Enbridge(NYSE: ENB) is a global leader in transporting crude oil. It operates North America's longest and most complex oil and liquids transportation system. The company moves 30% of all the oil produced on the continent.
The Canadian pipeline and utility company firmly believes its crude transportation assets will remain vital to fueling the economy for decades. It expects oil demand to continue rising through at least 2050. That bodes well for its ability to keep growing its nearly 7%-yielding dividend, which it has done for 29 straight years.
A very bullish view on crude
Enbridge CEO Greg Ebel expects global crude oil demand to be "well north" of 100 million barrels per day (BPD) by 2050, according to his comments in a recent interview with Bloomberg, believing it could be above 110 million BPD by then. That's well above the forecast of the International Energy Agency, which sees oil demand slipping to 97 million BPD in 2050. Ebel believes that a growing global economy will fuel more demand for oil, especially in developing nations.
That forecast bodes well for Enbridge's oil business. The company generates fee-based cash flow as crude oil volumes flow through its pipelines, sit in its storage terminals, and run through its export facilities. The company expects to get about half of its annual earnings from its liquids pipelines business in the near term. While that's down from 57% last year due to the acquisition of three natural gas utilities from Dominion, it's a meaningful contributor to its earnings and cash flow.
If Enbridge's forecast is correct, it can bank on fairly steady volumes flowing through its liquids pipelines assets for many more years. That should enable the company to continue generating a lot of cash flow from this business. Meanwhile, if crude oil volumes continue to rise as Enbridge expects, it should be able to secure more opportunities to invest in expanding its liquids pipelines platform. The company is currently investing only $300 million across three projects. It's expanding its Gray Oak pipeline by 120,000 BPD, adding another 2 million barrels of storage at its Enbridge Ingleside Energy Center, and building the Enbridge Houston Oil Terminal.
The company expects to capture more crude-related expansion projects in the future. For example, it's looking to add up to 150,000 BPD of capacity to its Mainline oil pipeline system in Canada in the coming years. It's also bullish on exports. Ebel told Bloomberg, "The future of oil in North America is through it and out of it. You see that on the export side." It's evaluating opportunities to expand its export capacity, which could drive additional earnings growth in its liquids pipeline business.
Planning to be wrong
While Enbridge is very bullish on crude oil demand, the company isn't betting everything on that view. It has been steadily reducing its reliance on its liquids pipelines business over the years by increasing its diversification. It bulked up its gas transmission business in 2017 by acquiring U.S. gas pipeline giant Spectra Energy for $28 billion. It has also invested heavily in building and buying other gas infrastructure assets. That business now supplies a quarter of its earnings. This number should continue to grow, driven by a slew of expansion projects, including new gas pipelines, a liquified natural gas (LNG) export terminal investment, and other related projects.
Meanwhile, it's closing its needle-moving gas utility acquisitions in phases this year. Its Dominion deals will boost the company's stable gas distribution earnings from 12% to 22% of its income. That number should also continue rising as Enbridge invests billions to expand its gas distribution and storage platform in the coming years.
Finally, Enbridge has a small (3% of its earnings) but growing renewable power business. The company has developed onshore renewable energy projects in North America and has a large-scale offshore wind energy business in Europe. It has several more projects under construction to continue growing its renewable-powered cash flows. It also has many other lower-carbon projects under development, including carbon capture and storage, blue ammonia, and green hydrogen.
Enbridge's investments in these lower-carbon energy businesses position it to continue growing its cash flow for decades. They will help to reduce the company's reliance on its liquids pipeline business so that the eventual decline in oil demand won't have much impact on its cash flow and ability to pay dividends.
Lots of fuel to pay dividends
Enbridge believes that oil demand will remain robust for the next few decades. Because of that, its liquids pipelines business should continue to generate lots of cash to pay dividends. It will also give it the money to invest in growing its lower-carbon businesses. This strategy should enable Enbridge to continue increasing its high-yielding payout in the coming years, making it a great income stock to hold for the long haul.
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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.
