Enbridge (ENB 2.83%) recently made a big splash. The Canadian energy infrastructure giant agreed to acquire privately held Moda Midstream Operating for $3 billion in cash. The deal will advance its U.S. Gulf Coast expansion strategy while significantly boosting its cash flow. Meanwhile, it includes near-term expansion opportunities and longer-term potential for low carbon energy infrastructure.
The compelling economics also enhance the long-term sustainability of Enbridge's 6.7%-yielding dividend. Here's a closer look at why income investors should like this deal.
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Drilling down into the deal
The primary driver of the Moda transaction is the acquisition of the Ingleside Energy Center. Located near Corpus Christi, Texas, Ingleside is North America's largest crude export terminal, loading a quarter of all U.S. Gulf Coast crude exports last year. Overall, the recently built state-of-the-art facility has 15.6 million barrels of storage capacity and can export 1.5 million barrels per day (BPD).
As part of the deal, Enbridge is also acquiring the following assets:
- A 20% interest in the 670,000-BPD Cactus II pipeline.
- 100% of the 300,000-BPD Viola pipeline.
- 100% of the 350,000-BPD Taft Terminal.
These pipeline and storage assets combine to provide a fully integrated crude oil export platform on the Gulf Coast. It generates stable income as long-term contracts underpin 90% of its cash flow. Meanwhile, Enbridge is paying an attractive price of around 8 times EBITDA, making it immediately and highly accretive to its cash flow.
Furthermore, the deal preserves Enbridge's financial flexibility. It can fund the purchase with existing liquidity while maintaining a leverage ratio at the low end of its target range. The acquisition therefore supports its dividend growth outlook and financial flexibility to invest $5 billion to $6 billion per year on expanding its platform in the future.
Perfectly positioned for the energy transition
In addition to the near-term boost, Ingleside comes with long-term upside potential. Enbridge can expand the facility's storage capacity up to 21 million barrels and export capacity to 1.9 million BPD. Those expansion opportunities represent low-cost, high-return growth potential.
Ingleside also includes up to 500 acres of undeveloped land within the terminal. Enbridge envisions using this land to support a lower-carbon future. It plans to build up to 60 megawatts (MW) of solar energy on-site. That will enable it to self-power the facility, which uses 6 MW, while potentially selling the excess renewable energy to local industry. This renewable energy capacity will give the already lower emissions facility a net-negative profile. Furthermore, it advances Enbridge's overall goal to achieve net-zero emissions by 2050.
In the near term, the facility will help support the global economy's growing demand for energy. Enbridge can expand its capacity as demand rises. At the same time, it's reducing the emissions profile of these fuels by adding solar to this facility.
Meanwhile, the facility's strategic location along the Gulf Coast could provide Enbridge with longer-term lower carbon opportunities. For example, it could eventually produce and export renewable fuels like green hydrogen and ammonia from the site. It could also serve as a staging terminal for carbon dioxide before its sequestration in local geological formations. That longer-term lower carbon potential makes it an ideal strategic fit for the company.
Putting the dividend on an even more sustainable foundation
Enbridge is one of the best dividend stocks in the energy sector. It has grown its dividend in each of the past 26 years, expanding it at a 10% compound annual rate. This deal enhances the company's ability to maintain that excellent track record. It provides a near-term income boost while increasing its long-term growth prospects. Enbridge continues to look like an attractive option for income-seeking investors.
