Published by Bob Ciura on May 18th, 2017
EnLink Midstream Partners (ENLK) has traded on its own for a short time, but it has already built itself a reputation as an impressive dividend stock.
It has a nearly 9% dividend yield, which towers above the average dividend yield in the stock market. EnLink is one of 295 stocks with a 5%+ dividend yield.
Even among high-yielding stocks, EnLink’s dividend stands out.
EnLink was established in 2014, when Crosstex Energy and Devon Energy (DVN) combined assets to form a midstream energy giant.
There are actually two ways to invest in this company. One is by purchasing shares of EnLink Midstream, LLC (ENLC), the General Partner. There is also EnLink Midstream Partners, which is the MLP.
ENLK has a much higher yield, more than 300 basis points above ENLC.
This article will discuss why EnLink Midstream Partners could be a valuable addition to an income investor’s portfolio.
EnLink is a midstream oil and gas company. It operates storage and transportation assets including pipelines and storage facilities, across natural gas, crude oil, condensate, and natural gas liquids.
One benefit of the midstream business model is that it is somewhat protected against falling commodity prices. Midstream operators are paid fees based on volumes transported through their assets.
As a result, they are not highly reliant on the price of oil and gas, although they do still carry some exposure.
EnLink has a fairly large network of assets, including 11,000 miles of pipeline, 20 processing facilities, and 7 fractionators.
Source: Q1 Earnings Presentation, page 22
Its assets have 260,000 barrels per day of fractionation capacity, 130,000 barrels per day of NGL pipeline capacity, and 4.5 billion cubic feet per day of gas processing capacity.
EnLink’s assets are concentrated primarily in four U.S. oil and gas fields: the Midland & Delaware Basin, Central Oklahoma, Louisiana, and North Texas.
These assets have served the company well. In 2016, the company posted impressive growth across several key operating metrics.
Distributable cash flow, or DCF, rose 15% last year, to $607 million.
DCF is a non-GAAP measure commonly utilized by MLPs to report cash flow available for shareholder distributions.
EnLink has a positive future growth outlook, as drilling activity continues to expand in the company’s core operating regions. For example, in the four-month period up to the end of the first quarter, 25 new rigs were added to EnLink’s Central Oklahoma, and Midland & Delaware Basin regions.
This represented a nearly 100% increase, and indicates demand remains steady.
The Delaware Basin is a particularly attractive area of future growth for the company. In the 18 months since EnLink entered the Delaware Basin, EnLink has added four new production customers. EnLink has added 90 additional miles of pipeline in this time, and expanded processing capacity five-fold.
The company made significant progress in advancing its growth strategy last quarter, with major capacity additions in its most important geographic areas.
Source: Q1 Earnings Presentation, page 5
At the midpoint of guidance, EnLink expects full-year 2017 net income and earnings before interest, taxes, depreciation, and adjusted amortization (EBITDA) of $100 million and $850 million, respectively. This represents year-over-year growth of more than 10% for EBITDA.
Distributable cash flow dipped 1.5% in the first quarter, but is expected in a range of $590 million-$650 million for the full year. At the midpoint, DCF is projected to increase approximately 2.1% in 2017.
EnLink’s growth will be due to significant investments in capacity additions.
EnLink expects to utilize $610 million-$770 million this year in growth capital expenditures, slightly more than half of which will be allocated to the company’s Oklahoma operations.
Source: Q1 Earnings Presentation, page 16
In addition, the company expects to spend $38 million-$48 million on maintenance capital expenditures this year.
EnLink’s growth capital expenditures will help the company increase capacity in its core regions. In the first quarter, the company added 200 million cubic feet per day of gas capacity, and another 230,000 barrels per day of oil capacity.
EnLink has a current quarterly dividend of $0.39 per share. Since its formation in 2014, it has increased its dividend by 8.3%.
Its consistent dividend increases are a sign of strength, as the past few years have been very difficult for the oil and gas industry.
The fact that EnLink has maintained its hefty payout despite plunging commodity prices, speaks to the resilience of its business model.
On an annualized basis, EnLink has a current dividend yield of 8.9%. This is an extremely high yield—EnLink’s dividend yields more than four times the average stock in the S&P 500 Index.
As a result, EnLink is attractive for income seekers. The important question is whether the dividend is sustainable.
In this case, it appears to be sustainable. EnLink’s midstream focus provides it a high degree of shelter from falling oil and gas prices.
The company maintains a tight dividend coverage ratio. 2017 DCF coverage is expected to be slightly above 1.0, meaning the company barely expects to cover its dividend with cash flow.
The good news is, thanks to capacity additions and future capital expenditure reductions, EnLink expects its distribution coverage to improve over the course of 2017.
While the company does not intend to raise the distribution in 2017, management has left open the possibility of a dividend increase in 2018.
Another positive aspect regarding the sustainability of EnLink’s dividend is its balance sheet. The company has made the wise decision not to load up with debt.
For example, EnLink’s net-debt-to-adjusted EBITDA ratio is expected in a range of 3.75-4.0 for 2017, with no near-term debt maturities. This is a below-average ratio for the industry. MLPs that got in trouble over the past year typically had ratios significantly above 4.0.
MLPs are popular choices for investors looking to increase their dividend income. Indeed, with their sky-high yields, MLPs are very tempting.
Of course, if the past year has taught us anything, it’s that investors need to tread carefully with high-yield stocks. Companies that have a lot of debt and questionable fundamentals are at risk of cutting their dividend payouts.
EnLink should be considered an MLP with above-average risk, given its tight dividend coverage. Fortunately, the company believes its dividend is secure, and has room for growth in 2018.
For investors willing to accept the risks, EnLink could be a worthwhile stock for dividend income.
- For a thorough analysis of another MLP, which has a 6% dividend yield and has increased its dividend for 38 quarters in a row, click here.
- MLPs aren’t the only stocks with 5%+ yields. To read about a REIT with a 6% dividend yield and a high likelihood of dividend growth, click here.