Brookfield Infrastructure Partners (NYSE:BIP) continued growing at a brisk pace in the first quarter, delivering a 20% year-over-year increase in funds from operations (FFO). However, the main tailwind that had been driving results over the past year -- the acquisition of a natural gas pipeline system in Brazil -- will dissipate in the coming quarter just as new headwinds begin to emerge. Because of that, Brookfield's management cautioned investors on the accompanying conference call to prepare themselves for leaner times in the near term as the company works to capture longer-term opportunities that could reaccelerate its growth rate.
1. Brookfield is building up liquidity just in case
CFO Bahir Manios led off the call with some quick highlights on the quarter before diving into an update on the company's strategic initiatives. He stated:
Entering the year, a key focus for us was to build up our corporate liquidity in response to signals suggesting a period of greater volatility. Even though economic conditions are quite favorable in most jurisdictions where we operate, we often source some of our best investment opportunities when markets are volatile. Consequently, heading into 2018, a major priority was completing the sale of our Chilean electricity transmission business.
That sale closed during the quarter, bolstering the company's total corporate liquidity to $4 billion, which will increase by another $500 million after Brookfield completes a debt offering on its Brazilian pipeline business. While this gives the company a big war chest to make investments, CEO Sam Pollock pointed out that it "may act as a partial drag on our near-term FFO until we deploy that capital." However, he also said that "the flexibility to respond to uncertainty in a period of market volatility is far more valuable to us in the long run."
2. Management might sell more businesses this year
The CFO also stated that Brookfield "launched the sale processes for other mature businesses" and that the company is "hopeful that these processes will close before the end of the year, generating further meaningful proceeds for Brookfield Infrastructure."
One thing management made clear on the call was that it wasn't selling these assets because it needed the cash. Instead, the CEO stated, these sales are part of the company's full-cycle strategy to buy assets for good values, invest in them to enhance cash flows, and then "once the business reaches maturity, we seek to opportunistically exit at strong valuations in order to redeploy the proceeds into higher returning investments." While these sales will drag on FFO in the near term, cash flow will grow faster in the longer term.
3. There are some headwinds ahead
In addition to the asset sale-related headwinds on the horizon, the CFO discussed other upcoming difficulties:
While we're benefiting from strong GDP-linked growth in our Transport assets in South America, we may experience headwinds at our Australian rail business in the second half of the year due to potential closures or production curtailments at two of our iron ore customers. We do not, as of yet, have a clear picture of the timing or scale of these curtailments as consolidation among industry players is being explored, which may result in certain existing operations remaining in production for several more years.
The CFO went on to say, "On a more positive note, several of our large customers are evaluating expansions at their operations to take place over the next several years that would largely replace drop-offs that may occur in near-term revenues." So again, the near-term headwinds should abate as longer-term tailwinds take hold.
4. There's a big slate of growth projects underway
Another anticipated tailwind is the company's backlog of growth projects, which stood at $2.5 billion at the end of the first quarter. The CFO noted that the company recently finished $500 million of these projects and had already lined up much of the funding for the balance of the backlog. He went into some detail, noting that the company finances smaller expansions with retained cash flow. Larger ones, however, require a different approach. The company typically finances these with new equity, either through asset sales or by issuing new common and preferred units. Overall, $1.2 billion of the company's remaining backlog fits into this second category, but the "equity capital has already been raised and set aside" for the projects it's working on over the next year, according to the CFO.
5. Management sees opportunities for M&A in the energy midstream sector
Brookfield Infrastructure Partners continues to actively seek out acquisition opportunities. One that has emerged is in the North American energy sector. The CFO noted that "there's been a stock market sell-off in listed energy infrastructure companies and the sentiment is relatively negative." As a result:
This has led to an opportunity set that includes potential asset carve-outs, take-privates, and partnership arrangements with owners of energy infrastructure assets. We are in various stages of discussions with large midstream energy companies and are encouraged by a number of the interesting opportunities in front of us. ... We believe that we are well positioned given our solid balance sheet, proven operational track record, and ability to act as a single counterparty for large transactions.
Given what lies before the company, it could quickly put its liquidity to work on some needle-moving transactions.
Slowing down to reaccelerate
Brookfield's management team made it clear on the first-quarter call that it's heading into a transitory period, which could cause FFO to drift backward in the near term. However, that's mainly due to recent and upcoming asset sales, which will give the company the cash to fund its expansion projects and take advantage of opportunities that are beginning to develop in the North American energy infrastructure market. As this capital is put to work, FFO growth should reaccelerate, providing the company with ample fuel to continue increasing its high-yield distribution.