EnLink Midstream LLC (ENLC) Update - Dec 5

[dan_s]

Since the end of March ENLC has lost 65% of its market-cap or almost $4 Billion. Their business is down in 2019, but EnLink is still on-track to generate over $850 million of cash flow from operations, which compares to their total 2019 capex budget of $630 million. Their preliminary capex budget for 2020 is $275 to $375 million and they expect EBITDA to increase by $75 million next year because of new projects coming on-line. This means they expect to have a lot more DCF in 2020.

WHY the big selloff since March?
> Because they stopped increasing their dividend quarter-after-quarter. After seven straight quarters of dividend increases, the board elected to keep the dividend flat from Q2 to Q3.
> They did book a big impairment charge in Q1 that started the selloff and they lowered EBITDA guidance to $1.07 Billion.
> FEAR drives all investors, but for yield investors you can triple the impact of FEAR.

Distributable Cash Flow ("DCF") coverage was 1.21X in Q3, but it was less than the company's stated goal of keeping it between 1.3X and 1.5X.

On EnLink's Q3 conference call three different analysts asked if they were considering cutting the dividend. Here is Barry Davis' response. Barry is the new Chairman.
“We hear the market as it has spoken loudly into this subject and there have been a lot of different voices, let me just acknowledge that. And what we've consistently said is that the distribution is appropriate for our business. And the factors that we consider as we look at the distributions are the projections for our business and the resulting distribution coverage and leverage, as you speak to. And so that will continue to be a higher priority for us to manage our balance sheet. We're serious when we say that we want a sub-4X leverage position, and we want distribution coverage to be in the 1.3 to 1.5x range. When it is clear to us that the business can't support that, then we would certainly have a different answer. The pace of change that we've seen in the last several months has been dramatic. And as you know, in response to that, we've discontinued the growth of the distribution and I think all we can say today is that we will continue to evaluate and assess the appropriate distribution. And if we saw something that told us it should be different then we would be quick to act. But today, we still believe that it ($0.283/quarter) is the right distribution for the business that we're operating.”

EnLink does have a lot of exposure to the big slow down in drilling & completion activity in Central Oklahoma (SCOOP and STACK). Devon, one of the largest customers, has said that they are going to stop all drilling in Central Oklahoma until gas and NGL prices improve. That said, Devon is not going to shut-in all of their existing wells. Plus, EnLink has other areas of growth, primarily Louisiana and West Texas.

My take is that the "worst case" is that ENLC cuts the quarterly dividend by 50%, but it is just as likely that don't cut at all until DCF coverage goes under 1.0X. Based on the conference call, they clearly expect a big increase in DCF next year, just because capex spending will be cut in half year-to-year.

IMO there is more than a 50% dividend cut priced into the shares today.

In the last 3 months, 3 ranked analysts set 12-month price targets for ENLC. The average price target among the analysts is $6.67. It closed today at $4.46.