Enbridge(NYSE: ENB) has evolved over the years. It has transitioned from an oil pipeline company to a more diversified energy infrastructure operator. The pipeline and utility company currently gets half its earnings from liquids pipelines and the other half from lower carbon energy, like natural gas and renewables.
The Canadian energy infrastructure company's steady pivot toward lower carbon energy will undoubtedly continue over the next five years. That's evident by looking at its recent acquisitions and the expansion projects it has coming down the pipeline.
The evolution of Enbridge
Before 2016, Enbridge was primarily an oil pipeline company. It generated 74% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from its legacy liquids pipelines franchise. The rest came from gas (21%) and renewable power (5%). Most of its gas-related earnings were from operating a large Canadian gas utility franchise.
Enbridge significantly shifted its focus toward lower carbon energy in 2017 when it closed its needle-moving acquisition of gas pipeline giant Spectra Energy. The merger created a premier North American energy infrastructure company with a much more diversified business mix (49% liquids, 47% gas, and 4% renewable power).
The company continued to invest in expanding its energy infrastructure platform in the subsequent years, focusing on growing its export capacity, developing renewables, and investing in new energies. It also capitalized on a rare opportunity to acquire three high-quality U.S. natural gas utilities from Dominion Energy, which closed this year. Those deals further enhanced the stability of its cash flows and its diversification (50% liquids pipelines, 25% gas transmission, 22% gas distribution, and 3% renewables).
The evolution will continue
As Enbridge has increased its size and scale, it has enhanced its ability to secure growth capital projects. The company ended the second quarter with a massive 24 billion Canadian dollars ($17.4 billion) of secured capital projects in its backlog. Those projects provide a lot of visibility into the company Enbridge will become over the next five years.
The company has only two small projects to expand its liquids pipelines franchise: the $100 million Gray Oak and Ingleside expansion and the $200 million Enbridge Houston Oil Terminal Project. Because of that, its liquids pipeline segment won't grow very much over the next five years unless the company makes a major acquisition.
The rest of its backlog consists of projects expanding its gas transmission, gas distribution and storage, and renewables franchises. Those projects include new natural gas pipelines, an investment in an LNG export terminal, gas utility expansions, solar projects in the U.S., and offshore wind farms in Europe. It has secured projects that will come online through 2029.
Enbridge's backlog provides a lot of visibility into its earnings growth profile. It expects its secured capital projects will grow its EBITDA by about 3% annually through at least 2026. Meanwhile, cost savings and optimizations will add another 1% to 2% to its bottom line each year. On top of that, thanks to its strong balance sheet, Enbridge has enough excess investment capacity to invest in additional expansion projects and make tuck-in acquisitions that can add another 1%+ to its EBITDA each year.
Given the visibility of its backlog and the strength of its financial profile, Enbridge believes it can continue delivering around 5% annual EBITDA growth after 2026. With more of that growth likely coming from lower carbon energy, Enbridge's business mix should steadily shift from the current balance to lean more heavily on gas and renewables in the future.
The company's growing earnings from more sustainable energy also suggest it should have plenty of power to continue increasing its dividend. Enbridge has raised that payout, which yields 6.4%, for 29 straight years.
The future is coming into focus
Enbridge will undoubtedly continue transitioning to lower carbon energy over the next five years. That's clear from its recent investments and its secured project backlog. That steady shift should also give the company the fuel to continue increasing its dividend. Given its high yield and steady growth, Enbridge looks like it will be an excellent stock to buy and hold for the next five years.
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Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
