This 6.7% energy action becomes even more sustainable
Enbridge (NYSE: ENB) recently caused a stir. The Canadian energy infrastructure giant has agreed to acquire private company Moda Midstream Operating for $ 3 billion in cash. The deal will advance its expansion strategy on the US Gulf Coast while significantly increasing its cash flow. At the same time, it includes short-term expansion opportunities and longer-term potential for low-carbon energy infrastructure.
The compelling economic factors also improve the long-term sustainability of the 6.7% –productive dividend. here’s why income investors should like this deal.
Exploring the Agreement
The main driver of the Moda transaction is the acquisition of the Ingleside Energy Center. Located near Corpus Christi, Texas, Ingleside is North America’s largest crude export terminal, handling a quarter of all U.S. Gulf Coast crude exports last year. Overall, the recently constructed state-of-the-art facility has a storage capacity of 15.6 million barrels and can export 1.5 million barrels per day (BPD).
As part of the agreement, Enbridge also acquires the following assets:
- A 20% stake in the Cactus II pipeline of 670,000 BPD.
- 100% of the Viola pipeline of 300,000 bpd.
- 100% of the 350,000 BPD Taft terminal.
These pipeline and storage assets combine to provide a fully integrated crude oil export platform on the Gulf Coast. It generates stable income because long-term contracts underpin 90% of its cash flow. Meanwhile, Enbridge pays an attractive price of around 8 times EBITDA, which makes it immediately and strongly accretive to its cash flow.
In addition, the agreement preserves Enbridge’s financial flexibility. It can finance the purchase with existing cash while maintaining a leverage ratio at the bottom of its target range. The acquisition therefore supports its prospects for dividend growth and financial flexibility to invest $ 5-6 billion per year in expanding its platform going forward.
Perfectly positioned for the energy transition
In addition to the short-term boost, Ingleside has long-term upside potential. Enbridge can increase the facility’s storage capacity to 21 million barrels and its export capacity to up to 1.9 million barrels per day. These expansion opportunities represent growth potential at low cost and high return.
Ingleside also includes up to 500 acres of undeveloped land in the terminal. Enbridge plans to use these lands to support a low carbon future. It plans to build up to 60 megawatts (MW) of solar energy on the site. This will allow it to self-power the facility, which uses 6 MW, while potentially selling the excess renewable energy to local industry. This renewable energy capacity will give the installation, which already emits less, a negative net profile. In addition, it advances Enbridge’s overall goal of achieving zero net emissions by 2050.
In the short term, the installation will help support the growing demand for energy in the global economy. Enbridge can increase its capacity as demand increases. At the same time, it reduces the emissions profile of these fuels by adding solar energy to this installation.
Meanwhile, the facility’s strategic location along the Gulf Coast could provide Enbridge with longer-term, low-carbon opportunities. For example, it could potentially produce and export renewable fuels like green hydrogen and ammonia from the site. It could also serve as a transit terminal for carbon dioxide before its sequestration in local geological formations. This lower carbon potential over the longer term makes it an ideal strategic fit for the company.
Place the dividend on an even more sustainable basis
Enbridge is one of the best dividend paying stocks in the energy sector. It has increased its dividend in each of the past 26 years, increasing it at a compound annual rate of 10%. This agreement strengthens the company’s ability to maintain this excellent balance sheet. It provides an increase in short-term income while increasing its long-term growth prospects. Enbridge continues to emerge as an attractive option for income seeking investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! 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.