Clean energy investment, which focuses on companies building things like wind and solar farms, is a favorite of the ESG crowd. For this investing group, companies that operate in the dirty carbon fuel space are often treated as pariahs.
One such carbon fuel-associated company is Enterprise Products Partners (EPD -0.20%), one of the largest midstream players in North America. Enterprise's management doesn't really care how the ESG crowd feels about it because it still sees years of growth ahead, regardless of the increasing importance of renewable energy.
How does Enterprise Products Partners make its money?
Enterprise is a master limited partnership (MLP) that owns vital energy infrastructure. Specifically, it has a vast portfolio of pipelines, storage, processing, and transportation assets in North America. This infrastructure is a necessity for moving and storing oil and natural gas around the world, as well as the products that result from the processing of this oil and natural gas. As long as there is demand for these energy resources, Enterprise will be there to facilitate things and collect a fee for doing so.
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A key factor here is that Enterprise does not produce oil or natural gas itself. It gets paid fees for the use of its midstream assets. That means that demand for these resources is more important to the MLP's top and bottom lines than volatile energy prices. Add in the fact that MLPs, despite some tax complications, are specifically structured to pass income on to investors, and Enterprise is a very desirable income stock. The distribution yield is a generous 7.8% and the distribution has been increased for 24 consecutive years. Cash flow covered the distribution by a strong 1.8 times in the third quarter of 2022.
That's all great, but only if the oil and natural gas the partnership's energy customers send through its systems doesn't get replaced by electricity provided by renewable energy companies. Enterprise management thinks the risk of a rapid decline in carbon fuel demand is low.
Enterprise benefits from an all-of-the-above attitude
The key story here is population growth. Just recently, the global population reached 8 billion people. By 2050, that figure is projected to increase to 9.7 billion, a nearly 23% increase. That's not the end of population growth, either, though the pace may slow a little. All of these new humans are going to need power if they don't want to live like Neanderthals. Historically, demand for coal, oil, and natural gas, key carbon energy sources, increased along with the population.
The advent of cost-effective renewable power options has led ESG investors to predict the end of carbon fuels. Only that doesn't appear feasible, since clean energy is still just a small slice of the global energy pie, which itself is expanding because of the increasing world population. While it is true that clean energy, like solar and wind power, is growing rapidly, it just isn't developed enough to displace the far larger and deeply ingrained carbon fuel sources of energy. In fact, the International Energy Agency (IEA) predicts that oil and natural gas demand will increase through at least 2040.
What's really happening, at least for the moment, is that clean energy is slowing the growth of carbon fuel demand. Clean energy is displacing dirtier options, particularly in more developed nations, but growth in overall power demand is leading to continued growth in demand for all fuel choices. This is an all-of-the-above approach, which is actually what the history of the energy sector has shown happens over time when looking all the way back to the start of the 1800s. Back then biomass was the key fuel, then coal, oil, natural gas, hydroelectric, and nuclear layered on top of it. Now solar and wind are being added, as well.
Sure, fuels go in and out of favor, but so far none of the options on this list has been replaced. In fact, demand has been consistent or growing across the entire list. Just because the current zeitgeist is all-in on clean energy does not mean it is a feasible possibility to rapidly replace carbon fuels. The fact that there is a massive gap between what countries are doing and what they say they want to do with regard to shifting away from carbon fuels is a telling fact.
Time is not running out
It would be wonderful if renewable clean energy could replace carbon fuels with the flip of a light switch. That's just not possible no matter how fast clean energy appears to be growing. And that means that Enterprise Products can happily continue to focus on its core business of moving oil and natural gas for years to come. Investors, meanwhile, can feel confident that the hefty, and well-covered, distributions they are collecting will remain well-supported.
