Natural gas demand is set to soar in the coming years as countries turn to gas-fired power production to support the transition to renewable power. This was already the case before the recent emergence of artificial intelligence (AI), which could turbo-charge the natural gas industry. Two top Canadian dividend stocks in the energy infrastructure sector should benefit and might be undervalued right now.
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AI impact on natural gas demand
The AI boom is driving billions of dollars of new investments in data centres in North America and around the world. These facilities consume significant amounts of power and analysts are starting to suggest that gas-fired power generation is going to play a big role in getting reliable electricity supplies to data centres in a timely way.
Ideally, renewable energy would supply the power needed to feed these sites, but wind, solar, and hydroelectric projects have limitations. Weather and climate change can impact the supply of power coming from these assets. In addition, the anticipated jump in power demand requires upgrades to electric transmission networks to move power generated by renewable energy assets to the data centres that need them. That requires billions of dollars of investments and can take years to complete due to the permitting and regulatory hurdles. The data centre industry doesn’t have the luxury of waiting for that infrastructure to be built. As such, the construction of gas-fired power-generation facilities can solve the problem.
Natural gas is a much cleaner fuel to burn than oil or coal to produce electricity, so it is the best alternative currently available to meet rising power demand as the transition to renewable energy progresses.
Canada and the United States have abundant natural gas resources. The energy infrastructure companies that move the fuel from the producers to domestic customers or liquified natural gas (LNG) export terminals should benefit from a boom in natural gas demand.
TC Energy
TC Energy (TSX:TRP) operates more than 90,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity in Canada, the United States, and Mexico. The company also has oil pipelines and power-generation facilities.
At the time of writing, the stock trades near $52 per share. This is up from the 12-month low of around $44 but is still way off the $74 the stock reached in 2022, so there is decent upside potential.
TC Energy’s 670 km Coastal GasLink pipeline reached mechanical completion last year and is scheduled to start delivering natural gas from Canadian producers to a new LNG terminal on the coast of British Columbia in 2025. The project saw its budget more than double to about $14.5 billion during the construction process. This put pressure on TC Energy’s balance sheet, but the company is making good progress on monetizing non-core assets to raise funds. TC Energy raised $5.3 billion in 2023 and expects asset sales to generate another $3 billion this year. In addition, the company intends to spin off the oil pipeline operations.
The capital spend for this year on other projects is targeted at $8 billion to $8.5 billion with about $7 billion in new assets to go into service. Capital investments in 2025 and beyond are expected to be in the range of $6 billion to $7 billion. TC Energy has said it anticipates cash flow will grow enough in the coming years to support annual dividend increases of at least 3%. The board has increased the payout annually for more than two decades. Investors who buy TRP stock at the current level can get a 7.4% dividend yield.
Enbridge
Enbridge (TSX:ENB) is known for its vast oil pipeline operations, but the company is also a strategic player in the natural gas sector. The firm’s natural gas transmission network moves about 20% of the natural gas used in the United States. Enbridge is a partner on the Woodfibre LNG facility being built in British Columbia and is set to become the largest natural gas utility operator in North America after it wraps up the remaining parts of a US$14 billion acquisition of three natural gas utilities in the United States.
Enbridge has a $25 billion capital program on the go that will boost cash flow in the coming years. The board has increased the dividend in each of the past 29 years and more hikes should be on the way. Enbridge expects distributable cash flow (DCF) to grow by 3% this year and in 2025 and by 5% in 2026 and beyond. Dividend growth will likely be in the same range.
Enbridge’s stock is up about 12% in recent weeks to the current price around $51. It was as high as $59 in 2022. Investors who buy ENB stock at the current level can get a 7.1% dividend yield.
The bottom line on natural gas infrastructure stocks
TC Energy and Enbridge should benefit from the anticipated growth in natural gas demand in the coming years. The stocks pay attractive dividends at the current share prices, and investors should see payouts continue to grow.
If you have some cash to put to work, these stocks deserve to be on your radar.
