The global economy is embarking on a massive undertaking. It's reducing its reliance on carbon-spewing fossil fuels by switching to cleaner alternatives. This energy transition will take decades to complete. However, it's a pivot the economy must make to secure a more sustainable future.
May energy companies have already started slowly transitioning their business to lower carbon alternatives, which should drive growth for years to come. Two companies with lots of lower-carbon growth potential are Kinder Morgan (KMI -0.32%) and Valero Energy (VLO 0.99%). With their shares trading at relatively attractive valuations, they're great energy stocks to buy like there's no tomorrow on the thesis that they'll play a crucial role in supporting a lower carbon future.
Steadily switching to lower carbon fuels
Kinder Morgan is a leader in North American energy infrastructure. The company has diversified operations, including being a leader in natural gas, petroleum products, and carbon dioxide transportation.
The company's focus on natural gas puts it in an excellent position to capitalize on a lower carbon future since that fuel burns cleaner than oil and coal. That's driving demand for gas, enabling Kinder Morgan to build more pipeline transportation capacity to support increased domestic production and new liquefied natural gas (LNG) export terminals. CEO Steve Kean noted in the most recent earnings release:
Our own and independent analysts project that demand from LNG facilities is expected to double in the coming years, and we are moving forward with projects to provide additional transport capacity for that growing market...With a large portion of our existing network in Texas and Louisiana -- where nearly all of that LNG demand growth is expected to occur -- we expect to largely serve that growth with highly capital-efficient expansions on our existing network.
On top of that, the company has already started investing in even lower carbon energy sources. It's building some renewable fuel hubs at its existing terminals. The company also acquired several renewable natural gas (RNG) companies to build a platform in that sector. Meanwhile, it's working on its first carbon capture and storage project. As a result, over 80% of the company's $3.3 billion capital project backlog is on lower carbon investments. These projects should help grow Kinder Morgan's cash flow, giving it more fuel to sustain and expand its leading dividend.
Investing in the fuels of the future
Valero is a leading independent refining company and fuels producer. It operates refineries and ethanol plants and has a joint venture focused on renewable fuels (Diamond Green Diesel or DGD).
The company's earnings have soared over the past year, fueled by improving refining market conditions and renewable fuel investments. Its investments put it in an even better position to profit in the future. It recently completed its latest DGD project adjacent to its Port Arthur refinery. That plant has the capacity to produce 470 million gallons of renewable diesel per year and 20 million gallons of renewable naphtha (an important component for solvents). That boosted DGD's total capacity to 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha.
Meanwhile, Valero is an anchor shipper on a carbon sequestration project that should start operating in 2024. That project will significantly reduce the carbon intensity of its ethanol business, which should drive a substantial margin improvement as it captures tax credits. Finally, DGD recently approved a sustainable aviation fuels project at Port Arthur. The $315 million project will have the capacity to upgrade 50% of its 470 million gallons annual aviation fuel production capacity to sustainable fuel.
These investments should help grow Valero's earnings and cash flow, giving it more money to return to shareholders. The company recently increased its dividend by 4.1% and has repurchased a meaningful amount of its shares over the years.
The fuel to continue growing
Kinder Morgan and Valero are investing money to help transition the global economy to lower carbon fuels. Those investments should pay big dividends over the long term, enabling the companies to grow their earnings and cash returns to investors. That could give them the fuel to produce attractive total returns, making them great energy stocks to buy with the future in mind.
