Enbridge (ENB -1.21%) is a giant North American midstream company with a collection of assets that would be virtually impossible to replace. This energy infrastructure generates reliable fees that support the company's generous 7% dividend yield. The problem is that to grow its cash flow and its dividend, the company has to build more assets. Three new projects, costing around CA$3 billion, will help support growth as they come online over the next five years.
A toll-taker
One of the most interesting things about Enbridge's energy business is that it generally sidesteps the ups and downs of commodity prices. That's because it charges fees for the use of its midstream and pipeline assets. It is a reliable business driven by the demand for energy, which remains strong even though the world is slowly shifting toward cleaner alternatives. The actual price of what's following through Enbridge's system isn't all that important.
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The problem with the model is that it costs a lot of money to build midstream assets, and once they are built, the cash flows they generate are reliable but slow-growing. So, to boost growth, Enbridge and its peers have to keep building or acquiring new pipelines, storage, transportation, and processing assets. With a market cap of around $75 billion, Enbridge has the heft to both build and acquire. For example, it just acquired Tri Global Energy, a renewable power developer, for an undisclosed sum. And it recently announced the addition of three projects to its capital investment pipeline worth a total of CA$3 billion.
Focusing on natural gas
Tri Global Energy will help bolster Enbridge's clean energy division, which is relatively small today. Growing that business is a long-term goal, so it can keep up with the world as it shifts toward cleaner energy alternatives. That said, the new ground-up construction is all in the company's natural gas business. This might seem at odds with the clean energy growth, but it really isn't. Natural gas is expected to be an important transition fuel because it burns more cleanly than alternatives like coal and oil. Broadly speaking, Enbridge is looking to increase the size of both its natural gas and clean energy operations while allowing its oil pipeline business to shrink in importance.
The smallest of the company's natural gas investments is the Venice Extension. It's a modest CA$400 million investment, but it is supported by the demand for liquefied natural gas (LNG). Essentially, the new pipeline will allow for more natural gas to reach an LNG export facility on the Gulf Coast, helping to alleviate energy constraints that are making life very hard for countries around the world today. This project should be completed by the end of 2024, but there are another CA$1.6 billion of additional projects waiting in the wings in the same region, so this particular growth engine isn't over just yet.
The next capital investment project to come online will be the T-North expansion. It is expected to be completed in 2026. This CA$1.2 billion project is being driven by a mix of increasing natural gas supply and increasing demand. Essentially, Enbridge is increasing its capacity with this addition. It is located in Western Canada and ties into the final project, which is a bit more exciting.
The last new project added to the company's list is the CA$1.5 billion Woodfibre LNG export facility, which ties into the same system to which T-North is attached. Enbridge (30% ownership) is partnered with Pacific Energy Corporation Limited (70%) on the project. It is expected to be in service by 2027. This LNG export asset is on the West Coast, which provides easier and cheaper access to Asian demand centers. Notably, demand for LNG from this region is expected to increase by 120% by 2050 over 2020 levels. And the transportation time is estimated at just two weeks from Woodfibre compared to East Coast LNG facilities, where transit times can be more than twice as long.
Backing up management's cash flow outlook
Enbridge is projecting distributable cash flow growth of between 5% and 7% a year, on average, over the next three years. Dividend growth should track along behind that. But the key to that growth is the ability to find new investment opportunities, like the three projects noted above. As long as Enbridge can keep building out its vital infrastructure system, investors can feel comfortable that growth is on track. This trio of new projects suggests that there's even more growth ahead after the current three-year projection period.
