- The gas-focused EnLink Midstream saw very strong results during 2021 and thankfully, these continued into 2022.
- They have increased their adjusted EBITDA guidance for 2022, which represents an increase of over 20% year-on-year.
- They also increased their capital expenditure guidance as they ramp up investments to handle higher volumes.
- Following the otherwise tragic Russia-Ukraine war, this sees them well-positioned to capitalize on the additional demand for LNG and thus gas from the United States.
- This should translate into an era of dividend growth and therefore, I believe that maintaining my buy rating is appropriate.
Upon entering 2022, the gas-focused EnLink Midstream (NYSE:ENLC) had all the ingredients for higher dividends, as my previous article highlighted back in late December 2021. Thankfully fate proved this quite apt with the very next month seeing their dividends lifted by a solid 20%, thereby now providing a moderate yield of 4.46%. Following the otherwise tragic Russia-Ukraine war, it now sees them all gassed up for an era of dividend growth as the global energy market adjusts, as discussed within this refreshed analysis.
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.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
Following a very strong set of results for 2021, their cash flow performance continued to power even higher during the first half of 2022 with their operating cash flow landing at $483m and thus 20.15% higher year-on-year versus their previous result of $402m during the first half of 2021. Even though this is obviously already very positive, if their temporary working capital movements are removed their underlying results are actually even higher at $517m for the first half of 2022, whilst their previous results are slightly lower than on the surface at $348m for the first half of 2021. This widening difference makes for a massive underlying improvement of 48.56% year-on-year, which unsurprisingly sees their guidance for 2022 lifted even higher, as the table included below displays.
Even after setting solid guidance for 2022, it was raised even higher with their adjusted EBITDA now expected to be $1.27b at the midpoint, which is almost 21% higher than their previous result for 2021 of $1.05b, as per their fourth quarter of 2021 results announcement. Meanwhile, their guidance also sees their capital expenditure for 2022 increasing to $430m at the midpoint and thus a very significant circa 41% higher than their original guidance of $305m at the midpoint. Thankfully, this is not a result of inflation but rather, it actually stems from additional projects to handle higher gas volumes, as per the commentary from management included below.
“So let me start with the back end of your question first on the CapEx changes for this year. They're all due to scope. And so, they're incremental projects to handle incremental volumes, and then, of course, the Matterhorn investment.”
-EnLink Midstream Q2 2022 Conference Call.
Since the first half of 2022 only saw capital expenditure of $151m, this new guidance indicates that the second half will see this jump higher to circa $279m if they meet the midpoint of their full-year guidance, thereby making for a marginal increase of circa $128m. Thankfully they generated $153m of excess free cash flow after dividend payments during the first half, even in the face of their working capital build and thus, looking ahead their dividend coverage for the remainder of 2022 should be adequate.
Despite higher capital expenditure reducing their free cash flow in the short-term, when looking afield into the medium to long-term, it actually enhances their outlook as they can better capitalize on the structural energy market changes in Europe. Whilst the gas market will never see perfectly smooth sailing, the outlook for supply from the United States has seldom looked as strong following the otherwise tragic invasion of Ukraine by Russia. Regardless of how an investor personally views the political aspect of this event, objectively speaking, it remains clear that Europe now needs to expedite sourcing their gas supplies from outside of Russia, especially with the latter already significantly reducing their exports, likely in retaliation for European support of Ukraine.
After seeing a wave of LNG investment over the years, the United States finds itself well-positioned to help provide this gas supply. Obviously, the issues faced by Europe cannot be solved entirely by LNG from the United States but at the same time, it still creates additional demand for gas in North America that helps support its prices and by extension, its production and thus finally, demand for midstream services. Since this should flow through to their free cash flow across the coming years as their operating cash flow increases, thereby creating the foundations for an era of dividend growth.
Apart from supporting their dividends, their very strong cash flow performance also helps push their net debt steadily lower to $4.302b, which is now at the lowest point in recent history. Despite only being a relatively small decrease versus even the end of 2019 when it was $4.687b, thankfully their earnings growth enhances its effect upon their leverage.
Whilst their net debt lays the foundations, metaphorically speaking, their leverage is actually more important when it comes to dividends, which continues to see a far more noticeable improvement on the back of their stronger earnings. This resulted in their net debt-to-EBITDA consistently decreasing at each point in time to most recently land at 3.33. Apart from now sitting within the moderate territory of between 2.01 and 3.50, it also marks a sizeable improvement versus their previous result of 4.64 at the end of 2019 that was towards the upper end of the high territory of between 3.51 to 5.00.
Even though their net debt-to-operating cash flow was more volatile across the years, which is normal for a cash-based metric, its latest result of 4.16 is still down versus its previous result, such as 4.73 at the end of 2019. Despite still sitting within the high territory of between 3.51 and 5.00, this is not concerning given their strong outlook that not only makes this leverage safe in the short-term but should also push it lower in the medium-term.
When looking elsewhere, their liquidity remains business-as-usual with their current ratio of 1.06 staying around its usual level since the end of 2019. Despite their almost non-existent cash ratio of only 0.01, their liquidity is still adequate when combined with their ability to generate ample free cash flow after dividend payments, plus their untapped credit facility with $1.45b of availability. They also recently announced a senior notes offering to begin refinancing their nearest debt maturities, which further supports their liquidity, whilst also being especially proactive because these do not arise until 2024 at the earliest, as the table included below displays.
Their very strong cash flow performance already points favorably for more dividend growth on the horizon, especially given their solid financial position. Meanwhile, the structural energy market changes in Europe enhance this outlook and thus see them all gassed up for an era of dividend growth thanks to increased demand and growth for their gas-focused midstream operations. Following this analysis, it should not be surprising that I continue to believe that my buy rating is 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.
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