash equivalents as well as accounts receivables. The drop in these assets could have been due to a fall in the company’s revenues that resulted from oil and gas prices.
Its quick ratio as at 31 December 2015 was 0.5998 indicating that its quick assets were able to repay only 60% of its total short-term obligations. The quick ratio increased from 0.5439 in 2013 to 0.7423 in 2014 showing that the short-term liquidity of Enbridge improved in 2014. However, it fell to 0.5998 in 2015 indicating a decline in the firm’s short-term cash. Both quick and current ratios suggest that Enbridge’s short-term obligations could not be fully settled using its existing assets. The trend also shows that liquidity deteriorated in 2015.
Long-term liquidity/solvency
Enbridge’s debt ratio as at December 31, 2015, was 0.7397 meaning that its total liabilities were 73.97% of the total assets. It shows that a majority of its assets financed through borrowing. The ratio was more than 50% implying that its capital structure had more debt than equity. It further shows that it has a low solvency. The debt ratio increased from 0.6742 in 2013 to 0.7111 and 0.7397 in 2014 and 2015 respectively. The trend indicates that the solvency of Enbridge declined in both 2014 and 2015. It's worsened by the fact that its return on assets was negative in the year 2015. According to the DuPont analysis, an increase in a company’s leverage causes an improvement in its return on equity if the company’s return on assets is positive. In this scenario, it is negative for return on assets. Hence, the rising leverage hurts Enbridge’s return on equity. The rise in force attributed to the company’s expansion through acquisition of additional assets and investment in technologies. Most of these projects were financed through borrowing thus lowering its solvency.
Long-term liquidity can also be assessed using interest cover ratio. In the year 2015, Enbridge’s time's interest earned ratio was 1.007 implying that its earnings before interest and tax were just adequate to meet its interest expense. Interest cover increased from 1.647 in 2013 to 2.925 in 2014 indicating an improvement in the firm’s solvency. It, however, declined to 1.007 in 2015 implying that Enbridge’s solvency deteriorated. The reduction can be explained by the fall in profitability due to the low oil and natural gas prices witnessed in 2015. If profits continue to fall, the company’s earnings may be inadequate to meet its debt interest obligations thus increasing the possibility of defaulting in debt obligations.
Other ratios
Enbridge’s earnings per share for 2015 were -0.04 down from 1.39 and 0.55 in 2014 and 2013 respectively. The fall in the company’s earnings per share was due to the decline in its profitability in 2015 as explained in the profitability analysis above. The total assets turnover for 2015 was 0.282 indicating that Enbridge generated revenue of $0.282 for every dollar of total assets. The ratio was 0.388 and 0.453 in 2014 and 2013 respectively. The trend shows that the efficiency of Enbridge in utilizing its assets to generate revenue declined. His decline was due to an increase in total assets in both 2014 and 2015 as a result of the company’s investment in plant, property and equipment for expansion as well improving its technologies. The fall in 2015 was also due to a fall in revenue caused by low oil and gas prices. In 2014, asset turnover declined although an increase in total revenue since the increase in total assets was more than that of total revenue.
INTANGIBLE RESOURCES
Human resources
Enbridge’s employees are key to its success in conducting its operations. Employees are required to uphold respect, integrity, and safety in the conduct of their duties. The company requires its employees to certify their compliance with its Business Conduct Statement on the annual basis (Enbridge.com, 2016). It is the company’s policy to invest in attracting retaining and developing its employees as future leaders. Through this, the company can sustain its success and growth. It enhances the capability of its employees to maximize their potential through programs such as enhancing career opportunities, leadership development, building change management, among other programs. The Maintenance and Operation centre in Markham offers a comprehensive training to employees including technical aspects. Besides empowering employees’ capabilities, the company provides incentives such as competitive salaries to retain staff. In 2015, the company was forced to cut down its workforce by 5% due to the cheap oil and energy prices (Enbridge.com, 2016). It necessitated by its need to maintain its competitiveness in the market. It also prides its diversity of human resources; its workforce has a variety of skills. It named among the top 100 employers in Canada for the 12th year.
Innovation
One of the company’s valuable intangible resources is its ability to innovate. It invests in research and development and supports innovation as a measure to enhance safety and provide renewable energy (Enbridge.com, 2016). It continuously seeks for opportunities to improve its existing technologies and introduce new ones in the design, maintenance, monitoring and leak detection of its pipelines and distribution systems.
In 2014, the company invested $32 million in research and development aimed at enhancing safety. It helps in prevention and to improve the production of renewable energy too (Enbridge.com, 2016). Enbridge’s solar, the wind and geothermal farcicalities are generating more than 2,700 Megawatts. The company has also entered into strategic safety innovation partnerships with other entities. Enbridge has a joint research and development program with EVRAZ North America to produce high-quality pipes. Through its collaboration with C-FER Technologies of Edmonton, Enbridge was able to introduce ELDER (External Leak Detection Experimental Research) test (Enbridge.com, 2016). The apparatus was the first in the world used for assessing technologies for detecting external leaks. These among the many success stories of Enbridge’s investment in innovation.
Reputation
Enbridge built the largest network of oil and natural gas pipelines for decades without with attracting any public attention. The company has come under public criticism since the early 2000s due to several oil spills from its pipeline network. The largest oil spill occurred in 2010 when its pipeline ruptured thus spilling 800,000 gallons of crude oil into the Kalamazoo River. This further polluted Lake Michigan since the river flows into the lake. Enbridge became under intense criticism since the company was warned before about its improper monitoring of corrosion of its pipeline a few months before the spill. The National Transport Safety Board carried out its investigations and gave damning revelations that the company took more than 17 hours after the spill to take necessary steps to address the problem. Enbridge slapped with a penalty of $3.7 million by the PHMSA. Even before people forgot the Michigan spill, one of Enbridge’s pipelines in Illinois ruptured. Another pipeline in Wisconsin ruptured in 2012 spilling 50,000 gallons of oil.
After the above oil spills, the company initiated a rebranding campaign in 2014 to reduce negative publicity. The campaign was dubbed Life Takes Energy (Cattaneo, 2014). However, this strategy has not stemmed all the negative publicity. The company still has a bad reputation, especially among the environmentalists. Environmentalists are concerned about its transportation of oil from the tar sand operations of Alberta. Environmentalists argue that these actions contribute to global warming, air, and water pollution.
VALUE CHAIN ANALYSIS
This section analyses the entire process and activities that Enbridge uses to bring its products or services from inception up to the delivery to consumers. It explores how the company uses its value chain to create value for customers thus achieve its corporate activities. The value chain subdivided into primary and secondary activities.
1. Primary activities
Inbound logistics
Enbridge Inc. provides pipeline transport services for oil and natural gas companies in the US and Canada. The company has constructed a pipeline network system that connects areas of crude oil exploration to the oil refineries. It receives these products from the terminals and transports them to the required locations within the pipeline network. The company also has tanks for storing crude oil and natural gas before transporting them to the required destinations. The company has entered into long-term contracts with most of its customers with most projects with oil producers in the oil sands running up to 2019.
In sourcing materials for construction, the company has placed several requirements for suppliers to ensure that the materials meet its quality standards. It has contracted ISNetworld to prequalify suppliers after conducting safety, quality, technical and financial reviews. The company also partners with credible contractors in the construction of pipelines and power plants. It has partnered with EVRAZ North America for the supply of quality pipes for research to enhance pipeline performance. For instance, the Talbot Energy Project is a partnership between RES Canada and Enbridge (Res-americas.com, 2016).
Operations
Crude oil does not undergo any processing since the company is just dealing in distribution. It can store fuel its tanks as they await transportation. For natural gas, the company has processing facilities to convert it into a final product for commercial, residential and industrial purposes. It gathers and processes natural gas using its processing facilities. The company also has wind turbines and solar panels for generating the wind and solar energy. The energy transformed into forms delivered to the final consumer.
Outbound logistics
The company transports oil and natural gas and products through its pipeline system. The company distributes natural gas to over 1.9 million people in Canada. The company also distributes solar and wind energy through its power transmission lines. Apart from its terminal connected to the pipeline system, the company has a gas distribution network that enables it to distribute natural gas to residential and commercial points.
Sales and marketing
The services and products of the Company marketed through some ways. Pipelines construction that connects oil-sand by self-positioning and uses of publicity and advertising to reach out to customers and to enhance its reputation. Marketing performance through the Enbridge Liquids Transportation and Marketing, which is its subsidiary.
2. Secondary activities
Procurement
The company has established a comprehensive guideline for its procurement process. Its license guidelines coincide with its values which are integrity, respect, and safety. It has also produced its Statement on Business Conduct which guides the conduct of all stakeholders including employees and suppliers. It upholds environmental policy standards for suppliers. Most of the steel and plastic pipes the company purchases must consist of recycled content. Other systems include the corporate social responsibility, environment, health, safety, major projects, among other policies. The company requires compliance with these policies as a precondition for doing business with suppliers.
Individual contracts and services required by segments such as Gas Distribution, Liquids Pipelines, among others, require prequalification of providers. It has, therefore, contracted ISNetworld to evaluate the capacity of vendors regarding financial stability, technical capability, and safety, among other parameters.
Technology Development
The company has invested heavily in research and development to advance in technology, therefore, enhancing efficiency in oil and natural gas distribution among other operations. Detecting and preventing leakage on its pipelines is critical to its success. Oil spills hurt the company through litigation as well as negative reputation among the public. The company focuses on improving existing technologies for detecting leakages as well as developing new technologies. In this process, the company also partners with other companies to develop emerging technologies. For instance, it conducts joint research and development with EZRA North America to enhance the performance of pipelines. Other partnerships and acquisitions to improve innovation and technological development include Sea NG, Morgan Solar, Genalta Power, among other strategic alliances (Enbridge.com, 2016).
Human Resource Management
Enbridge has a pool of qualified employees. It is cognizant of the significant contribution of its employees towards the achievement of its corporate goals. Its management of human resource, the company requires all its employees to uphold its values of respect, safety, and integrity. These values confirmed in employees’ interactions with any stakeholder of the company, employees, customers, suppliers, among other stakeholders. They must also adhere to Enbridge’s Statement on Business Conduct. The compliance must be certified annual by each employee. It is the policy of Enbridge to attract, retain and develop employees to execute its strategies and to ensure sustainable success. The company offers several training and development programs such as leadership, building change management capabilities, career enhancement opportunities, among other programs. Enbridge also ensures that it rewards employees well by paying them competitive salaries by industry standards. The company ranked among the top 100 employers in Canada for the last twelve years. Effective human resource management has enabled the company to promote innovation, efficient customer service, among other benefits. Sometimes it is forced to downsize when market factors are not favorable. For instance, it had to reduce its workforce by 5% in 2015 owing to the fall in revenues due to the decline of prices in the energy market.
General Administration
The administration and the overall management of Enbridge are the responsibility of the board headed by Al Monaco, the president, and chief executive officer. The company is sub-divided into segments with each segment under the responsibility of an executive. Each segmental head is responsible for the affairs of his/her segment although the segments are not completely autonomous. This allows faster decision making and improves customer satisfaction within the segments.
CORE COMPETENCE ANALYSIS
Enbridge’s organizational capabilities
Competencies and skills
The company is well-endowed with a competent pool of employees. It has even established a subsidiary that offers technical training and advisory services to oil and gas companies worldwide. Besides, the comprehensive and continuous training it offers its employees enable it to sustain such competencies. Its execution capability is high due to its well-established infrastructure as well as experience in handling oil and natural gas projects. It has been in the business for more than 60 years thus it has a valuable experience in the sector.
Combination of assets
The company has a suitable combination consisting of appropriate assets and partnerships. Through the combination of its competent staff and well-established networks, the company can conduct major projects including research and development. The company has acquired other companies that are developing and have emerging technologies that can improve the detection of leakage of pipelines as well as provide green energy. For instance, the ELDER test, an innovative leakage detection technology evaluation tool, was established by Enbridge, through its partnership with C-FER Technologies.
Abilities
The company also enjoys low-cost funding for its projects. It has adopted a strategy of using a sponsored vehicle, Enbridge Income Fund to promote its capital programs. The sponsored vehicle is expected to provide access to sources of funds at low costs. The strategy has been successful in the past years. In 2015, Enbridge raised over $1.7 billion of equity capital and debt capital amounting to $3.7 billion. Access to diversified sources of low-cost funds enables the company to fund its capital projects and gain a competitive advantage in the industry.
VRIN Table
Explanation of findings
Enbridge has pipeline system connecting Canada and the US. The pipeline covers 2,841 kilometres and is the longest in the world. The pipeline is valuable to the company since its business is transportation and distribution of oil and natural gas. It is not rare since other companies have similar pipelines though not as long as Enbridge’s. It is hard for the competitors to imitate due to the length of time required as well as the capital investment required. The system is almost non-substitutable since there is no other suitable method of transporting crude oil in the region. Other means such as road would be costly. Therefore, the company derives a sustainable competitive advantage from its pipeline system.
Enbridge has established key partnerships and networks with suppliers, customers and other parties in the value chain. It implements its capital investment and innovation programs through such networks. It has contracted EVZRAN North America to supply high-quality pipes. Besides, the two companies conduct joint research and development to enhance the performance of the pipeline. Such networks are valuable, rare and cannot be substituted although they can be imitated by the competitors. Therefore, Enbridge derives sustainable competitive advantage from its diversified networks and partnerships.
The company has invested heavily in innovation and has made significant strides in enhancing pipeline leak detection as well as producing renewable energy. Through innovation as well as partnerships, it has established solar and wind energy plants. It has already acquired corporate equity in companies dealing with emerging technologies that enhance the performance of the pipeline system as well those that produce green energy. Innovation is valuable, rare, difficult to imitate and cannot be substituted. Thus, the company derives valuable competitive advantage through its innovation practices.
IV. KEY SUCCESS FACTORS
1. Management of human resources
Innovation through the internal pool of staff is a critical factor in the industry. When employees are developed and given a conducive environment to formulate new ideas, the company is likely to be successful. Enbridge offers its employees both theoretical and practical training among other training programs to enhance their skills. This has improved the productivity of the company and contributed to its success.
2. Infrastructure
The nature of the company’s infrastructure and technological progress also contributes to success or failure. Oil and gas transportation requires advanced technology to monitor and prevent leakages. Enbridge uses advanced technology and has invested in innovation to find better ways of monitoring leakages. The company had also replaced the old pipes with the modern pipes.
3. Good customer and supplier relationships
Good supplier relationships ensure an interrupted supply of high-quality raw materials. This is important especially in industries where the required raw materials are scarce. Enbridge has established valuable relationships with suppliers such as EVZRAN North American, among other suppliers. Other relationships in the value chain have also helped the company in establishing partnerships for research and development as well as implementing construction of pipelines, establishing energy plants among other projects.
4. Financing structure
The cost of funding to the company’s operations is critical in this industry. Investments in the industry require significant capital outlays. Besides, maintenance of pipelines is costly. Without adequate low-cost funding, a company cannot fund the improvement of its infrastructure as well as innovation. Enbridge enjoys low-cost funding due to its strategy of establishing the Enbridge Income Fund Inc. the sponsored vehicle enabled it to raise large amounts of equity and debt capital in 2015.
Conclusion
The above analysis indicates that Enbridge Inc. has the necessary tangible and intangible resources for its success in the industry. It suffered financial losses in its operations in 2015 due to the fall in oil and gas prices. Its valuable resources are the human resource, innovation, infrastructure and supplier networks. It also has access to low-cost funding through its sponsored vehicle, Enbridge Income Fund. Its investment in innovation has enabled it to introduce new measures to curb pipeline leakages. These provide a sustainable competitive advantage for the company.
References
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