Brookfield Infrastructure (NYSE: BIP) might not seem like an energy company at first glance. That's because the global infrastructure giant operates a diversified portfolio of assets like data centers, telecom towers, railways, ports, and toll roads.
However, in addition to those transportation and data infrastructure businesses, the company also operates several energy-focused enterprises, which currently supply 60% of its cash flow. It therefore offers investors a unique way to gain exposure to the energy sector.
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Brookfield Infrastructure: An energy infrastructure powerhouse
Brookfield Infrastructure separates its energy businesses into two segments: utilities and energy. The company's utility businesses consist of three types of operations:
- Regulated distribution: utilities that distribute electricity and natural gas to customers in the U.K. and South America.
- Regulated transmission: a large natural gas pipeline in Brazil and electricity transmission lines in North and South America.
- Regulated terminal: a large coal export terminal in Australia that handles 20% of global seaborne metallurgical coal.
These businesses generate stable cash flow backed by long-term, fee-based contracts, with about 80% of the cash flow they produce having no volume risk. The company therefore has minimal exposure to commodity price volatility.
Brookfield's energy business, meanwhile, consists of two types of operations:
- Natural gas midstream: natural gas pipelines, processing plants, and storage assets in North America.
- Distributed energy: commercial heating and cooling systems in North America and Australia as well as a residential infrastructure leasing business in North America.
These businesses also generate stable cash flow backed by long-term contracts with customers, about 65% of which has no volume risk. Again, those agreements help reduce the company's exposure to commodity prices, making it much less risky than most other energy companies.
The stable cash flow produced by Brookfield's energy businesses helps support the company's 4.2%-yielding dividend.
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Dual fuels to power healthy growth
Aside from providing the company with steady cash flow, Brookfield's energy operations also help fuel growth. The company, for example, expects to invest $1.1 billion over the next couple of years to expand its utility businesses. These investments should enable those operations to grow their cash flow at a mid-single-digit growth rate over the next five years. Meanwhile, the company expects to invest more than $300 million to expand its energy operations. Add that investment rate to the expected volume growth of those assets, and they should increase their cash flow at a 9% compound annual rate over the next five years.
Brookfield Infrastructure should also be able to continue making acquisitions to help grow its cash flow at a faster pace. The company recently bought natural gas pipeline assets in both India and Mexico. Meanwhile, it will soon close the second phase of a Canadian gas midstream acquisition. These deals will help boost its cash flow in the near term.
Future transactions could come from several different areas. Brookfield, for example, sees $150 billion of investment potential in the North American midstream market over the next five years. Among the opportunities it's monitoring is the continued consolidation of master limited partnerships and the sector's need for capital to expand pipeline infrastructure. On top of that, it's interested in bolstering its presence in places like India, Peru, and Chile, which could come by making energy-focused deals. With a strong balance sheet and active capital recycling program, the company has the financial flexibility to continue making needle-moving acquisitions in the energy sector.
An excellent low-risk energy option
Brookfield Infrastructure makes most of its money by transporting, storing, and processing energy. Because of that, it gets paid predictable fees as it handles those volumes, which limits its direct exposure to energy prices. As such, the company can generate steady cash flow to pay its high-yielding dividend. Meanwhile, given the growth of its energy-related business, the company expects to increase that payout at a 5% to 9% annual rate over the next few years. Add in its acquisition-fueled upside potential, and Brookfield is an excellent option for investors seeking a less risky way to energize their portfolio.
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