Enbridge predicts huge growth for this carbon fuel

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VSlean energy investments account for around 4% Enbridgeit is (NYSE: ENB) business, which includes things like solar and wind farms. The rest of the North American midstream giant’s business is related to carbon fuels. But that’s not a bad thing, considering that demand for natural gas is strong and likely to continue to grow. Here’s how Enbridge should benefit.

Evolve over time

Approximately 58% of Enbridge earnings before interest, taxes, depreciation and amortization (EBITDA) comes from oil pipelines. This is a strong core business, driven by the fees the company charges for the use of its assets. Commodity prices, often volatile, are not as important as demand, so the half-way business cash flows tend to be fairly constant over time. This activity, however, should lose importance as others develop.

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For example, approximately 30% of Enbridge’s production capital expenditure budget is earmarked for its clean energy business. This division currently accounts for only 4% of EBITDA, but based on investment plans here, including three offshore wind farms in Europe, it should see significant growth. This is the area that often gets the most attention from the company, but there are still two other divisions.

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

Carbon growth

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

But a noticeable change is still taking shape, with natural gas replacing dirtier energy alternatives, such as coal and oil. This is why Enbridge expects its natural gas business to grow in size at the expense of its oil business.

Notably, the company has just announced its intention 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 the integrated energy giant BP. This figure could rise to 90%. This project is attractive to Enbridge as it estimates LNG exports from North America will grow 230% from 2021 levels by 2040.

In 2022, Enbridge estimates that its pipelines will supply approximately 20% of the natural gas used in LNG exports. By 2040, he thinks he can increase this figure to 30%. But this needs to be put into context. Not only does Enbridge expect its piece of the pie to be bigger, it also expects the pie itself to be much bigger. So there’s a double tailwind here as Enbridge looks to capitalize on what it expects to be significant demand for natural gas, with notable demand coming from Asia.

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

All the foregoing

Enbridge uses its core oil business to help fund the growth of other divisions. Clean energy is getting a lot of attention, but natural gas shouldn’t be overlooked. This fuel, considered a key element of the energy transition, seems to have years of growth ahead of it. And Enbridge is positioning itself to take advantage of it.

With a high dividend yield of 5.9% and over 25 consecutive years of dividend increases, it’s a good name for dividend investors looking for a diversified energy exposure.

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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