The energy midstream sector faces the prospect of slowing growth. Many forecasters believe global oil demand is nearing a peak. If so, the industry will probably have fewer investment opportunities to expand, which could affect cash flow growth.
That's leading many in the sector to seek out new sources of growth. A potentially massive opportunity is carbon capture and sequestration (CCS). Several pipeline stocks are working to capture that opportunity, which could fuel needle-moving growth by 2030.
A strategic advantage
EnLink Midstream (ENLC +0.00%) is an early mover capitalizing on the CCS opportunity. The midstream company owns significant pipeline assets in Louisiana that are currently underutilized. The company believes it can repurpose a portion of these pipelines to transport carbon dioxide. That would increase its margins and boost its earnings.
NYSE: ENLC
Key Data Points
The pipeline company signed the first of what could be many transportation service agreements with ExxonMobil (XOM 1.78%) last fall. Exxon signed a 25-year contract to reserve enough capacity to ship 3.2 million metric tonnes of carbon dioxide annually starting in 2025. The oil giant could increase its capacity up to 10 million metric tonnes per year in the future. EnLink is investing about $200 million into the project, including repurposing existing pipelines and building new facilities.
It's currently in discussions with several other energy companies to utilize more of its existing infrastructure to support CCS projects:
Image source: EnLink.
UBS analyst Erik Mace recently initiated coverage on EnLink Midstream, rating the stock a buy. One factor driving that bullish view is its CCS upside. The analyst thinks its Louisiana low carbon and CCS opportunities represent a $300 million-a-year income stream under a bull-case scenario where it captures 30 million metric tonnes of transportation capacity contracts. That would be 20% of the company's projected earnings in 2030, implying significant growth potential. These projects could give EnLink more fuel to grow its dividend, which currently yields 5%.
Working to capture the opportunity
Several other pipeline companies are working to capture the potentially needle-moving CCS opportunity. For example, natural gas pipeline giant Kinder Morgan (KMI 0.85%) recently approved a small project to capture carbon dioxide from two natural gas treating facilities in Southern Colorado. It will transport that carbon dioxide via its Cortez pipeline, which ships naturally occurring carbon dioxide to the Permian Basin for enhanced oil recovery (EOR). The company will use the captured carbon for EOR. It could be the first of many CCS projects by Kinder Morgan as it seeks to leverage its expertise in carbon dioxide and extensive existing infrastructure to capture this potentially massive opportunity. CCS could give the pipeline giant more fuel to grow its 6.8%-yielding dividend.
NYSE: KMI
Key Data Points
Canadian energy infrastructure giant Enbridge (ENB 0.33%) is working with oil producer Occidental Petroleum (OXY 0.86%) on a potential carbon dioxide sequestration hub in the Corpus Christi area of the Texas Gulf Coast. Enbridge would develop, construct, and operate pipeline facilities to ship the captured greenhouse gas to a sequestration hub developed by Occidental. Enbridge is also a potential customer of the project. It's partnering with Yara International to develop a world-scale low-carbon blue ammonia production facility at the Enbridge Ingleside Energy Center near Corpus Christi. Enbridge expects to capture about 95% of the carbon dioxide emitted from the production process, which it would transport and store. These projects would enhance Enbridge's ability to continue increasing its dividend, which currently yields 7.1%.
NYSE: ENB
Key Data Points
Energy Transfer (ET +0.52%) is working on a similar solution with Occidental Petroleum in Louisiana. The companies are seeking to secure long-term contracts with carbon dioxide emitters to capture and permanently store those emissions. The partnership would utilize some of Energy Transfer's existing underutilized pipelines to transport the captured greenhouse gas to a storage hub Occidental would develop. CCS represents another fuel source to help grow Energy Transfer's 9.8%-yielding distribution.
A potential needle-moving growth driver
Midstream companies see lots of potential in CCS. It could enable them to increase the utilization of their existing pipelines and build new ones to connect emissions sources to sequestration hubs. That could supply them with more cash flow in the future to sustain and increase their already high-yielding dividends. Given the enormous potential of CCS, income-focused investors should keep a close eye on these developments since they could drive needle-moving dividend growth by the end of the decade.
