This year has been a disappointing one for investors in Enbridge (NYSE: ENB) and Brookfield Infrastructure Partners (NYSE: BIP) as both stocks are down double-digits. Two different factors have weighed on their valuations. In Enbridge's case, investors worried that the Canadian pipeline giant's debt level had grown too high. Meanwhile, Brookfield Infrastructure has been under pressure due to concerns about growth in the near-term after a recent asset sale.
Those issues, however, should fade away after the companies teamed up on a deal where Enbridge will sell a business unit to Brookfield for 4.31 billion Canadian dollars ($3.3 billion) in cash. That's because it should solve Enbridge's balance sheet problems while also addressing concerns about Brookfield's ability to grow. By correcting those issues, the deal makes it increasingly likely that the two companies can increase their high-yielding dividends at a healthy rate in the coming years.
Details on the deal
Enbridge is selling its natural gas gathering and processing assets in Western Canada to Brookfield Infrastructure and its institutional partners in a two-stage deal. This business includes more than 2,200 miles of gathering pipelines and 19 natural gas processing and liquids handling facilities. These assets gather natural gas from wells and transport it to the processing plants, which extract natural gas liquids (NGLs) from the gas. Brookfield will acquire the assets regulated by provincial governments later this year and the federally regulated ones by the middle of 2019.
How this transaction helps Enbridge
For Enbridge, the cash payments will give the company the financial flexibility to address its balance sheet concerns as it funds a CA$22 billion ($16.8 billion) expansion program. It's the third non-core asset sale by the company this year as part of its efforts to accelerate the deleveraging of its balance sheet. With this latest transaction, Enbridge has announced CA$7.5 billion ($5.7 billion) of asset sales, more than double its CA$3 billion ($2.3 billion) target.
Even with those divestitures, Enbridge still expects to achieve its forecast to grow cash flow per share at a 10% annual rate through 2020. That keeps the company on pace to increase its 6%-yielding dividend at the same double-digit pace over that timeframe.
How the deal helps Brookfield Infrastructure
Brookfield, meanwhile, intends on investing $500 million into this transaction to acquire a 30% stake in the business, with its partners acquiring the other 70% interest in the assets. The company will fund its portion of the deal using some of the cash proceeds from the sale of its Chilean electricity transmission business.
These assets are an ideal fit for Brookfield, which has been eyeing energy midstream businesses in North America. "This investment represents an exciting opportunity to invest in scale in one of North America's leading gas gathering and processing businesses based in Western Canada. The business is strategically positioned for the continued development of the prolific Montney Basin," according to CEO Sam Pollock. Not only does it offer growth potential, but it generates stable cash flows underpinned by long-term contracts that have an average remaining life of 10 years.
Those cash flows will enable the company to replace some of the lost income from the sale of its electric transmission business, which will be a drag on growth in the near-term. However, by quickly redeploying a portion of those proceeds into this acquisition as well as recently agreeing to invest in a data infrastructure business, the near-term headwind will soon shift into a long-term tailwind. Because of that, Brookfield Infrastructure Partners could potentially increase its 4.9%-yielding distribution toward the high end of its 5% to 9% target growth range in the next year.
Making great buys even better
This transaction solves a problem that had weighed on the valuations of both companies this year. Because of that, it makes them even better stocks to buy now since it brings clarity to both situations. That improved visibility should increase investors' confidence in the ability of both companies to achieve their dividend growth goals.
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