Clean energy investing, which focuses on companies building things like wind and solar farms, is a favorite of the ESG crowd. For this group of investors, companies that operate in the field of dirty carbon fuels are often treated as pariahs.
One such company associated with carbon fuels is Enterprise Product Partners (EPD 0.46%), one of the largest midstream players in North America. Enterprise management doesn’t really care what the ESG crowd thinks because they still see years of growth ahead of them, regardless of the growing importance of renewables.
How does Enterprise Products Partners make its money?
Enterprise is a Master Limited Partnership (MLP) that owns vital energy infrastructure. Specifically, it has an extensive portfolio of pipelines, storage, processing and transmission assets in North America. This infrastructure is a necessity for moving and storing the world’s oil and natural gas, and the products that result from the processing of that oil and natural gas. As long as there is a demand for these energy resources, Enterprise will be there to make it easy and collect a fee to do so.
A key factor here is that Enterprise does not produce oil or natural gas itself. It receives fees for the use of its intermediary assets. This means that demand for these resources is more important to MLP revenue and bottom line than energy price volatility. Add to that the fact that MLPs, despite some tax complications, are specifically structured to pass income through to investors, and Enterprise is a very desirable income stock. The payout yield is a generous 7.8% and the payout has been increased for 24 consecutive years. Cash flow covered the 1.8x distribution in Q3 2022.
That’s fine, but only if the oil and natural gas that the partnership’s energy customers send through its systems isn’t replaced by electricity supplied by renewable energy companies. Company management believes the risk of a rapid decline in demand for carbon fuels is low.
The company benefits from a global attitude
The key story here is population growth. Just recently, the world population reached 8 billion people. By 2050, this figure is expected to rise to 9.7 billion, an increase of almost 23%. It’s not the end of population growth either, although the pace may slow down a bit. All these new humans are going to need energy if they don’t want to live like Neanderthals. Historically, the demand for coal, oil and natural gas, the main sources of carbon energy, has increased with population.
The advent of cost-effective renewable energy options has led ESG investors to predict the end of carbon fuels. Only this does not seem feasible, since clean energy is still only a small slice of the global energy pie, which itself is expanding due to the increase in world population. While it is true that clean energy such as solar and wind power are growing rapidly, they are simply not developed enough to replace the much larger and deeply rooted carbon energy sources. In fact, the International Energy Agency (IEA) predicts that the demand for oil and natural gas will increase at least until 2040.
What is really happening, at least for now, is that clean energy is slowing the growth in demand for carbon fuels. Clean energy is replacing dirtier options, especially in more developed countries, but growing global demand for electricity is driving continued growth in demand for all fuel choices. This is a comprehensive approach, which is in fact consistent with what the history of the energy sector has shown over time going back to the early 1800s. Back then, biomass was the main fuel, followed by coal, oil, natural gas, hydroelectricity and nuclear. Now solar and wind are also added.
Sure, fuels come and go, but so far none of the options on this list have been replaced. In fact, demand has been constant or increasing across the entire list. Just because the current zeitgeist is all about clean energy doesn’t mean it’s possible to quickly replace carbon fuels. The fact that there is a huge gap between what countries are doing and what they say they want to do when it comes to moving away from carbon fuels is a telling fact.
Time is not rushing
It would be wonderful if clean, renewable energy could replace carbon fuels at the flick of a switch. It’s just not possible, no matter how fast clean energy seems to be growing. And that means Enterprise Products can continue to focus on its core oil and natural gas transportation business for years to come. Investors, meanwhile, can be confident that the large, well-hedged distributions they collect will remain well supported.