Jefferies downgrades ENB to Hold after recent re-rating

Investing.com -- Canadian midstream equities have been on a strong run to start the year, but questions are emerging over how sustainable the rally may be, according to Jefferies.

The sector rallied around 13% year-to-date, with performance “even more pronounced over the last few weeks,” Jefferies analysts say, helped by a broader Energy rally and falling U.S. and Canadian bond yields.

One explanation, they note, is “flows” as money rotated out of U.S. technology and into Energy, with the IGV Software ETF (BMV:IGV) down 22% year to date.

"While tough to precisely quantify all the different vectors, there has clearly been a tide lifting all boats," analysts led by Sam Burwell said in a note. However, the analysts are skeptical about the sustainability of the move, arguing that the current re-rating appears more flow-driven than structurally underpinned.

"In this current instance, we think cross-sector flows are a key driver and thus makes us less sold on CAD Midstream re-rating further (and if further re-rating does happen, less confident in how structural it could be)," they said.

Against that backdrop, Jefferies downgraded Enbridge Inc (TSX: ENB) to Hold from Buy, citing valuation. While fourth-quarter EBITDA beat expectations, the analysts say recent share performance has left the stock adequately pricing in growth.

Shares are up 12% year to date and have “re-rated nearly a turn of EBITDA in the last 3 weeks to the highest multiple since ’22," they noted.

Enbridge now trades at 12.8x and 12.2x on 2027 and 2028 EBITDA, respectively, and at roughly a 0.5x discount to TC Energy, which Jefferies considers fair given TRP’s greater growth visibility.

Although the broker still expects 2027–2028 EBITDA growth to accelerate from 2026’s roughly 3% pace, it does not see imminent upside revisions to the company’s approximately 5% long-term growth target.

Jefferies raised its price target on Enbridge to C$76 from C$71.

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