According to a study from the INGAA Foundation, the U.S. and Canada will need to invest $546 billion in building new energy-related infrastructure over the next two decades to support anticipated supply and demand growth. While that represents an enormous opportunity for energy infrastructure developers, three companies stand out as no-brainer options for investors looking to profit from this growth: TransCanada (NYSE: TRP), Enbridge (NYSE: ENB), and Enterprise Products Partners (NYSE: EPD). Here's what makes them top options in the sector.
Stepping on the gas
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According to the INGAA Foundation, about 60% of these infrastructure investments will be natural gas-related assets such gas gathering and transmission lines, processing equipment, and liquefied natural gas (LNG) export facilities. Fueling that need is that natural gas demand in North America is expected to accelerate over the next few years because of new natural gas power plants under construction and an increase in exports both to Mexico and via LNG terminals that are in development. According to analysts at Wood Mackenzie, natural gas demand in North America will increase from the 3.2% annual pace it had over the past five years to 3.8% annually through 2021.
These trends play right into the hands of TransCanada, which already transports a quarter of the continent's gas demand. The company enhanced that position last year after spending $13 billion to buy Columbia Pipeline Group, which brought with it a $7.3 billion pipeline of expansion projects. Further, the transaction gave the company a foothold in America's fastest-growing gas-producing region, which should fuel additional expansion opportunities in the coming years.
Not to be outdone, Enbridge spent $28 billion last year to purchase Spectra Energy. That not only made it North America's largest energy infrastructure company but also provided it with a massive pipeline of natural gas-focused projects.
Oil and natural gas liquids will fuel big growth, too
In addition to all that investment in gas-related infrastructure, the industry will need to spend as much as $190 billion in building new oil infrastructure, including pipelines and storage tanks. That trend bodes well for Enbridge, which is already one of the leading oil pipeline companies and currently supplies 28% of America's oil imports. That oil dominance should continue growing, since half of its current growth projects are oil pipelines.
Meanwhile, the industry will also need to invest as much as $55 billion into new natural gas liquids projects such as fractionation and export facilities. Enterprise Products Partners is ideally positioned to capture these opportunities because it's a leader in the space, including being the largest liquefied petroleum gas exporter in the world. That leadership was evident earlier this month, when it announced that it would develop a new ethylene marine export terminal along the Gulf Coast. Before that, Enterprise announced that it would build a major liquids pipeline from the Permian Basin to its hub in Mont Belvieu, Texas. Further, while the company leads in natural gas liquids, it also operates a growing portfolio of oil and natural gas infrastructure assets and is currently building a major oil pipeline in Texas and has a gas pipeline project under development in the state. Overall, Enterprise has nearly $9 billion of projects under construction and has even more in the works.
All this growth, with less risk
What makes these three companies such compelling investment opportunities is that they offer investors access to the industry's growth with less risk than most other energy infrastructure options. Here's how their financial metrics stack up against some rivals:
All three companies get a greater percentage of their cash flow from stable sources, and they have a much more conservative dividend coverage ratio. Those two factors are why these companies have stronger credit ratings, which provides them with greater access to cheaper capital. That has proved to be a competitive advantage during the recent oil market downturn, since all three were able to continue to finance their growth initiatives and increase their investor payouts at healthy rates.
Contrast that with Plains, Energy Transfer, and Targa Resources, which not only struggled to raise the capital they needed but also had to pay higher rates for that money. That situation ultimately forced Plains and Energy Transfer to reduce their payouts, while Targa's hasn't grown.
Don't overthink things: Stick with the industry leaders
While rising supply and demand in the energy industry will create opportunities for the entire sector, TransCanada, Enbridge, and Enterprise Products Partners are among the best positioned to capture this growth because of their industry-leading positions and top-tier financial profiles. That combination makes them no-brainer stocks to buy for investors looking for the best ways to capture this growth.
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Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.