Early in March 2013, Crosstex Energy (XTXI) and Crosstex Energy, LP (XTEX) completed a merger with the midstream assets of Devon Energy (NYSE:DVN) to form two new natural gas midstream focused companies: EnLink Midstream, LLC (NYSE:ENLC) and EnLink Midstream Partners, LP (NYSE:ENLK). The two new companies are positioned to provide better distribution growth opportunities than the predecessors.
Note: Master limited partnerships are not corporations, so investors in an MLP own units and not shares. Income payments made to investors are distributions and not corporate dividends. However, to keep things moving along and not become repetitive, the words shares and dividends may be used in this article with an understanding that the use is not technically correct.
The New Organizational Chart
As can happen when MLPs get merged, the org charts for ENLC and ENLK are somewhat less than straightforward. Here is a quick outline of the structure of the new companies:
EnLink Midstream LLC is the general partner for ENLK, owning the 1% GP interest, the incentive distribution rights, and about 7% of the LP units. ENLC also owns 50% of the former Devon Midstream Holdings, now called EnLink Midstream Holdings.
EnLink Midstream Partners is the former Crosstex Energy, LP plus the other half of EnLink Midstream Holdings and acts as the general partner for the latter.
Devon Energy owns 70% of ENLC and 52% of ENLK. This leaves the public float at 30% and 42% of the two new companies, respectively.
Potential Growth Sources
The business structure of the EnLink midstream duo focuses on fee-based services including oil, liquids and gas gathering; gas processing and transportation; NGL transportation, fractionation and storage; condensate stabilization; and barge and rail logistics. The combination of the Crosstex and Devon midstream assets allows the EnLink companies to provide services across the full midstream spectrum.
Growth opportunities are expected to come from several sources:
Drop Downs: Crosstex Energy had several projects under development that are currently managed by ENLC and can be dropped down to ENLK. The first drop down is expected in Q2 of 2014. The 50% of Midstream Holdings are to be dropped to ENLK starting in 2015.
Organic Growth Projects from expanding or building on to the current portfolio of Devon and Crosstex midstream assets.
Devon Energy midstream growth requirements. As DVN expands its E&P footprint, EnLink Midstream would be the natural choice to own any midstream projects built to support that growth.
Mergers & Acquisitions. The combined midstream companies now have greater access to capital backed by an investment grade credit rating.
The list of ready or near-ready drop down assets gives visibility for accretive asset growth for EnLink Midstream Partners through at least the end of 2015. What is less certain, and possibly more interesting, is what the effect on the EnLink Midstream distributions will be when assets move from the GP company down to the IDR paying LP company.
Potential and Dangers
A recent presentation shows a projected $0.80 annual distribution for the general partner, ENLC. This puts the current yield at 2.3%. The published distribution of $1.47 for the LP company calculates to a 4.6% yield for ENLK. The yield on the limited partnership company indicates the market expects distribution growth of about 10% per year, which seems very probable given the assets available for drop down. The much lower yield for ENLC means the market has priced the general partner for distribution growth in the 20% plus range. That assumption seems somewhat strong without additional guidance concerning the effect of either drop downs or added assets to ENLK to produce the required cash flow growth to the general partner.
Finally, the EnLink companies currently are dependent on Devon Energy for 55% of revenues. The companies have long-term fee based contracts with the energy company, but that is a lot of eggs in one basket.
Note: As this article was being prepared for submission to Seeking Alpha, it was announced that an insider group had filed to sell 18 million shares of ENLK, worth about $550 million. The news produced a 6% share price drop when the market opened the next day on March 21.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.