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EnLink Midstream’s (ENLC) next earnings call is scheduled for February 17th to discuss its fourth quarter and full-year 2020 earnings, along with 2021 financial guidance. Due to rising natural gas and natural gas liquids (NGL) prices, improved takeaway capacity in the Permian and additional drilling on their footprint, I believe EnLink will show outperformance in Q4 2020 and return nearly flat adjusted EBITDA net to ENLC for 2021, setting the stage for the next leg-up for this perennially beaten down midstream company.
EnLink, like many energy companies, hasn’t yet provided forward guidance beyond 2020 due to uncertainties regarding COVID-19, energy prices, drilling schedules and federal policy changes. Understanding how EnLink’s Gross Operating Margin (GOM) flexes under different scenarios can give us key insights into 4th quarter earnings as well 2021 and 2022 earnings potential. I’m not going to delve too deeply into impairments and other non-cash impacts which were significant in 2020 but rather look at EnLink from a cash- generating perspective to understand its underlying value.
Understanding EnLink’s gross operating margin
To come up with a prediction for Q4 and subsequent years, we need to take the EnLink engine apart to figure out to what extent each factor contributed to the drop in earnings and which pieces are slated for a bounce-back. To do that, we’re going to look at the Gross Operating Margin level. EnLink defines gross operating margin as revenues less cost of sales and it’s a good place to start to understand their underlining business performance.
Gross operating margin is
