Summary
Jefferies warned investors that the recent strength across Canadian midstream equities looks heavily influenced by market flows and a broader energy rally rather than a clear change in fundamentals. The bank lowered Enbridge Inc. from Buy to Hold on valuation grounds, even as it nudged up its price target to C$76. Analysts pointed to falling U.S. and Canadian bond yields and rotation of money out of U.S. technology as important contributors to the sector's move.
Sector performance and drivers
Canadian midstream names have rallied roughly 13% year-to-date, with Jefferies noting that gains have been "even more pronounced over the last few weeks." The firm attributes this strength in part to a wider Energy sector upswing and lower bond yields in the U.S. and Canada, which have supported midstream valuations.
Jefferies also highlighted cross-sector flows as a factor, saying investors rotated capital out of U.S. technology and into Energy. The note cites the IGV Software ETF (BMV:IGV) as an example, and reports it is 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 wrote.
Jefferies' view on sustainability and valuation
Despite acknowledging the recent run, Jefferies expressed skepticism about how durable the re-rating is. "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)," the analysts wrote.
Against that backdrop, the broker moved Enbridge to Hold from Buy, pointing to valuation as the main rationale. Although Enbridge reported fourth-quarter EBITDA that beat expectations, recent share gains have already priced in a material portion of the company’s expected growth.
Enbridge specific details
Shares of Enbridge are up about 12% year to date and have "re-rated nearly a turn of EBITDA in the last 3 weeks to the highest multiple since '22," according to Jefferies. The firm calculates Enbridge is trading at 12.8x 2027 EBITDA and 12.2x 2028 EBITDA. The stock sits at approximately a 0.5x discount to TC Energy, a spread Jefferies views as reasonable given TC Energy's greater visibility on growth.
Jefferies raised its price target on Enbridge to C$76 from C$71. The broker still expects EBITDA growth for 2027-2028 to accelerate from 2026's roughly 3% pace, but it does not see a clear case for near-term upward revisions to the company's about 5% long-term growth target.
Implications for investors
Jefferies' note suggests investors should be cautious about attributing recent gains to improved company fundamentals. With a meaningful share re-rating already reflected in Enbridge's multiples and the view that flows are a dominant driver, the bank signaled limited conviction that the re-rating will continue absent stronger structural evidence.