Kinder Morgan (NYSE:KMI) is very popular with investors because it generates a boatload of cash flow each year due to the fee-based nature of the bulk of its asset base. Those fees provide tremendous strength amid the current stormy conditions of the energy market, evidenced by the relatively stable cash flow the company generated over the past two years. That said, as good as Kinder Morgan is, its Canadian rival, Enbridge (NYSE:ENB), is even better. Here's why investors should check out the Canadian energy infrastructure giant.
The transformational transaction
Enbridge recently announced that it was acquiring Spectra Energy (NYSE:SE) in an all-stock deal valued at $28 billion. Doing so will vault the pro forma company well past Kinder Morgan in size making it the largest energy infrastructure company in North America. More importantly, it will diversify Enbridge's earnings so that it will become much more balanced between liquids and natural gas, which will supply 49% and 47%, respectively, of EBITDA going forward. Contrast that with Kinder Morgan, where natural gas supplies 57% of EBITDA.
Furthermore, 96% of the company's pro forma cash flow comes from stable cost-of-service, take-or-pay, or fee-based contracts. Contrast this with Kinder Morgan where fees support 91% of its cash flow. Meanwhile, less than 5% of Enbridge's cash flow has exposure to commodity prices, while 9% of Kinder Morgan's cash flow is either commodity-based or hedged cash flow. While Kinder Morgan's direct exposure is minor, it is one reason why its distributable cash flow per share declined from $2.14 last year to a projection of $2.10 in 2016.
What sets Enbridge apart is its unmatched growth. By combining its growth project backlog with Spectra Energy's, it boasts an industry-leading $20 billion in projects currently under development compared to $13.5 billion at Kinder Morgan. Enbridge intends to fund the bulk of the backlog through internally generated cash flow, planned asset monetizations, and joint venture contributions. Because of that, it foresees no need to access the equity market to complete its current project backlog.
Enbridge's backlog supports its projections that it will grow its available cash flow from operations by 12% to 14% through 2019. As a result, the company has high visibility to grow its dividend by 10% to 12% through 2024, including an anticipated 15% increase in 2017. Contrast this with Kinder Morgan, which cut its dividend 75% last year and plans to keep its payout flat until it gets its leverage under control. Based on current projections, dividend growth in 2017 is questionable.
In addition to the growth Enbridge already has in development, the company has another $37 billion of future projects to support continued expansion over the next decade. While these projects span all six Enbridge's segments, what differentiates it from Kinder Morgan is the growth potential of its renewable power segment. Not only does Enbridge currently have 1,800 MW of renewable generation capacity already in service, but it has nearly C$10 billion in growth projects under development. These projects consist of offshore wind farms in Europe, transmission lines, and other renewable developments. There's an enormous amount of growth potential in the renewable sector given the global shift away from fossil fuels, which gives Enbridge a nearly endless supply of opportunities in the years ahead.
Enbridge believes that its acquisition of Spectra Energy pushes it over the top to become the must own energy infrastructure stock in the sector. The numbers certainly stand out, with the largest in the group by size and the most growth potential both in the absolute value of its current project backlog as well as projections for double-digit cash flow and dividend growth for the next several years. Needless to say, investors who are interested in Kinder Morgan should check out what Enbridge has to offer.
Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan and Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.