Brookfield Infrastructure Partners (NYSE: BIP) has been shifting gears over the past year. One of the big changes is that the company sold one of its legacy businesses and is reinvesting those proceeds across several faster-growing opportunities.
The company's management team sees more changes ahead, which was evident in their comments on the fourth-quarter conference call. Here are three that investors should keep an eye on over the next year.
Image source: Getty Images.
1. We're shifting our funding model
Like many high-yield dividend-paying companies, Brookfield has seen a shift in investor sentiment. Gone are the days that they'd gobble up new equity so that these companies could fund acquisitions and expansion projects. Instead, investors are pressing companies to retain more cash and fund expansion internally. "As such, we've taken strides in repositioning our funding model to become much more self-reliant in nature with respect to how we fund our growth going forward," according to CFO Bahir Manios. He noted that the company has:
Accomplished this by executing well on our asset rotation strategy, which is an integral component of our overall full investment cycle plan. The ability for us to buy and sell assets is important because it enables us to capture extra value for our unitholders. Our goal is to buy higher-growth businesses, where we can apply our operational expertise, thus earning higher returns. These investments are funded with proceeds generated from the sale of mature de-risked businesses to investors with lower return hurdles. The value arbitrage between the two can be quite meaningful to our results. This strategy, in addition to being an alternative source of funding, allows us to utilize the capital markets only on an opportunistic basis to fund our growth. Going forward, we expect the majority of our growth to be funded by the proceeds from asset sales and cash flows retained in the business.
By shifting its funding strategy, Brookfield believes that it can create more value for investors over the long term. Further, because it will only sell equity when "we have outsized investment opportunities or in circumstances when it makes financial sense to do so," it's more likely to do so at a higher valuation than if it was continually selling shares. That should enable the company to grow cash flow per unit at a faster pace in the future, which should enhance the value of its unit price.
2. We see opportunities in the U.S. midstream market
In addition to selling businesses as they mature, Brookfield Infrastructure remains focused on buying those that are earlier in their growth cycle. One area where it's currently on the prowl is the U.S. midstream segment. CEO Sam Pollock stated on the call that:
We do have an interest in U.S. midstream. We think that with the pullback in the MLP market and the lack of capital that many midstream owners in the states have today -- their lack of access -- provides great opportunities for us to joint-venture with various partners to help them build out some of their infrastructure. There are opportunities to do carve-outs, much like we did with Enbridge. And then, absolutely, to the extent that it makes sense from a value perspective, we will look at the public to private as well. Those are all part of our game plan going forward. And we think one of the best opportunities today is in various parts of the U.S. midstream sector.
Pollock noted that many U.S. midstream companies aren't able to issue equity at attractive valuations to fund growth, which has them looking at alternative financing sources. That's opening up opportunities for Brookfield to potentially partner with them on expansion projects, buy assets from them so that they can fund growth -- which is what it did with Enbridge by acquiring its Western Canadian midstream business -- or even purchasing entire companies. Given the amount of capital that energy infrastructure companies need to invest in the sector over the coming years, Brookfield should have no shortage of opportunities to expand its midstream asset base.
Image source: Getty Images.
3. We like what we see in South America
Another area where Brookfield sees the potential to make growth-focused investments is in South America, particularly in Chile (where it recently sold an electric transmission business) and Peru (where it bought a water business). In discussing those two regions, Pollock stated:
We have a couple of interesting transactions that we are currently monitoring. They are smaller economies. And so these aren't what I would describe as highly active markets. But every year or two, very attractive businesses do come to market, either through privatizations or through sale from strategics. And as that happens, we tend to be one of the first calls, given our reputation in that market and our ability to get transactions closed. So I am optimistic about our ability to transact in those markets in the not-so-distant future.
As Pollock noted, opportunities in these regions don't come along all that often, which is why the company has worked hard to build its reputation so that it's one of the first calls sellers make. That gives Brookfield a leg up on the competition when bidding for businesses that it believes can create significant value for its investors.
Expect a more dynamic portfolio in the future
Brookfield Infrastructure tends to buy businesses that it means to hold for the long term. While that preference hasn't changed, the company will likely be a more active seller of assets in the future so that it can quickly pounce on higher-returning opportunities elsewhere. That seems to be the case in both U.S. midstream as well as South America, so it wouldn't be a surprise to see the company's portfolio undergo a few more changes in the coming year.
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