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Introduction
Despite seeing a bumpy start to 2021 due to the Texas Winter storm dubbed Uri, EnLink Midstream (NYSE:ENLC) still had the potential to double their distributions that currently provide a moderate yield of 5.81%, as my previous article discussed. This article provides a follow-up analysis assessing how they have subsequently fared since the end of the first quarter of 2021, which thankfully now sees them with all the ingredients for higher distributions in 2022.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
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Detailed Analysis
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Instead of simply assessing distribution coverage through distributable cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact on their financial position. The main difference between the two is that the former ignores the capital expenditure that relates to growth projects, which given the very high capital intensity of their industry can create a material difference.
On the surface their cash flow performance throughout the first nine months of 2021 has been solid with an increase of 6.77% year-on-year to $599m versus their result of $561m during the first nine months of 2020. Although once removing the temporary impacts of working capital movements, it actually sees their underlying results down 11.53% year-on-year to only $560m for the first nine months of 2021 versus their equivalent result of $633m during 2020. Whilst this sounds negative, it largely stems from the noise in their results as a result of the Texas Winter storm that skewed their results by $59m during the first quarter of 2021, as my previously linked article discussed in detail for any readers who are interested. If this is added to their results from the first nine months of 2021, their underlying operating cash flow equals $619m and thus very similar to their equivalent result of $633m from 2020, thereby making for business-as-usual second and third quarters. This leaves their impending distribution increase as the more exciting development, as per the commentary from management included below.
“You've seen us be pretty light touch on the buyback side, but we do plan to employ that program, and we also think it is time to look at the distribution. So we'll be doing that with the Board here in the near term.”
-EnLink Midstream Q3 2021 Conference Call.
Thankfully, their commentary is quite cut and dry with them clearly signalling a desire to push their distributions higher within the short term. Whilst they have not given an exact magnitude of any potential increase nor their guidance for 2022, they clearly have scope to fund a very large increase given their ample free cash flow that at $409m during the first nine months of 2021 has eclipsed their distribution payments of only $140m. It remains to be seen whether they opt for a slower progressive approach with small quarterly increases or a faster one-off increase, although they clearly have scope to potentially double their distributions given their very strong coverage.
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Thanks to their excess free cash flow after distribution payments, their net debt has decreased slightly to $4.357b versus its previous level of $4.422b at the end of the first quarter of 2021. Whilst this only represents a very small improvement, at least the direction is positive and thus should see further improvements throughout 2022 and beyond.
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On the surface it appears that their leverage has oddly still decreased despite the bumpy start to the year with their net debt-to-EBITDA decreasing to 3.81 versus 4.33 at the end of 2020. Although this stems from the previously mentioned noise in the first quarter from the Texas Winter storm that has skewed their results. When calculating their EBITDA utilizing my standardized approach for my library of comparable analysis, losses and gains on derivatives are normally ignored and whilst these are often immaterial, they saw a material $155.2m loss during the first nine months of 2021 versus only $22m for the entirety of 2020. If these losses were not excluded, their net debt-to-EBITDA would currently be 4.66 versus 4.43 at the end of 2020, which still resides within the high territory of between 3.51 and 5.00. Whilst high leverage is not necessarily ideal, their financial position nevertheless remains healthy, providing that their liquidity has remained at least adequate and thus it nevertheless does not stand in the way of higher distributions.
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Despite the noise skewing their leverage, thankfully their liquidity remains adequate and essentially unchanged since the end of the first quarter of 2021 with respective current and cash ratios of 0.89 and 0.03 being similar to their previous respective results of 0.73 and 0.07. When reviewing their debt structure, thankfully they face no maturities until 2024 at the earliest apart from an insignificant $150m term loan payment in the fourth quarter of 2021, as the table included below displays. When combined with the $1.75b undrawn from their credit facility, this means that they not only have access to ample additional capital if required but they also have no uses outside of rewarding unitholders for the next two years.
Image Source: EnLink Midstream Q3 2021 10-Q.
Conclusion
Thankfully, they have all the ingredients for higher distributions in 2022 with them sporting a healthy financial position, ample free cash flow and most importantly, a clear desire from management to push their distributions higher. Following this positive outlook, it should be no surprise that I believe my bullish rating remains appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from EnLink Midstream’s SEC filings, all calculated figures were performed by the author.
