The energy market is in the midst of a monumental shift towards cleaner fuel sources. Companies in the sector will need to invest trillions of dollars over the next several decades to make the transition. Fortunately for these energy companies, the slow pace of this change should give them enough time to adjust.
This is also great news for dividend investors, as it suggests that many high yielding stocks in the sector will survive the transition. This certainly appears to be the case for Enbridge (NYSE: ENB), Enterprise Product Partners (NYSE: EPD), and Kinder Morgan (NYSE: KMI). Here’s why three of our contributors believe these companies will have no problem adjusting to the changes in the energy industry.
Decades of demand to go
Reuben Gregg Brewer (Enbridge): The world is turning to clean energy, including solar and wind power. This is definitely a problem for companies like Enbridge that have significant exposure to oil and natural gas. However, the energy transition is expected to last for decades and not happen overnight, so demand for the pipelines that underpin 83% of Enbridge’s EBITDA isn’t going away anytime soon.
But that’s not all that’s important to understand here. Approximately 14% of EBITDA is derived from Enbridge’s natural gas utility operations. Natural gas is a cleaner alternative to fuel oil for home heating. The remaining 3% of Enbridge’s EBITDA comes from its renewable energy business. This segment has significant offshore wind projects underway in Europe which are expected to expand in scale over time.
But take a step back and think about these two companies. Enbridge is a major contributor to the clean energy transition and moves slowly with the world around it.
That said, Enbridge estimates it has the capacity to spend $ 4 billion to $ 6 billion annually on its investment plans for the foreseeable future. This, in turn, is expected to result in 5% to 7% annual growth in distributable cash flow and regular increases in dividends that will likely be slightly below these levels. Consider Enbridge’s 6.8% dividend yield over current stock price and there’s a lot to love about the future of this Canadian pipeline giant, even as the world’s energy future turns greener. .
Designed to handle cleaner fuels
Matt DiLallo (Kinder Morgan): Kinder Morgan operates one of the largest energy infrastructure networks in North America. It has the largest natural gas transport network. It is also the largest independent transporter of refined petroleum products, the leading independent terminal operator and the largest transporter of carbon dioxide. These assets generate a lot of cash to support its dividend, which earns around 5.9% in today’s stock price.
While most of this infrastructure focuses on fossil fuels, much of it could also transport and store the low carbon fuels of tomorrow. For example, renewable natural gas is interchangeable with conventional natural gas. This same infrastructure can also support 5-10% hydrogen mixtures with little or no modification. Meanwhile, if hydrogen emerges as a viable commercial fuel solution, Kinder Morgan could make the necessary changes to reuse its existing gas infrastructure to move it.
Likewise, Kinder Morgan’s refined products pipelines and terminal assets are critical to supporting alternatives like ethanol, biodiesel and renewable diesel. In addition, the company is developing new infrastructure on the west coast to support renewable fuels.
Finally, Kinder Morgan’s expertise in carbon dioxide transport and sequestration as part of its enhanced oil recovery program places it in an excellent position to take advantage of future carbon capture and storage opportunities. It could use its existing carbon dioxide pipelines to transport captured carbon dioxide from the atmosphere for sequestration, and convert others for that purpose as well.
Kinder Morgan’s existing assets are expected to continue to generate stable liquidity for many years to come. This will give it the money to support its high yield dividend and invest in transitioning its operations to handle higher volumes of cleaner alternative fuels. For this reason, he should have no problem surviving energy transition.
This incredible dividend streak won’t break so quickly
Neha Chamaria (Corporate Product Partners): The growth of clean energy sources will undoubtedly change the face of the energy industry, but that doesn’t mean oil and gas companies will be bankrupt anytime soon. At least not the cleaner fossil fuel-focused infrastructure giants like Enterprise Products Partners.
Enterprise Products Partners operates one of the largest pipeline systems in the United States, transporting natural gas, natural gas liquids (NGLs), crude oil, and refined and petrochemical products. The company also has large natural gas processing and NGL storage facilities, and is the world’s largest exporter of liquefied petroleum gas. In 2020, LNG and natural gas pipelines and services combined generated 50% of Enterprise Products Partners revenue, while crude oil pipelines and services and petrochemical pipelines and services each provided about a quarter of its revenue. business.
As an intermediary company, Enterprise Products Partners is insulated from the volatility of oil prices. In addition, it has more exposure to natural gas and NGLs than to crude oil, and derives most of its operating income and cash flow from fee-based contracts. The company could also use its extensive infrastructure to store and transport future fuels if business conditions warrant. These factors should help Enterprise Products Partners survive the clean energy transition and maintain stable dividends.
Enterprise Products Partners has so far increased its annual dividend payouts for 22 straight years, and the stock is returning a solid 7.4% to today’s stock price. So even in an environment where the world is increasingly turning to cleaner fuels, Enterprise Products Partners remains one of the safest energy dividend stocks on the market.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.