Enable Midstream Partners: A Well-Covered 60%+ Yield To Grab Onto – Enable Midstream Partners, LP (NYSE:ENBL)

I recently wrote an article on EnLink Midstream, LLC (NYSE:ENLC) that had a juicy 50%+ dividend yield, but I recently came across Enable Midstream Partners (NYSE:ENBL) with similar operating segments and has a similar financial position, so in many respects, I can use the same investment thesis.

Under normal circumstances, companies with dividend yields at 50%+ are priced as such because the markets see the company heading towards bankruptcy and are more often than not correct in that presumption. However, this is not a normal circumstance now that many stocks have taken a hit with COVID-19 concerns.

Midstream companies should be relatively unaffected by what will likely be a short-term (no more than two years) drop in demand for oil as a result of the likelihood of lessened transportation via air travel, as midstream companies tend to obtain the majority of their income via long-term, fixed-fee contracts for gathering and processing, storage, and pipeline transportation and hedge away the portion of their income that is exposed to short-term fluctuations via derivative contracts.

ENBL is a natural gas and crude oil MLP with operations in gathering and processing, transportation, and storage. ENBL has 89% of its expected 2020 gross margins coming from fee-based contracts which should provide very stable cash flows for 2020.

Source: 2019 Q4 Conference Call Presentation

ENBL has very modest leverage with a debt to adjusted EBITDA of only 3.3. Which is well below most O&G midstream companies.

Source: 2019 Q4 Conference Call Presentation

ENBL has also managed to raise its quarterly dividend at 5% CAGR and maintained strong distribution coverage.Source: Author’s Tables

Source: 2019 Q4 Conference Call Presentation

Yet the company trades as though it is about to go bankrupt in the near future with an EV/EBITDA of only ~6x, a P/DCF of ~1.15x and has a ~65% yield.

Investment Thesis

ENBL’s assets are organized into two reportable segments on its YEFS: gathering and processing, and transportation and storage. The G&P segment primarily provides natural gas gathering and processing services to producer customers and crude oil, condensate and produced water-gathering services to producer and refiner customers. The transportation and storage segment provides interstate and intrastate natural gas pipeline transportation and storage services primarily to producer, power plant, LDC and industrial end-user customers.

As of December 31, 2019, ENBL’s portfolio consisted of:

  • 14,000 miles of natural gas, crude oil, condensate and produced water gathering pipelines;
  • 15 major processing plants with 2.6Bcf/d of processing capacity;
  • 7,800 miles of interstate pipelines (including SESH);
  • 2,300 miles of intrastate pipelines; and
  • eight natural gas storage facilities with 84.5Bcf of storage capacity.

Source: 2019 Q4 Conference Call Presentation

ENBL’s G&A operations are mostly related to natural gas and serve the Anadarko, Arkoma and Ark-La-Tex Basins. Although these basins don’t make headlines, ENBL serves over 200 producers in the Anadarko Basin and has secured 5.4 million gross acres of dedication under long-term, fee-based contracts.

Producers currently have 27 active rigs connected to Enable’s gathering systems, 18 of which in the SCOOP play, and although natural gas gathering volumes have been flat YoY, crude oil and condensates gather volumes have increased more than 3x YoY.

ENBL only spent a modest $306MM in growth CAPEX throughout 2019. Most of which was on the crude oil and condensate gathering system acquisition in the Anadarko Basin which enabled this increase in gathered volumes and growth in the Williston Basin.

Source: 2019 Q4 Conference Call Presentation

The transportation segment is often overlooked but actually accounted for 71% of gross margins and doesn’t include the 50% ownership of the SESH pipeline that is accounted for in the 2019 YEFS using the equity method.

Transported volumes increased YoY primarily as a result of newly contracted capacity on the Enable Gas Transmission (EGT) pipeline. EGT is ENBL’s largest pipeline which covers 5,900 miles and serves utilities, industrial end-users and producers, providing access to Mid-Continent supply and other Northeastern, Mid-Continent and Gulf Coast markets through interconnects.

Source: 2019 Q4 Conference Call Presentation

ENBL owns and operates interstate and intrastate natural gas transportation and storage systems across nine states. The transportation and storage systems consist primarily of our interstate systems, EGT, and Mississippi River Transmission (MGT), Enable Oklahoma Intrastate Transmission (EOIT), and the investment in Southeast Supply Header (SESH). The transportation and storage assets transport natural gas from areas of production and interconnected pipelines to power plants, LDCs and industrial end users as well as interconnected pipelines for delivery to additional markets.

ENBL has mostly investment-grade and large market capitalization customers.

Source: 2019 Q4 Conference Call Presentation

ENBL also extended the weighted-average remaining term transportation contract life for EGT, MRT and EOIT from 3.6 years at year-end 2018 to 4.1 years at year-end 2019.

Source: 2019 Q4 Conference Call Presentation

In September 2018, ENBL executed a precedent agreement for the development of the Gulf Run Pipeline, an interstate natural gas transportation project. In January 2019, a final investment decision was made by Golden Pass LNG, the cornerstone shipper for the LNG facility to be served by the Gulf Run Pipeline project.

Subject to approval of the project by FERC, ENBL will be required to construct a large-diameter pipeline from northern Louisiana to Gulf Coast markets. In addition, ENBL may transfer existing EGT transportation infrastructure to the Gulf Run Pipeline. Under the precedent agreement, ENBL estimates the cost to complete the Gulf Run Pipeline project would be as much as $500MM and the project is backed by a 20-year firm transportation service. The Gulf Run Pipeline connects natural gas producing regions in the U.S., including the Haynesville, Marcellus, Utica and Barnett shales and the Mid-Continent region. The project is expected to be placed into service in 2022.

Source: 2019 Q4 Conference Call Presentation

Financial Flexibility and Liquidity

In 2018 the company made $1.2 Billion in CAPEX on acquisitions ($981MM of which in the G&A segment), $444MM of which was the November 2018 acquisition of Velocity Holdings, LLC, now EOCS, which owns and operates a crude oil and condensate gathering system in the SCOOP and STACK plays of the Anadarko Basin. Since then ENBL has been very lean on growth CAPEX since as only $306M was spent on growth CAPEX in the 2019 fiscal year and no more than $240M will be spent in 2020.

$40M-$60M of the $160M-$240M in growth CAPEX will likely go towards the Gulf Run Pipeline in 2020. The remaining $120M-$160M will likely go towards further developments in the Anadarko and Williston Basins to increase crude oil and condensate gathering.

This is not necessarily a bad thing in this type of environment as EBITDA and DCF growth may be a challenge with the uncertainty surrounding the economic climate for fiscal 2020.

ENBL was able to fund ~80% of CAPEX in 2019 with internal earnings. Assuming no DCF growth for 2020 ENBL could still 95% self fund with $760MM in DCF, $240MM in growth CAPEX, and $564MM in common distributions.

As mentioned above, ENBL is fairly conservatively financed at only 3.83x EBITDA which is quite low for any midstream company. Further, EBITDA would have to drop by ~30% from its 2019 YE level for it to have to consider cuts to the common dividend as it would have to meet the 5.50:1 Debt/EBITDA covenant on its revolving credit facility.

2019 YE Adj. EBITDA $1,147
2020 Growth CAPEX ($240)
2019 Maintenance CAPEX ($126)
Interest ($191)
Pref. A Distributions ($36)
Common Distributions ($564)
Surplus/(Shortfall) ($10)

% Drop in Adj. EBITDA Debt/Adj. EBITDA
10% 4.255545868
15% 4.505872096
20% 4.787489102
25% 5.106655042
30% 5.471416117
35% 5.892294279

Source: Authors Tables

Even in today’s uncertain climate, I see this as highly unlikely given the long-term contracts and the 90% fixed-fee revenue structure in place.

On April 6, 2018, ENBL amended and restated its revolving credit facility and has a limit of $1.75 billion. The revolver is scheduled to mature in April 2023, subject to an extension option, which could be exercised two times to extend the term of the revolving credit facility, in each case, for an additional one-year term. The revolver currently has a zero balance.

The debt maturities are also well-staggered and the revolving credit facility can absorb the $400MM due in the 2020 fiscal year with no impact on leverage.

Source: 2019 YEFS


In normal times, we often value a company based on its growth prospects and overlook its capacity for immediate distribution to shareholders. However, these are not normal times and uncertainty is prevalent and this is precisely what makes ENBL a very strong defensive portfolio addition at this time. It has a strong balance sheet and has confirmed moderate growth CAPEX plans for the immediate future giving it ample flexibility for distributions and/or share buybacks, which is a more favorable quality to have in this environment rather than having a greater percentage of the asset base in infrastructure financed via debt to obtain future shareholder value that may not materialize for a few years.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ENBL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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