Summary
- EnLink reported record profits in 2022, up 22% YoY led by massive growth in the Permian and higher natural gas prices.
- EBITDA will grow to $1355MM in 2023, but much of that growth will be consumed by higher expenses.
- Their project roster will eventually drive their EBITDA to $1.4 billion.
- They purchased Tall Oak's Midcon system in Oklahoma which adds a lot of value to their existing footprint.
- EnLink is still undervalued. Their strong buyback program is closing that valuation gap in a hurry.
In mid-February, EnLink (ENLC) reported a record 2022 full year performance, with their adjusted EBITDA, net to EnLink coming in at $1285MM, a new record. This grew 22% YoY which is also a record. But it wasn't all roses - their guidance for 2023 showed additional EBITDA growth of $1355MM at the midpoint of the guide, but nearly all that growth is being gobbled up by higher interest and maintenance expenditures and slightly higher preferred equity payouts.
Also, recent 13F data shows some large institutions took profits in the 4th quarter, suggesting that in the near term, EnLink will be rangebound. Nevertheless, EnLink remains a buy on any pullback of $1.50 to $3 from the recent peak of $13.58. Swing traders can buy the dip and resell the highs as the stock price oscillates. Long term investors can add to their position in the $10.58 to $12.08 range. There is a ton of data to unpack, so let's get started.
Enlink's Permian Assets Extraordinary Rise
Net of plant relocation OPEX and unrealized derivative gains, EnLink poured in $414.5MM in 2022 segment profits from their Permian assets versus $262.3MM in 2021 - a massive 58% rise due to higher volumes, exceptionally high natural gas prices, reduced natural gas hedging and higher volumes on their crude gathering assets. Volumes on their natural gas assets rose from Q4 2021 to Q4 2022 by 31% and their crude volumes came in 16% higher, so the volume growth was certainly the largest contributor to higher profits - roughly 2/3rd of the 58% uplift in segment profit is attributable to higher volumes.
The next contributor to higher profits in the Permian were natural gas prices which soared close to $10/MMbtu (Henry Hub) in August of 2022 before pulling back.
Relative to 2021's realized natural gas prices, roughly 1/3 of the $152.2MM rise in segment profit for the Permian footprint is due to higher natural gas prices. Although a lot of the volume in the Permian is fee based, they have a significant exposure to natural gas prices on the Midland side of the basin. Instead of paying a fixed fee based on volumes, some producers who contract with EnLink pay a portion of what they owe in the form of natural gas. They call these contracts precent-of-proceeds or POP. By my estimation, EnLink receives roughly 125MMcf/d from its producers in lieu of dollars and nearly all of this comes from the Permian.
EnLink's Natural Gas Hedging
What EnLink did in the face of rising natural gas prices in 2022 shows some skill:
As natural gas prices rose to the $4 handle, they reduced their hedging exposure significantly. They let out the sail and rode the wind of higher natural gas prices. By Q1 of 2022, they hedged only 14% of their exposed natural gas volumes and only for the next two quarters. Then when natural gas prices took off in Q2 and Q3, they increased their hedges substantially for the following quarters.
Contrary to running a programmatic hedging program, they responded brilliantly, locking in higher natural gas prices as they peaked in Q2 and Q3 of last year, securing additional cash flow for 2023 (and beyond). Although prices for the natural gas have collapsed to the $2 per MMbtu range in early 2023, EnLink hedged 96% of their 2023 exposure at higher prices such that a 50 cent rise or fall in natural gas prices only moves their profits up or down by $1MM.
With a warmer winter, the continued outage at the Freeport LNG export terminal and higher US output, US natural gas inventories have swelled over their 5-year average, crushing prices.
Freeport will ramp back up to 2 Bcf/d over the coming months and large natural gas producers are expected to pull some drilling rigs - both actions should help support natural gas prices, but one thing is for sure, prices won't repeat their 2022 super performance and Enlink's Permian profit growth won't see the same level of uplift, despite the robust volume increases expected for 2023. I estimate that EnLink will realize $18.3MM less in segment profit in 2023 in their Permian footprint due to lower realized natural gas prices in 2023 versus 2022. Although they've hedged their 2023 natural gas exposure, it is hedged at lower prices than their realized prices for 2022.
2023 Guide
The guide shows a rise from $1285MM in 2022 to $1355MM in 2023 at the midpoint, but nearly all that growth is being gobbled up by higher interest and maintenance expenditures and slightly higher preferred equity payouts.
Interest expenses are up by $35.5MM versus 2022. This is due to a rise in the level of debt from $4,381MM at the end of 2021 to $4,764MM at the end of 2022 - a rise of $383MM YoY primarily because they financed two deals: The Crestwood acquisition in the Barnett and a new purchase in Northern Oklahoma (more on this below). They also refinanced $700MM of their near-term debt at higher rates (6.5% for 2030 notes versus 4.14% and 4.4% for 2024 and 2025 notes).
In addition, their maintenance capex rises by $25MM YoY to $70MM. On the earnings call , Enlink's CFO, Ben Lamb, explained that this rise in maintenance CAPEX is due to an extensive amount of compressor maintenance and isn't indicative of a new run-rate.
The preferred equity rises by an additional $3MM despite the fact that they purchased $19MM worth of Series C preferred stock at a discount of $0.80 on the dollar. The yield on the Series C rises to 8.8463% from a fixed 6% as of December 15th 2022. The new rate on Series C is now variable - 4.11% plus the 3-month Libor rate which is currently 4.7363%. Since rising rates impact the 3-month Libor rate, EnLink can expect to pay higher payouts.
Although EnLink is growing in 2023, much of that growth is being consumed by higher expenses elsewhere.
DCF and Growth CAPEX
Their 2022 Distributable Cash Flow came in at $908MM in 2022 and this will grow to $915MM at the midpoint of the guide. The distribution rises by $0.05 to $0.50 per unit. Growth CAPEX including plant relocation expenses rises by $54MM to $365MM for 2023. Much of that 2023 growth CAPEX spend will be realized in future years:
They will spend another $50MM for their 15% share of the massive 2.5Bcf/d Matterhorn Express natural gas pipeline project (bringing the total spend to $114MM) and $25MM for their share of their Gulf Coast Fractionator maintenance which is scheduled to restart in 2024. They will spend $30MM net to EnLink to move their newly acquired Cowtown plant from the Barnett to the Delaware basin. That move along with other synergies have driven their $275MM Crestwood acquisition to well below a 3x EBITDA multiple.
We discussed the $20MM expansion of the Venture Global LNG project in our previous article . The Exxon Mobile Carbon Transport project will soak up $40MM in 2023 and another $160MM in 2024 generating a total estimated EBITDA return of $25MM (we'll provide more details on this project in a future article). Given all the spend for 2023, their Free Cash Flow after distributions drops to $240MM (at the midpoint of the guide) versus $312MM in 2022.
Looking at segment profit guidance by region:
The Permian segment profit is still growing but not at quickly for the reasons stated above. Louisiana is estimated to lose some profits. Some of the extensive natural gas marketing opportunities that appeared in Q3 and Q4 of 2022 and created record segment profits for their Louisiana gas segment are forecasted to fade in 2023 .
They have a large natural gas system in Louisiana with multiple receipt and delivery points and storage facilities, and the large, flexible system allows them to occasionally take advantage of market dislocations. In 2022, they moved a lot of gas for their neighbors, solving a lot of their problems - buying, storing and selling gas. In addition, earlier in 2022, they opportunistically pulled rich natural gas from neighboring pipelines and processed it for near record margins. Those margins faded almost overnight. Occasionally, the market hands midstream businesses extraordinary short-term opportunities, and EnLink capitalized on them, however, Ben Lamb doesn't expect those opportunities to repeat in 2023, so consider 2022 a banner year for Louisiana.
Their Ohio River Valley (ORV) crude and condensate business (which is counted in their Louisiana segment) came in exceptionally low in the 4th quarter clocking in at just $1.9MM due to unfavorable margins, and this weakness may leak into 2023. The segment profit for the ORV crude business drops to $22MM for 2022 versus $30MM in 2021 and $35MM in 2020 - poor margins and lower volumes on some ORV assets are to blame. The shift in volumes on their ORV assets may be permanent given that they sold $12MM worth of ORV's compression equipment in Q4. ORV has yet to fully recover post-Covid.
North Texas is coming in flat as expected and Oklahoma loses a bit of steam because the crash in prices for the NGL barrel and natural gas prices may slowly reduce drilling in that patch in the 2nd half, although volumes are still expected to rise by double digits due in part to a recent acquisition. Rather than double digit segment profit growth, we are seeing only an 8% increase in segment profits, and that's inclusive of their recent Oklahoma purchase which adds $19MM for 2023.
What did EnLink buy for Christmas?
EnLink purchased another tuck-in gathering and processing system, this time in Northern Oklahoma for $101MM including working capital.
This is Tall Oak's Midcon system which stretches across 9 counties in Northern Oklahoma. If the Tall Oak name sounds familiar, it's because EnLink paid roughly $1.4 billion in 2015-2016 for Tall Oak's core gathering and processing system in the STACK and CNOW regions. Here are the details on the Midcon system according to Tall Oak's website and Enlink's annual report and earnings release:
- 1,000 miles of low- and high-pressure gas gathering lines.
- Two processing plants: the operational Redcliff Cryogenic natural gas Plant in Woodward county which can process up to 220 MMcf/d and the non-operational 60 MMcf/d Carmen plant in Alfalfa county (not shown in the image)
- 80 MMcf/d is currently being gathered and treated on this system.
- 2023 estimated EBITDA is $19MM
- The system has seen some drilling activity since the purchase closed in December
These tuck-in systems offer a lot of value to EnLink. There is 140 MMcf/d of spare capacity on the Redcliff gas plant which EnLink can use to offload some of their growing volumes in their Oklahoma footprint. The system fully integrates with Enlink's system with minimal CAPEX spend. It ties their Dewey county gathering assets to their overall system (with minimal CAPEX spend) and over time, the larger system will allow them to daisy-chain additional tuck-in assets that make sense and come available at the right price.
The 60 MMcf/d Carmen plant and potentially some surplus compression equipment can be sold, moved or utilized. The Redcliff plant was completed in 2018 so this is a relatively new plant. A new plant of that size would cost $150 to $180MM, and yet EnLink paid less $100MM for the entire G&P asset. As the shale patch matures, prices for bolt-on assets have come down substantially. For contrast, EnLink paid $2 billion for two major systems in 2015 at a 20x EBITDA multiple, albeit with huge growth potential. They are paying 5x EBITDA for this asset.
Here's their combined footprint in Oklahoma:
Pricing analysis and 13F data
Institutions with over $100MM in assets under management must report their fund holdings once a quarter in what is called a 13F report . They have 45 days from the end of the quarter to report the quarters' data. Characterizing this data as slow is an understatement - it's glacially slow because it takes the full 45+ days for the previous quarter's data to arrive, and the data is nearly useless until the final company reports. However, multi-quarter accumulation or distribution tells you how well a stock is likely to be supported.
The final bit of reported data for ENLC for Q4 2022 came in on Feb 15th and the cumulative data shows that large institutions were net sellers in Q4 to the tune of roughly 4.6MM units, essentially breaking a 10-quarter accumulation streak. Given that large institutional companies hold in excess of 200MM units, we can chalk this up to some profit taking, but it does suggest that EnLink trades sideways for 3+ months while these extra shares are digested.
Excluding the units purchased from GIP, EnLink absorbed about 2.6 million publicly traded units through their buyback program in Q4, so they were able to soak up some of the excess but not all. Since August of last year, Ben Lamb, Enlink's CFO, sold 957K shares at prices ranging from $9.18 to $12.72 (taking 2/3rds of his chips off the table). However, EnLink renewed their $200MM buyback program for 2023, so I remain optimistic on the share price over the long term.
For all of 2022's buying program which concluded on Feb 13th with the matching purchase of common units from GIP, EnLink devoured 20.6MM units for a price of $200MM (average share price of $9.70 per share). The 2020 to 2022 buyback program has retired 27.1MM units cumulatively at an average buyback price of $8.90 per unit. For comparison, from 2016 to 2018 EnLink sold into the market 18.8 million ENLK common units at an average sell price of $17.05 or $320MM. In Jan 2019, those shares converted into ENLC common units at a rate of 1.15 ENLC unit for each ENLK unit. Converting those shares, we have 21.62 million common ENLC units at an average sale price $14.82. They have now bought back those common units (and more) at 60 cents on the dollar.
I think EnLink will continue mopping up common units in 2023 to help close this valuation gap. The following chart shows how undervalued EnLink remains relative to its peers in the S&P500, however, that could also be said for many companies in the energy space.
By the end of this year, the distributable cash flow per unit (including restricted units) could approach $2 per unit based on the guide and the ongoing buyback program. In 2019, DCF on a per unit basis was $1.47 (including restricted units). The DCF yield at an average sale price of $14.82 is slightly less than 10%. They were unwilling to sell common units in 2019 when the price traded from $13.10 to a low of $4.33, when their cost of selling this equity rose above 10%. Using this logic, EnLink would be unwilling to sell common units until prices rise above $20 per unit.
Conclusion
EnLink reported an exceptionally strong year in 2022. EBITDA numbers were up a record 22% YoY led by the Permian basin which soared by 58% YoY based on Segment profit. Although the 2023 guide showed a significant rise in both interest and maintenance CAPEX, EnLink is still in growth mode. Based on the forward project roster and Enlink's ability to scoop up smaller systems adjacent to their existing assets, I think EnLink will soon see EBITDA numbers that top $1.4 billion, setting a new all-time record for EBITDA. I recommend buying ENLC in the $10.58 to $12.08 range.
For further details see:
EnLink: Buy The Dip