Description

"Show me the incentive and I will show you the result." Charlie Munger

Enlink Midstream (ENLC) is a troubled MLP. It had been a captive of Devon Energy (DVN). In 2018 Devon sold its interest in ENLC to Global Infrastructure Partners (GIP) for $3.1 billion. As a result GIP owns 224,355,000 shares of ENLC, 45.9% of the 488,445,000 shares outstanding. The rest is public. The investment was made in their $15.8 billion GIP Fund III. GIP is a well regarded firm with a good investment record. They own or have owned airports, alternative energy projects, ports and pipelines, including Access Midstream, Hess Infrastructure, Medallion Gathering & Processing and Ruby Pipeline. GIP has since raised a Fund IV and has a little over $50 billion under management.

In order to improve their rate of return on the ENLC deal, GIP borrowed $1 billion from a Goldman Sachs lead syndicate using the ENLC shares as collateral. The loan carries a Prime + 325bp interest rate and has a $10 million a year sinking fund. Its maturity is 7/18/25. The loan does not have a default provision based on the price of ENLC shares. As long as interest and amortization is covered 1.1x by cash to the lenders, the loan is in good stead. On Bloomberg it is the Stetson Midstream Loan and is priced at 44%. In a 3rd quarter, 2019 presentation, ENLC management said that the loan balance was under $900 million. Using 6.5% for the rate and $875 million as the balance outstanding, the loan needs cash flow from ENLC dividends of $67 million to keep current. ENLC has reduced its dividend twice recently - from $1.132 annually, to $0.75 annually, and, most recently, to $0.375 annually. This rate will provide GIP with $84 million of dividends to keep their loan out of default. Based on a $1.30 share price for ENLC, the loan is worth about 33% of par based on $875 million of principal outstanding. By 7/18/25 the loan balance should be reduced by $55 million through the sinking fund to $830 million. The bank group needs ENLC stock to be worth $3.70 to be whole.

GIP's fee structure is a sliding annual fee of about 1.5% plus a 20% carried interest with an 8% preferred return going to the limiteds and a catch-up for GIP - that's a 9.5% hurdle for GIP.  The GIP Fund III invested 13.3% of its capital in ENLC. Without a return on ENLC, the rest of the portfolio carries a 10.7%+ hurdle before GIP's 20% kicks in. If the rest of GIP Fund III can clear or match the preferred return, every dollar of increase in ENLC stock over $3.70 is worth $45 million to the GIP partners. If the stock were to be worth $10.00, the GIP partners would share in $228 million. A lesser incentive is that I cannot imagine that GIP wants to have a total write off of an investment.

"Business is people." Michael Milken

The Chairman of GIP is Bayo Ogunlesi. I know him vaguely. He was born and raised in Nigeria. He left Nigeria to further his education at Oxford. He went onto Harvard where he got an MBA and a JD. He then to clerked for Thurgood Marshall at the US Supreme Court. He briefly practiced law at Cravath, Swaine & Moore before joining Credit Suisse First Boston where he became head of global investment banking and sat on the executive committee. He left CSFB to start GIP in 2006. He is also the lead director of the Goldman Sachs board. I think that a bet on Bayo is a reasonable speculation.

The partner in charge of the ENLC investment is Will Brilliant - BRILLIANT! What more do I need to say?

ENLC has four areas of operation which together produced $1.08 billion of EBITDA in 2019. In its 2/25/20 PR release the company estimated that 2020 EBITDA would be at about that same level. However, there is weakness expected for later years as the company's relationship with Devon has shifted and MVCs are rolling off.

OKLAHOMA with the SCOOP and the STACK is expected to produce 35% of ENLC's $435 of EBITDA. The company operates 1.2bcf/d of processing capacity and owns 2,000 miles of pipelines. The bad news is that Devon's MVC rolls off in 2020. EDITDA is expected to be lower by $65 million in 2021 as a result. Better news is that Devon has signed an agreement with Dow Chemical to jointly develop part of their acreage. Dow is paying Devon $100 million for a half working interest in 133 undrilled wells. ENLC's capital expenditures for 2020 are modest at $35 million as Devon has shifted their drilling to the Permian. Higher gas prices would make for better Oklahoma returns in the future.

NORTH TEXAS is expected to produce 20% of 2020's EBITDA or about $240 million with modest capital expenditures of about $20 million. ENLC has 1.2 bcf/d of processing capacity, 15 mbbl/d fractionation capacity and 4,000 miles of pipeline. Devon has an agreement to sell their Barnett Shale assets to Banpu Kalnin Ventures $570 million of cash and contingent payments of up to $260 million. A new owner is presumably a more active owner.

LOUISIANA is expected to produce 25% of the company's EBITDA or about $300 mil. Capital expenditures are expected to be about $50 million. They have a good position here. They have 5 Gulf Coast fractionators with 216 mbbl/d capacity in Louisiana and 56 mbbl/d in Mont Belvieu, 935 mmcf/d operating gas processing capacity, 6 processing facilities, 4,000 miles of pipeline and the Cajun-Sibon NGL pipeline able to transport 185 mbbl/d.

PERMIAN is expected to produce $200 million of EBITDA. Originally, capital expenditures here were to be over $300 million in 2010. They have been cut back substantially. The Midland platform consists of 530 mmcf/d expected by the end of 2020, 5 processing facilities and 1,100 miles of pipeline.The Delaware platform has 575 mmcf/d of operating capacity from 3 facilities currently operating and 200 mmcf/d expected in 2020. The Avenger pipeline went full service in 2019. The system has 155 miles of pipeline. These systems will be built out at producers demand based on conditions.

Despite being Devon's butt-boy for years and despite having terrible returns on capital, equity and any other measure, ENLC is an investment grade credit and has a balance sheet that will afford management time for remediation and corrective measures. With the dividend reductions and capital expenditure cutbacks, ENLC estimates that it will have $500 million of capital available for its balance sheet and, later, for profitable investments. At 12/31/2019 ENLC's balance sheet was:

$850 million unsecured Term Loan due 12/10/21 @ 3.2%                                                                                              $350 million outstanding on a $1.75 billion Consolidated credit facility due 1/25/2024 @ 3.3%. The $850 million Term Loan can be rolled into this facility. Accordingly, $550 million is available. With the recent cost cutting measures and dividend cuts, ENLC is well within compliance.                                                                                                                       $550 million 4.40% Sr unsecured notes due 4/1/2024.                                                                                                  $750 million 4.15% Sr. unsecured notes due 6/1/2025.                                                                                            $500 million 4.85% Sr unsecured notes due 7/15/26.                                                                                                 $500 million 5.60% Sr unsecured notes due 6/1/29                                                                                                         $350 million 5.60% Sr unsecured notes due 4/1/44.                                                                                                  $450 million 5.05% Sr unsecured noted due 4/1/45.                                                                                                 $500 million 5.45% Sr unsecured notes due 6/1/47                                                                                                   $4.8 billion total debt

$750 million of an 8.5% $15 par convertible into 1.15 shares of ENLC. Held Goldman Sachs and TPG. TBG on BOD of ENLC. $400 million of a 6% perpetual junior preferred which goes to LIBOR +411 bp in 2023.                                             $5.950 billion senior to the common.                                                                                                                  $586.134 million for 488.445 million common @ $1.20.                                                                                             $6.5 billion total enterprise value

No debt is due until 1/25/2024 - almost 4 years out. Over 25% of the debt has a term about 25 out. $1.15 billion of preferred stock is long term and cheap.

There is the time, the money and, perhaps, the talent to improve the value of ENLC stock.

Catalyst

Natural gas prices improve.

ENLC is able to purchase debt at a discount and improve its balance sheet.

Opportunities present themselves in a distressed midstream market.