Enbridge (ENB -1.21%) earns about 16 billion Canadian dollars ($11.9 billion) each year. More than half of that income (57% in 2023) comes from its liquids pipelines business.
The energy infrastructure company operates the longest and most-complex crude oil and liquids transportation system in the world. It handles 30% of all the oil produced in North America each year.
Enbridge's liquids pipelines are crucial to supporting its big-time dividend (currently yielding 7.3%). But while oil is the company's main fuel source today, lower-carbon energy will provide its future growth. The company's investments in natural gas and renewable energy should give it the ability to continue increasing its high-yielding payout, something it has done for 29 straight years.
A needle-moving deal in many ways
Enbridge has been steadily reducing its exposure to the oil market over the years by focusing its investments on lower-carbon energy like natural gas and renewables. Before 2016, it got nearly three-quarters of its earnings from its liquid commodities (oil and refined products). However, it made a major shift toward natural gas in 2016 by acquiring gas pipeline giant Spectra Energy for $28 billion.
The company is making another notable push to increase its exposure to gas by acquiring three natural gas utilities from Dominion Energy in deals that should close this year. The $14 billion transaction will make Enbridge North America's largest operator of natural gas utilities. That deal will also shift its earnings more toward lower-carbon energy:
Image source: Enbridge.
As that slide shows, Enbridge will get half of its annual earnings before interest, taxes, depreciation, and amortization (EBITDA) from lower-carbon energy after closing those deals. The transaction will also increase its cash flow from regulated utility assets, which tend to be very stable.
It will also enhance Enbridge's earnings growth. The company expects the transaction to be accretive to its adjusted earnings and distributable cash flow per share in the first year. It will also enhance its long-term growth profile as it invests capital to expand those operations.
The steady shift should continue
Acquisitions like Spectra and the Dominion utilities have allowed Enbridge to accelerate its shift to lower-carbon energy. That pivot should continue in the coming years even if it doesn't do another larger transaction. Fueling that view is Enbridge's large and growing backlog of commercially secured expansion projects:
Image source: Enbridge.
As that slide shows, Enbridge has about CA$24 billion ($17.8 billion) of secured capital projects currently under construction. All but $300 million of those investments support lower carbon energy.
The company is investing heavily in expanding its gas transmission business, including building new pipelines and participating in developing an LNG export facility. Enbridge also plans to invest capital to expand its gas distribution and storage operations, including $3.7 billion of planned spending at the U.S. gas utilities it's acquiring from Dominion. The company also continues to expand its renewables segment, with several offshore wind projects underway in Europe. Enbridge expects those projects to help fuel around 5% adjusted EBITDA growth over the medium term.
Meanwhile, Enbridge has lots of potential lower-carbon energy projects under development. For example, it partnered with Yara International to develop a low-carbon ammonia production facility at the Enbridge Ingleside Energy Center in Texas. It's also working on a couple of carbon capture and storage projects in the U.S. and Canada.
In addition, Enbridge has several more renewable energy projects under development, including additional European offshore wind farms.
Enbridge has also made several smaller acquisitions to enhance its lower-carbon energy platforms. For example, the company increased its ownership in two offshore wind farms in Germany and bought seven operating landfill-to-renewable natural gas assets in the U.S. last year. The company has the financial flexibility to continue making acquisitions to bolster its lower-carbon energy platforms as opportunities arise.
Slowly switching fuel sources
Oil has been the primary fuel source of Enbridge's dividend over the years, given that its liquids pipelines segment has historically supplied more than half its earnings. However, that will change in the coming years as lower-carbon energy starts providing the majority of its earnings while driving the bulk of its growth capital investments. This shift should put its payout on a more sustainable long-term foundation, enhancing its appeal as a great source of durable dividend income.
