As a result of energy transition and electrification the electricity grid is not only overloaded in the Netherlands, but also in the USA for example. Adding to this is the rapid growth in the number of data centers as a result of AI, especially now that they increasingly run on faster chips from Nvidia. These chips consume significantly more power than their less advanced predecessors.
This growing electricity demand can never be met by sustainable energy sources and batteries alone. Fossil fuels seem indispensable. For example, in the United States, natural gas is still the main source of electricity. The demand for natural gas to generate the necessary electricity presents new opportunities for pipeline operators.
Therefore, listed operators of oil and gas pipelines have recently become popular among investors. It has everything to do with the exploding demand for electricity. For a long time, stocks were in the spotlight only because of their defensive nature and attractive dividends. Companies do not have much growth opportunities. Debts were reduced, dividends were further increased and share buyback schemes were announced to make investment in these stocks more attractive. Some companies converted their master limited partnership structure to a regular stock exchange listing.
Enbridge is the largest operator of oil and gas pipelines in North America. The Canadian company owns long oil and gas pipelines and ensures the export of oil and gas from Canada to the United States. About 30 percent of oil consumption and 20 percent of natural gas goes through Enbridge’s pipelines. The mainline pipeline system carries 3.1 million barrels of oil per day. There are only a limited number of pipelines in the United States. Its rapid expansion is not expected. Permits are becoming increasingly rare in a world of increasing environmental awareness. For example, the Keystone XL project was canceled by the Biden administration. This makes existing pipelines more valuable.
Enbridge is headquartered in Calgary, Canada. The stock is traded on the Toronto and New York Stock Exchanges. Among the four business units, oil pipelines account for 50 percent of sales and natural gas for 25 percent. In addition, Enbridge owns a gas supplier and gas storage terminals, which account for 22 percent of revenues. Finally, Enbridge also owns wind and solar farms, which account for 3 percent of turnover.
Investing in Enbridge is not dependent on oil prices. Not less than 98 percent of operating decisions are based on long-term contracts. Cash flows are more predictable over the coming years. Customer base is investment grade. Additionally, 80 percent of turnover is protected against inflation.
According to Enbridge CEO Greg Eibel, data centers and generating AI require large amounts of electricity. This amount of electricity comes mainly from sustainable energy sources and natural gas. A significant increase in natural gas demand is expected. It is booming for the sector. In the coming years, this will create enormous demand for infrastructure for energy generation, transportation and storage.
Last year, Enbridge announced the acquisition of three natural gas companies from Dominion Energy. Purchases of Questar Gas and East Ohio Gas have already been completed and the acquisition of North Carolina Public Service Company will continue later this year. The purchase amount is 14 billion dollars. Of this amount, 2 billion will be paid from shares not yet issued. As a result, Enbridge will become the largest gas supplier in North America.
Enbridge recently announced its first quarter results. Turnover fell from $12 billion to $11 billion. Adjusted earnings per share increased 8 percent from 0.85 to 0.92 per share. Management reaffirmed the outlook for the remainder of 2024. Dividends have been steadily increasing over the past 29 years. This makes the company a dividend aristocrat. Enbridge is investment grade with a BBB rating. 60 billion debt burden becomes a burden in the current interest rate environment. As environmental awareness has increased and very few permits are issued, many new pipelines will not be added. As a major player in this area, this makes Enbridge an interesting investment.
Author has no individual status, Fintessa customers have Enbridge stock in their portfolio.
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