Oil pipeline giant Enbridge (ENB 0.20%) and refining and midstream company Phillips 66 (PSX 1.14%) each have a long history of paying attractive dividends to investors. Enbridge has increased its dividend for 27 straight years, making it Dividend Aristocrat, while Phillips 66 has given investors 11 raises since its formation in 2012. The energy companies currently offer attractive dividend yields, 4.3% at Phillips 66 and 6.3% for Enbridge.
The energy companies are taking a joint step to improve their abilities to maintain and grow their high-yielding payouts by consolidating two joint ventures. They are, in a sense, trading stakes in two assets to enhance their strategies. Here's a closer look at the deal and how it will benefit these energy stocks.
A high-value trade
Enbridge and Phillips 66 recently completed a joint venture (JV) merger transaction. They now own a single JV holding their ownership interests in the Gray Oak Pipeline and DCP Midstream (DCP).
The new JV will see Enbridge take over the operatorship of the Gray Oak oil pipeline from Phillips 66 while increasing its indirect economic interest from 22.8% to 58.5%. Gray Oak is a long-haul, contracted pipeline that transports oil from the Permian Basin into Corpus Christi and the Houston area. Meanwhile, Phillips 66's stake in that pipeline will fall from 42.25% to 6.5%.
In exchange, Phillips 66 will increase its economic interest in DCP Midstream from 28.26% to 43.31%, while Enbridge's will fall to 13.3%. DCP Midstream is a master limited partnership focused on gathering and processing natural gas. Phillips 66 will oversee and manage their joint interest in the MLP. The refining company will also contribute about $400 million in cash to even out the trade.
Phillips 66 also offered to acquire all of the outstanding units of DCP Midstream that it doesn't currently own for $34.75 per unit in cash. The JV currently holds 56.51% of the MLP's common units. It's now up to the MLP's board to decide if it wants to accept the offer.
Enhancing their strategies
The new JV structure has several benefits for these energy companies. It will simplify their operations, enhance their strategies, and boost their respective earnings.
On Enbridge's side, it's increasing its stake in a key oil pipeline while reducing its interest in DCP Midstream's gathering and processing operations. That move will enhance the company's U.S. Gulf Coast export position, which also features its leading export facility, Ingleside Energy Center. It will also reduce its exposure to commodity price volatility and strengthen its low-risk pipeline/utility business model. Finally, Enbridge intends to extend its solar energy self-power strategy to Grey Oak by installing solar facilities along the pipeline to reduce its emissions and costs.
The merger is immediately accretive to Enbridge's distributable cash flow per share. In addition, the $400 million in cash it received creates additional financial flexibility to further its capital allocation strategy. That helps support Enbridge's plan to grow its distributable cash flow by 5% to 7% per share through 2024, which should allow it to continue increasing its dividend.
Meanwhile, the transaction will enhance Phillips 66's existing natural gas liquids (NGL) platform. It will allow for further integration while positioning the company to continue growing its NGL business. The company will gain even more control over this platform if its offer to acquire the rest of DCP Midstream it doesn't already own is successful. That would further simplify its ownership structure and follows Phillips 66's deal to acquire its other MLP, Phillips 66 Partners, earlier this year.
The transaction is also accretive to Phillips 66's earnings while improving its stability by further diversifying it away from the volatile refining industry into the midstream sector. That will improve the long-term sustainability of the company's dividend while giving it the fuel to continue growing its payout.
A win-win trade
Enbridge and Phillips 66 are swapping stakes in two jointly owned assets to further enhance their strategic focuses. The deal will immediately boost their earnings while improving their long-term growth prospects. It will put their dividends on even more sustainable foundations, enhancing their ability to continue growing the payouts in the future. That makes them even more attractive options for investors seeking a high-yielding and growing passive income stream.
