The global push to reduce carbon emissions is strong, and it's hard not to have an emotional reaction to headlines about global warming. But shifting from carbon fuels to cleaner alternatives is going to take decades.
This is why Enbridge (ENB 2.83%) is starting out on its clean energy effort, while it can still count on material cash flows from its massive collection of carbon-based assets. But don't let that carbon exposure deter you from investing in this high-yield Dividend Aristocrat -- its growth in clean energy is still going to be huge. Here's what investors need to know.
Oil is king, for now
Oil will remain one of the most important contributors to global energy for a long time, with demand expected to keep growing through 2040, despite the fact that its share of overall energy demand will shrink. So with Enbridge getting roughly 58% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from oil pipelines, these fee-based assets should provide reliable cash flows for years into the future.
Image source: Getty Images.
Complementing this business is the 26% of EBITDA that comes from Enbridge's natural gas pipelines. This fuel is seen as a bridge to a low-carbon future because it burns more cleanly than coal and oil. In addition to these natural gas midstream assets, Enbridge also owns a natural gas utility, which makes up 12% of EBITDA. Natural gas is expected to see increased demand through 2040 and an increase in its energy market share. Long term, the company expects these two natural gas businesses to grow in importance while its oil operations shrink.
So while still operating in the carbon space, it's adjusting at the fringes to the greening world. But for investors, Enbridge's clean energy segment offers promise, accounted for 3% of EBITDA in 2020.
Growing fast
That 3% is projected to be 4% at the end of 2022. On an absolute basis, that's a tiny percentage-point increase. But from such a small base, clean energy's importance to Enbridge's business is increasing by 33%. And while that level of growth may not be sustainable, material growth in the clean energy segment is pretty much baked in.
The North American energy giant, with its $84 billion market cap, is looking to invest around 1.5 billion Canadian dollars ($1.2 billion) internally in things like using solar power on its own pipelines, investing in renewable natural gas, and to examine integrating hydrogen into its business, among other things. But the really exciting opportunity comes from Europe, not Enbridge's North American footprint.
Across the pond, the company has three large offshore wind-power projects set to come on line, one each year, between 2022 and 2024. Once complete, the company's offshore wind portfolio will have doubled in size. That should have a significant impact on the EBITDA breakdown of the company's businesses, since Enbridge likes to focus on assets backed by long-term contracts. That means that these clean energy investments will be roughly similar to its fee-based oil and natural gas pipelines.
Enbridge's investment plans show how it's prioritizing clean energy. Although these assets are projected to make up only 4% of EBITDA, roughly 30% of the company's capital investment is earmarked for renewable power over the next few years. The bulk of that, at around 28% of the total capital budget, is for the European wind investments (the remaining 2% is going to the internal projects mentioned above). All in, renewable power is an important focus for Enbridge in the future, just like it is for the growing group of socially-responsible ESG investors.
ENB dividend yield. Data by YCharts.
A foundation for the future
Enbridge is a Dividend Aristocrat with a historically high dividend yield of around 6.5%. Investors seem to view it as a dinosaur burdened by its oil and natural gas assets. But since it is actually using the cash flow from these investments to invest in its own rapid clean energy growth, it's probably best to think of the carbon-energy portfolio as a foundation upon which it can build a renewables powerhouse.
Given that this energy transition will take decades, with a material amount of investment needed along the way, it seems like a pretty good plan even if it strikes some clean energy advocates as slow-going.
