In early July, Brookfield Infrastructure Partners (NYSE:BIP) and Enbridge (NYSE:ENB) teamed up on a win-win deal for both companies. Brookfield Infrastructure is acquiring a business that will help plug a hole left after the company sold its electricity transmission business in Chile. Meanwhile, Enbridge will bring in some much-needed cash to reduce debt.
However, while both companies will benefit from this transaction, Brookfield stands to gain the most from the deal since it comes with a healthy dose of upside for the infrastructure networks operator. The acquired assets could provide the company with the fuel to grow its high-yielding dividend at an even faster rate in the future.
Drilling down into the deal
When Brookfield Infrastructure announced that it would acquire Enbridge's Western Canadian natural gas gathering and processing business, the initial focus was on the current cash flow this business generates. The system, which includes 19 gas processing facilities and more than 2,200 miles of pipelines, produces steady cash flows "anchored by a firm contract profile with a weighted average life of 10 years," according to CEO Sam Pollock. Overall, those agreements support 85% of the revenue generated by this business, which gives the company a very predictable income stream to sustain its dividend.
In addition to that, Pollock wrote in the company's second-quarter letter to investors:
This business is an ideal platform to establish our midstream presence in Canada, as it is competitively positioned for growth given the highly economic and prolific acreage throughout the Montney region. We believe the region's massive scale and low breakeven costs will ensure that it continues to be a focal point for development by top tier producers with over 40 years of anticipated economic drilling inventory at current price levels. Production in the Montney is anticipated to grow by approximately 20%+ from 2017 to 2024 and we believe the catchment area of the business overlies more than 35,000 potential future wells, representing approximately 60% of the region's gas resources.
In other words, thanks to the strategic position of these assets, Pollock sees the potential for significant expansion of this system in the coming decades. Not only should the company be able to build more gathering pipelines to hook newly drilled wells to its processing plants, but it should also be able to construct additional facilities in the future after the current ones reach their capacity. On top of that, there's the potential to expand further downstream by building other midstream assets such as longer-haul pipelines and facilities that separate and store natural gas liquids.
Digging into the Montney shale
Canada's Montney Shale doesn't currently capture investors' attention like the Permian Basin. However, that doesn't mean it's a second-tier play. Quite the contrary since, like the Permian, it's a resource-rich region with as many as six drillable formations that produce highly economic liquids-rich natural gas. Because of those features, it has become an important growth driver for companies like Encana (NYSE:ECA).
While Encana expects to invest 50% of its capital into the Permian over the next five years, it plans to spend the second-largest percentage on the Montney. Those investments will fuel a 15% compound annual growth rate in its gas production, while higher-margin liquids output will expand at an even faster 35% compound annual rate.
Among the factors driving Encana's ability to develop the Montney are its partnerships with midstream companies Keyera (TSX:KEY) and Pembina Pipeline (NYSE:PBA), which are building assets to support its growth. Keyera, for example, signed a deal earlier in the year to acquire and fund the development of Encana's Pipestone Liquids Hub and the planned Pipestone Processing Facility. The companies signed an innovative fee-for-service agreement, which will increase Encana's flexibility. Meanwhile, Pembina Pipeline recently finished construction of three gas processing plants that will enable Encana to capture higher-value liquids from its production in the region.
Several other oil and gas companies are beginning to ramp up their investments in the Montney. U.S. oil giant ConocoPhillips (NYSE:COP), for example, spent $120 million earlier this year to lease another 35,000 acres in the region. That boosted ConocoPhillips' position up to 140,000 acres that it can develop in the future. As companies like ConocoPhillips drill more wells in the Montney, it should open the door for Brookfield to expand its system in the region, which should grow its cash flows.
A needle-mover both now and in the future
While Brookfield Infrastructure's deal with Enbridge will plug an immediate hole in its cash flow, this transaction is more than just about filling a gap. In fact, it has the potential to be an important growth driver in the years ahead as the company expands the system to capture the growing volumes of producers in the region. That upside from organic growth enhances the potential for Brookfield Infrastructure to increase its dividend at the high end of its 5% to 9% annual target range.