Insights

Enbridge Sees Huge Growth Ahead for This Carbon Fuel

Clean energy investments make up around 4% of Enbridge‘s (NYSE: ENB) business, which includes things like solar and wind farms. The rest of the North American midstream giant’s business is tied to carbon fuels. But that’s not a bad thing, when you consider that natural gas demand is strong and likely to keep growing. Here’s how Enbridge is set to benefit.

Shifting with the times

Roughly 58% of Enbridge’s earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil pipelines. That’s a solid core business, driven by the fees the company charges for the use of its assets. Often-volatile commodity prices aren’t nearly as important as demand, so the midstream company’s cash flows tend to be fairly consistent over time. This business, however, is slated to shrink in importance as others grow.

Image source: Getty Images.

For example, roughly 30% of Enbridge’s capital spending budget is earmarked for its clean energy business. That division currently makes up just 4% of EBITDA, but based on the investment plans here, including three offshore wind farms in Europe, it’s set to grow materially. This is the area that often gets the most attention at the company, but there are still two more divisions.

One is a natural gas utility that makes up around 12% of EBITDA. There’s growth in this business, but as a regulated utility, it is really a slow and steady operation. And then there’s Enbridge’s natural gas midstream operations, which account for 26% of EBITDA. 

Growth in carbon

While it would be nice if the world could simply flip a switch and get rid of carbon fuels entirely, that’s just not possible. The global tensions upending the world’s energy markets are clear evidence that clean energy just isn’t ready to replace the existing carbon infrastructure.

But there is still a notable shift taking shape, with natural gas displacing dirtier energy alternatives, like coal and oil. Which is why Enbridge expects its natural gas business to grow in importance at the expense of its oil business.

Notably, the company just announced plans to help build a new liquefied natural gas (LNG) export facility in Canada. It is expected to be completed in 2027 and already has contracts for 70% of its throughput with integrated energy giant BP. That figure could rise to 90%. This project is enticing to Enbridge because it believes exports of LNG from North America will increase a huge 230% over 2021 levels by 2040. 

As of 2022, Enbridge estimates that its pipelines supply about 20% of of the natural gas used in LNG exports. By 2040, it believes it can expand that to 30%. But that needs to be taken in context. Not only is Enbridge expecting its piece of the pie to be bigger, but it is also expecting the pie itself to be much bigger. So there’s a double tailwind here as Enbridge looks to take advantage of what it expects to be material demand for natural gas, with notable demand from Asia.

Located on the west coast of Canada, the above-mentioned LNG terminal will be ideally placed because of the cost benefits associated with shorter travel distances to Asian markets.

All of the above

Enbridge is using its core oil operations to help fund growth in other divisions. Clean energy is one that gets a lot of attention, but natural gas shouldn’t be overlooked. This fuel, which is viewed as a key part of the energy transition, appears to have years of growth ahead of it. And Enbridge is positioning itself to take advantage of that.

With a hefty 5.9% dividend yield and over 25 consecutive years of dividend increases behind it, this is a good name for dividend investors seeking diversified energy exposure.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends BP and Enbridge. The Motley Fool has a disclosure policy.

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