The global economy is rapidly shifting fuel sources from carbon-emitting fossil fuels to cleaner alternatives like renewable energy. However, it will take decades and trillions of dollars to make the switch. Because of that, the economy will continue needing a variety of fuel sources to bridge the gap in the interim.
That's why investors shouldn't completely disregard more traditional energy options. With that in mind, we asked some of our energy contributors what energy companies they believe could be long-term winners during the energy transition. They see the brightest futures for The Southern Company (NYSE:SO), Kinder Morgan (NYSE:KMI), and Enbridge (NYSE:ENB).
The other clean energy
Reuben Gregg Brewer (The Southern Company): The world looks at renewables like solar and wind as the de facto winner in the low carbon energy space. But the world has had clean alternatives for a long time, including hydro power and nuclear power. Although generally safe, a small number of high-profile accidents have left nuclear power on the outs. However, it provides reliable base load power that can help support the growth of intermittent solar and wind. Many believe it will be a vital part of the clean energy future.
One supporter is U.S. utility giant The Southern Company, which is building two nuclear power plants right now (the only nuclear plants being built in the country today). The Vogtle project, as it is known, has been a long slog, including the bankruptcy of Westinghouse and the impact of the the coronavirus. That said, once these two plants are finally up and running, which should be sometime in the next two years, The Southern Company will have reactors that it can rely on for decades to come as it phases out dirtier carbon-based options. And all the power that the Vogtle nuclear power plants generate will come with zero carbon emissions.
The Southern Company's dividend yield is a fairly generous 4% today (backed by two decades worth of annual dividend hikes), which is well more than twice what the S&P 500 index is offering up. It's also a step above the roughly 3.15% the average utility provides, using the Vanguard Utilities Index ETF (NYSEMKT:VPU) as a proxy. It's worth a look for dividend investors trying to find a clean energy play that's not wildly overpriced.
Vital infrastructure for the energy transition and beyond
Matt DiLallo (Kinder Morgan): While the world is rapidly pivoting toward renewable energy, it will still need fossil fuels for quite a while. The cleanest option during this energy transition is natural gas. That's why the International Energy Agency (IEA) expects demand for gas to rise 29% by 2040.
This outlook bodes well for Kinder Morgan, a leader in transporting natural gas in North America. Utilization of the company's existing gas network should remain high, enabling it to continue generating steady cash flow. Further, as demand rises, it will provide Kinder Morgan with opportunities to expand its pipeline network in the future.
Meanwhile, Kinder Morgan's existing assets could play a key role in transporting and storing the fuels of the future. For example, the company can transport renewable natural gas and a 5% to 10% gas-hydrogen blend on its existing pipelines with little to no modifications. Moreover, it could eventually repurpose much of its gas pipeline network to move hydrogen. That could yield major expansion opportunities since that fuel is one-third as energy dense as natural gas, implying it would need three times the infrastructure capacity.
That's why the IEA believes that "existing gas infrastructure is a valuable asset with significant storage capacity that can be repurposed over time to deliver large volumes of biomethane or, with modifications, low-carbon hydrogen." Given this potential essential future role for Kinder Morgan's existing energy infrastructure network, it could be a long-term winner as the economy transitions fuel sources.
Built to last
Neha Chamaria (Enbridge): The adoption of renewable energy may have picked up the pace, but fossil fuels still accounted for 84% of the global energy consumption in 2019. In fact, there are barely any alternatives yet for nearly 80% of oil's end-user demand, such as in industrials, air, marine, and heavy-duty vehicles. Clearly, it'll take a really long time for clean energy sources to displace fossil fuels, if at all, and some energy companies could still thrive. Enbridge, for example, should continue to transport crude oil and natural gas through its extensive pipeline network for decades to come. As one of North America's largest energy infrastructure companies, Enbridge has solid clout in the midstream oil and gas space.
In fact, Enbridge has silently undergone a sea change in the past decade, reducing dependency on liquid pipelines and expanding its natural gas transmission, storage, and distribution infrastructure. Although a fossil fuel, natural gas is a relatively cleaner traditional source of energy.
Enbridge has its plans well in place. Through 2023, it aims to focus on its existing pipeline of projects, which includes modernization of gas transmission. Beyond 2023, Enbridge foresees an organic growth development pipeline worth $30 billion, of which more than $10 billion could be spent on gas transmission alone, and nearly $6 billion on gas distribution and storage. Roughly $7 billion could go toward renewables and only the remaining to liquid pipelines. Enbridge believes its focus on natural gas and some spending on renewables should help the company achieve net-zero emissions by 2050.
More importantly, Enbridge is confident its growth-spending plan could boost its distributable cash flow per share by 5% to 7% in the long run, which should also mean bigger dividends for shareholders from this energy company that could win even as the world shifts to renewable energy.