Brookfield Infrastructure (BIP 3.35%) (BIPC 3.21%) has one of the more recession-resistant businesses. That durability was on full display during the second quarter as it generated stable cash flow despite the impact of COVID-19. Instead of negatively affecting its operations, the pandemic will probably improve its fortunes over the long term. That's because it will likely result in new investment opportunities emerging over the coming months and years.
That was one of the key takeaways of the company's second-quarter conference call. Here's a look at where the company sees opportunities to fuel future growth.
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What goes up, must come back down
Governments and companies borrowed significant sums of money during the early days of the pandemic. The former did so to help stimulate their economies, and the latter used it to shore up their liquidity. While the market is allowing this excess debt at the moment, these entities will eventually need to reduce their indebtedness. Chief Executive Officer Sam Pollock discussed how this might benefit Brookfield on the call:
Once the immediate measures to stabilize economies and businesses have been implemented, governments and businesses alike will need to evaluate alternative sources of capital to repay excessively high debt levels. We've spoken in the past about the secular trend of government seeking investment from private sector to acquire and build out infrastructure. With the deficits along with the desire to stimulate economic activity, we expect the impetus for this to become even more pronounced. In addition, many corporations will be susceptible to tighter credit markets and need to reduce debt levels through asset sales. Suffice to say this is an attractive environment for Brookfield Infrastructure to source investment opportunities for the foreseeable future.
Brookfield is already reaching out to both groups to gauge their interest in selling infrastructure assets. It's currently focused on medium-sized tuck-in acquisitions to bolster its existing energy, transportation, and data operations. In addition, it's looking at several new investment opportunities in all its regions. While it might take a while before these new investments emerge, Brookfield could make several deals that resulted from the previous owner needing to sell to help pay off pandemic-related debt.
Taking a stake in hopes of bagging a bigger deal
Brookfield went on a stock-buying spree in March, scooping up shares of publicly traded infrastructure companies as they sold off. It has since monetized some of them as the market recovered, netting a nice profit. However, Pollock noted that "we continue to accumulate positions in a handful of companies that we hope will lead to broader strategic initiatives in time." While he didn't elaborate much further, the company could use its stake to gauge interest in a merger or asset acquisition.
Midstream opportunities abound
One of the many hard-hit sectors this year has been energy. With crude prices and demand cratering, energy companies are struggling. However, where some see challenges, Brookfield sees opportunities, especially in the North American midstream sector. Pollock stated: "Our focus is in highly contracted businesses with solid counterparties, limited exposure to volume and pricing risk, and long life critical infrastructure that complements our existing operations. We believe several of these types of opportunities exist to implement both in the public and private market." The company could look at a merger or acquire assets that complement its existing business, which primarily focuses on natural gas transportation and storage.
Dialing up more 5G investments
Another "ongoing area of focus for us is on data infrastructure," stated Pollock. He continued:
We believe this sector offers significant opportunities given the large scale investors required to replace the aging copper infrastructure with fiber and upgrade wireless networks to the new 5G standards. With increasing demand placed on capital, telecom operators are looking for funding partners to reduce the strain on their balance sheet and deliver the next generation networks required to support increasingly interconnected society. We remain patient in this regard but we believe we have laid a substantial amount of groundwork and we'll aim to advance these opportunities in the coming months. Our liquidity position combined with access to several sources of capital allow us to move quickly when the catalysts for such transactions emerges.
The company has been actively building its data business in recent years, including recently acquiring data transmission and distribution operations in the U.K. and New Zealand. It's currently working on buying a large-scale cell tower portfolio in India and expanding its data center operations in South America. More growth seems likely in this segment, given Pollock's comments.
A multitude of opportunities to fuel growth
As Pollock laid out on the call, Brookfield expects a growing number of investment options to emerge in the coming quarters. It's well suited to capture them thanks to its top-notch balance sheet and loads of liquidity. As it does, they'll provide the company with more fuel to keep growing its cash flow and high-yielding dividend, which should continue enriching long-term investors.
