Enbridge Faces DOJ Pressure for Pipeline Crack Repairs

Enbridge ENB is once again under scrutiny as the U.S. Department of Justice ("DOJ") has proposed amendments to a 2016 consent decree. This change could mandate Enbridge to address previously identified cracks in its extensive Lakehead pipeline system, including the controversial Line 5.

The backdrop to this development dates back to 2010 when two significant oil spills from ENB's pipelines near Marshall, MI, and Romeoville, IL, resulted in severe environmental damage. These spills led to the unlawful discharge of oil into U.S. waters, triggering a lawsuit by the United States under the Clean Water Act and the Oil Pollution Act. The legal action sought civil penalties, recovery of cleanup costs and injunctive relief to prevent future incidents.

In 2017, a Consent Decree approved by the United States District Court for the Western District of Michigan established stringent requirements for Enbridge's network of 14 pipelines, collectively known as the Lakehead System. This decree included specific criteria for selecting and repairing pipeline sections, imposing interim pressure restrictions, and monitoring for features such as cracks detected through In-Line Inspections.

The latest proposed modifications specifically target how Enbridge handles circumferential cracks that encircle the pipeline rather than running lengthwise. These changes would require Enbridge to reassess such cracks using new methodologies tailored to the unique threats posed by circumferential cracks. This reassessment would consider all potential stresses that could cause these cracks to grow and ultimately fail, obligating ENB to schedule any necessary repairs promptly.

The impetus for these proposed changes can be traced back to the catastrophic 2010 oil spill from Enbridge's Line 6b near Marshall, MI. This rupture released more than a million gallons of oil into Talmadge Creek and the Kalamazoo River, going undetected for several hours and causing extensive environmental damage.

The DOJ and Enbridge reached a settlement agreement in 2016 to resolve the lawsuits stemming from the Marshall and Romeoville spills. Now, with the proposed amendments, the DOJ aims to ensure that ENB takes more proactive and comprehensive measures to address pipeline integrity issues, particularly focusing on circumferential cracks.

The Lakehead System, which spans the Midwest, includes Line 5, a 71-year-old pipeline that runs beneath the ecologically sensitive Straits of Mackinac. This segment of the pipeline has been a focal point of environmental concerns and legal battles, with advocates calling for its shutdown due to the potential risk of an oil spill in the Great Lakes.

Once approved, the proposed changes to the consent decree could significantly impact Enbridge's operations, compelling the company to adopt enhanced safety measures and ensure the long-term integrity of its pipeline network. This move underscores the ongoing efforts by federal authorities to mitigate environmental risks and hold energy companies accountable for the safe operation of their infrastructure.

Zacks Rank & Key Picks

Currently, Enbridge carries a Zack Rank #3 (Hold).

Investors interested in the energy sector may look at some better-ranked stocks like GeoPark Ltd. GPRK, Sunoco LP SUN and The Williams Companies, Inc. WMB. GeoPark and Sunoco currently sport a Zacks Rank #1 (Strong Buy), whereas Williams Companies carries a Zacks Rank #2 (Buy).

GeoPark, based in Hamilton, Bermuda, is an explorer, operator and consolidator in the oil and gas sector. The company primarily operates in Chile, Colombia, Brazil and Argentina. It has a Zacks Style Score of A for Value and Growth.

The Zacks Consensus Estimate for 2024 and 2025 earnings per unit is pegged at $3.23 and $3.98, respectively. The company has witnessed upward earnings estimate revisions for 2024 and 2025 in the past 60 days.

Sunoco is a leading wholesale motor fuel distributor in the United States, boasting a vast distribution network spanning 40 states. With long-term contracts servicing more than 10,000 convenience stores, it distributes more than 10 fuel brands, ensuring a stable revenue stream. SUN currently has a Value Score of A.

The Zacks Consensus Estimate for 2024 and 2025 earnings per unit is pegged at $7.29 and $7.17, respectively. The partnership has witnessed upward earnings estimate revisions for 2024 and 2025 in the past 60 days.

Williams Companies is a premier energy infrastructure provider in North America. The company's core operations include finding, producing, gathering, processing and transportation of natural gas and natural gas liquids.WMB is paying out its shareholders an attractive dividend yielding around 5%. 

The Zacks Consensus Estimate for WMB's 2024 and 2025 EPS is pegged at $1.79 and $2.03, respectively. The company has a Zacks Style Score of B for Growth. It has witnessed upward earnings estimate revisions for 2024 and 2025 in the past 30 days.

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