Earlier this year, Brookfield Infrastructure Partners (NYSE:BIP) sold its stake in an electricity transmission business in Chile so that it would have the funds to capture opportunities it saw up ahead. One area where it sees potential is the global midstream segment, which processes, transports, and stores oil and gas. That's why the company is investing roughly $700 million in midstream acquisitions in Canada and India that will drive growth in the near term.
However, while Brookfield's most recent midstream investments were outside of the U.S., the company sees a big opportunity in the States, because companies need to pump as much as $150 billion into the sector over the next five years. Given this large investment opportunity, it wouldn't be a surprise if the infrastructure giant adds new U.S. midstream assets to its portfolio in the future. That was clear from the comments of CEO Sam Pollock on the company's third-quarter conference call, in which he laid out three reasons why the company likes the midstream sector.
1. These are great infrastructure assets
Pollock started his discussion on why Brookfield has been investing in the midstream sector by stating that:
We like its core infrastructure characteristics. These assets are strategically located, difficult to replicate, and have a strong contracted cash flow profile. Their scarcity value is supported by the fact that they are often the only connections between supply and demand centers.
The company's recent decision to buy a stake in an Indian pipeline is a perfect example of these features. Brookfield is working to acquire a roughly 900-mile pipeline that moves natural gas from the prolific Krishna Godavari basin off India's east coast to market centers in the west, which makes it a crucial piece of the country's energy infrastructure. Given its strategic importance, 20-year contracts underpin the pipeline's cash flows, which would provide Brookfield with a very predictable income stream.
Most of the midstream assets the company has acquired in recent years share those same characteristics, which is why they fit so well into its infrastructure portfolio.
2. They come with embedded upside
Pollock continued with why Brookfield likes the midstream sector by stating that "The businesses we own have significant growth potential. With the emergence of new resources and growing demand, there is a large funding gap for infrastructure build out, making these assets prime to benefit from future growth."
That growth is currently very evident in the company's North American midstream operations. For example, the company owns a gas pipeline joint venture in the U.S. with Kinder Morgan (NYSE:KMI) that it's expanding rapidly. The partners recently completed a $100 million project on the system that will supply them with an incremental $25 million of annual earnings. In addition to that, Brookfield Infrastructure and Kinder Morgan just announced the second phase of expansion, which is a $230 million project that should supply them with another $50 million of annual earnings when it comes online in the future.
Meanwhile, the company is in the process of buying Enbridge's (NYSE:ENB) natural gas gathering and processing business in Western Canada. One of the draws of these assets is the potential for Brookfield to expand the system as production in the region grows in the future.
That growth potential is why Brookfield wants to continue acquiring North American midstream assets. Pollock noted this massive opportunity set on the call by pointing out that:
The scale of the North American natural gas market is unparalleled given the massive transformation we've seen over the last 10 years. Both supply and demand are at all-time highs, requiring substantial amounts of infrastructure to help move and store gas. We believe that there is approximately $150 billion of energy infrastructure investment opportunities in the U.S. alone. This is comprised of roughly $100 billion of capital required for midstream development through 2021 with the balance representing potential investments in MLPs, many of whom are seeking structural simplification. This has created a large pipeline of prospective transactions of scale through corporate carve-outs, partnerships, and privatizations. In the coming years, we are optimistic about our ability to continue to grow our presence in the energy sector.
Those comments seem to indicate that Brookfield could be an active acquirer of U.S. midstream assets.
3. Brookfield makes a great owner for these assets
The CEO concluded his remarks on why Brookfield wants to continue investing in the midstream sector by stating that: "We are a well-established owner and operator. With almost 40 years of energy investment experience across Brookfield, we have deep institutional knowledge and access to market intelligence, which provides us with a competitive edge in identifying discrete opportunities."
Unlike many institutional investors in the sector like private equity or pension funds, Brookfield owns and operates midstream assets. The company believes that this provides it with a competitive advantage over those financial buyers because it can leverage its deep industry knowledge to find the best midstream investment opportunities, which should enable it to generate higher returns over the long term.
Expect midstream to become a major growth driver
While Brookfield Infrastructure's diversification enables it to make acquisitions across several different asset classes and geographies, it sees a big opportunity to invest in the U.S. midstream segment. Because of that, investors shouldn't be surprised if the company makes more deals in that sector in the coming years. That would enable Brookfield to add more great infrastructure assets to its portfolio, which should drive strong growth and returns in the future.
Matthew DiLallo owns shares of Brookfield Infrastructure Partners, Enbridge, and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners and Enbridge. The Motley Fool has a disclosure policy.