Natural gas storage plays a vital role in the energy sector. Gas storage facilities help balance natural gas demand between seasons and during periods of disruption from storms and other factors. Despite their importance, investors often overlook these assets.
As a result, many investors haven't noticed all the activity in thenatural gas storage market over the past few years. Leading infrastructure operators have been scooping up gas storage assets. Their gas storage investments could give them more fuel to grow their dividends.
Here's a look at why these companies see value in natural gas storage.
Its contrarian bet should continue paying dividends
Brookfield Infrastructure(NYSE: BIPC)(NYSE: BIP) highlighted the value of its natural gas storage investments in its first-quarter letter to investors. The global infrastructure giant noted that it initially began acquiring North American gas storage assets over a decade ago. It took a contrarian view, buying several assets when values were down (investing a total of $310 million), driven by its conviction that the market would eventually recover.
That's exactly what has happened. Brookfield's gas storage business has grown its funds from operations (FFO) at a more than 20% compound annual rate over the last five years. The company has since sold two of its noncore natural gas storage assets (Tres Palacios in Texas and Salt Plains in Oklahoma) at strong valuation multiples, netting $100 million in cash proceeds.
Despite those sales, it remains one of North America's largest independent gas storage operators, generating over $240 million of annual earnings before interest, taxes, depreciation, and amortization (EBITDA).
Brookfield Infrastructure believes its gas storage business has more growth ahead. In addition to supporting the natural gas market, it's "seeing several ways our assets can support energy transition opportunities," wrote CEO Sam Pollock in the first-quarter letter.
The company could eventually use its storage assets for renewable natural gas and hydrogen. Because of that, it's excited about the future of this business. Continued earnings growth from its gas storage business would give Brookfield more fuel to grow its dividend, which currently has a forward dividend yield of more than 4.5%. The company aims to increase its payout at a 5% to 9% annual rate.
Going on a gas storage shopping spree
While Brookfield has been selling some of its noncore gas storage assets more recently, other midstream companies have been buying up storage assets as they become available. Enbridge(NYSE: ENB) acquired two gas storage assets last year. It bought Tres Palacios from Brookfield and its partner Crestwood Equity Partners for $335 million. It also bought Aitken Creek Natural Gas Storage in Canada for 400 million Canadian dollars ($293 million).
The acquisitions provided an immediate boost to its free cash flow. They will also enhance its ability to support liquified natural gas (LNG) export facilities in those regions. In addition, the company recently agreed to form a joint venture in the U.S. Gulf Coast region, which will enable it to acquire interests in existing gas pipelines and storage assets.
These deals have expanded Enbridge's already sizable gas storage business. The assets help feed gas into its existing transmission and distribution pipelines, enhancing the value of its system. They also help provide Enbridge with stable, growing cash flow to support its high-yielding dividend (currently over 7%), which Enbridge has increased for nearly 30 straight years.
Making a needle-moving gas storage deal
Natural gas pipeline giant Williams(NYSE: WMB) has made the biggest splash in gas storage. In early January, it closed the acquisition of a major natural gas storage portfolio for almost $2 billion. It bought a portfolio of six gas storage assets in Louisiana and Mississippi to integrate into its existing pipeline network to support the power and LNG markets.
Williams expects growing demand to fuel significant earnings growth from these assets. That will add to the incremental cash flow it will collect from the needle-moving deal. The company's growing earnings enabled it to increase its dividend by over 6% earlier this year, pushing its forward yield above 4.5%. With more growth ahead, Williams should have the fuel to continue increasing its dividend.
Keeping their dividends well-fueled
Natural gas storage doesn't get much attention. However, it's vital to the energy market. Because of that, it should supply Brookfield Infrastructure, Enbridge, and Williams with growing cash flow in the future. That should give these companies more fuel to increase their high-yielding dividends, making them even more attractive options for income-seeking investors.
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Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
