Enbridge(NYSE: ENB), MPLX(NYSE: MPLX), and two private equity firms are forming a new joint venture (JV) to develop, build, own, and operate natural gas pipelines and storage assets. The JV will serve as a bridge between gas supplies in the Permian Basin and market centers in the U.S. Gulf Coast region. The deal will enhance their operations in the region, diversify their cash flows, and provide new growth opportunities.
The new JV should also enhance their ability to grow their high-yielding dividends (Enbridge currently yields 7.5%, while MPLX's distribution yields 8.4%). Here's a look at the deal and how it will benefit investors in those pipeline stocks.
Drilling down into the new JV
Enbridge, MPLX, and private equity firms White Water and I Squared Capital are forming a new JV to strategically combine the Whistler and Rio Bravo pipelines. Enbridge will contribute its wholly owned Rio Bravo Pipeline project and $350 million in cash and will fund the first $150 million of the capital required to complete the Rio Bravo project. In exchange, it will receive a 19% equity interest in the JV and retain a 25% economic interest in Rio Bravo.
The new JV will consist of the following assets:
- Whistler Pipeline (100% interest): The 450-mile pipeline transports natural gas from the Waha Header system in the Permian Basin to Agua Dulce, TX, which is near the starting point of the proposed Rio Bravo project. MPLX, White Water, and I Squared Capital expanded that pipeline's capacity from 2 billion cubic feet per day (Bcf/d) to 2.5 Bcf/d in the third quarter of last year.
- Rio Bravo pipeline project (100% interest): Enbridge is developing the new 137-mile pipeline to transport natural gas from the Agua Dulce supply area to NextDecade's Rio Grande LNG project in Brownsville, TX, a liquefied natural gas (LNG) export facility currently under construction that should enter service in 2027.
- Agua Dulce Corpus Christi (ADCC) pipeline lateral (70% interest): The proposed 40-mile pipeline will transport 1.7 Bcf/d from Agua Dulce to Cheniere's Corpus Christi LNG export facility. The pipeline should enter service in the third quarter of this year. There's the potential to expand its capacity to 2.5 Bcf/d in the future.
- Waha Gas Storage (50% interest): The cavern has the capacity to store 2 Bcf of gas.
White Water and I Squared Capital will jointly own a 50.6% stake in the JV, with MPLX holding 30.4% and Enbridge holding the remaining 19%.
How the JV will benefit Enbridge and MPLX
The new joint venture will provide Enbridge with several meaningful benefits. It will be immediately accretive to its distributable cash flow. It's exchanging an interest in a development project for a stake in operating assets that generate stable cash flow. Overall, roughly 98% of the capacity of the JV's assets are under long-term, take-or-pay contracts, meaning the owners get paid fees even if the customers don't use the capacity. This structure will provide Enbridge and its partners with very stable cash flow.
Those cash flows will grow as ADCC comes online later this year and Rio Bravo starts service in the future. Meanwhile, there's additional growth potential from future ADCC and Rio Bravo expansions. Finally, the deal will further diversify Enbridge's earnings and cash flow while reducing its share of the future capital needed to build Rio Bravo. The growing cash flows from these projects will give Enbridge more fuel to increase its dividend, which it has done for 29 straight years.
The transaction will also benefit MPLX. The new JV will provide the master limited partnership (MLP) with even more visibility into its long-term growth prospects by adding Rio Bravo. The company currently has several pipeline expansions and gas processing plants under construction that should enter service through the second half of next year. It will now add a longer-term growth project to its backlog. The transaction also further enhances its wellhead-to-water growth strategy. This new platform could open the door to additional expansion opportunities to meet the growing demand for natural gas in the U.S. Gulf Coast region from LNG export facilities. That growing cash flow should give the MLP more fuel to increase its big-time distribution.
A win-win partnership
Enbridge and MPLX are entering into a winning partnership. Enbridge will increase and diversify its near-term cash flows while reducing future capital costs. Meanwhile, MPLX will extend its long-term growth outlook. Those positive catalysts should enhance their ability to pay dividends in the coming years, making them even more attractive income investments.
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Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
