ENLINK Midstream

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

A midstream energy company focused on gathering, processing, transporting, and storing natural gas, NGLs, and crude oil, with operations primarily in the US, leveraging its pipeline network and processing facilities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: ENLC Midstream is a midstream energy company that primarily focuses on providing midstream services, including:

  • Gathering and Processing: Gathering natural gas, crude oil, and condensate from production sites. They process this raw material into marketable products.
  • Transportation: Operating a network of pipelines that transport natural gas, crude oil, and condensate to their processing or delivery locations.
  • Storage: Storing natural gas, crude oil, and condensate at strategic locations.

The business is predominantly focused on oil and gas gathering, processing, and transportation activities, especially in Louisiana, Oklahoma, and Texas.

  • They generate revenue based on volume and fees charged for throughput and various services.
  • The company’s customers are primarily producers of oil and gas.
  • ENLC operates in highly competitive industry with a handful of larger players.

The company is mainly structured into the following main segments:

  • Permian
  • Louisiana
  • Oklahoma
  • North Texas
  • Corporate

Let’s dive into a more detailed analysis:

Moat Analysis (2/5):

ENLC’s moat is rated a 2 out of 5. Here’s why:

  • Limited Competitive Advantage: Unlike companies with strong moats like brand recognition or patent protection, ENLC operates in a service-oriented sector where competition is fierce and switching costs are low. While their regional network provides a scale advantage and some customer stickiness, it does not seem like one which creates a wide moat.

  • They do have a wide geographic coverage with over 12000 miles of pipelines, but other midstream companies have wide coverage as well.

  • Process Based Advantage: They do provide a reliable and consistent service and do have an expansive midstream system. However, their pipelines are not unique, as they are in general constructed by other similar firms, which also means their technology advantage is very low.

  • Customer Loyalty is not a significant factor For most oil & gas customers, changing pipelines is very easy. All they need is a connection to another pipeline which may be nearby and provide a cheaper service.

    • While the company does have long-term contracts, these are often easily terminated if prices fall below a certain level, or are restructured during bankruptcy. This greatly reduces stickiness and long-term predictability in earnings.
  • Pricing Power: Although ENLC can sometimes command premium prices based on location and specific needs, it’s not a structural advantage, because it is unlikely to be maintained for long if any competitor offers similar service at a lower cost, especially due to low switching costs for the customers.

In conclusion, ENLC does not possess the structural characteristics inherent to build a strong moat.

Risks to the Moat and Business Resilience:

The following are key risk factors that could harm ENLC’s moat and business resilience:

  • Commodity Price Risk: ENLC’s profitability is directly linked to natural gas, crude oil, and NGL prices. A decline in commodity prices decreases production and thus their throughput which reduces revenue. While the company tries to limit the exposure, they are still subject to volatility.
  • Regulatory and Permitting Risk: The midstream energy sector faces a complex regulatory landscape. Changes in environmental regulations or permitting could increase costs or limit their operations. The company itself is subject to Federal Energy Regulatory Commission.
  • Customer Credit Risk: Their customers are primarily producers and thus exposed to fluctuations in prices that could affect their businesses. Any problems at a customer, or any bankruptcy, could lead to reduced production and less use of ENLC’s systems and consequently affect their revenues.
  • Operational Risks: Midstream operations inherently involve risks of accidents, equipment failure, and damage from natural disasters. They may also face legal challenges to their contracts or existing facilities. Any such incidents could cause business interruption and negatively impact financial performance.
  • Competition: The midstream energy sector is competitive. New entrants, and aggressive pricing, by incumbents could reduce profits, and revenues. This includes competing with local companies and larger companies with wider reach.
  • Geopolitical risks: The current situation in Ukraine could affect commodity price trends.
  • Debt levels: Although the company has adequate debt coverage, the debt levels are fairly high and this gives the company very little flexibility if revenues or prices fall for its commodities.

Business Explanation:

  • Revenue Distribution: ENLC’s revenue is primarily derived from fees for gathering, processing, transporting, and storing natural gas, crude oil, and condensate. Fees are mostly dependent on volumes transported through their network, or are linked to commodity prices.
  • The largest contributors to revenue are natural gas (63% of volume) , NGL(25% of volume), and crude oil (12% of volume)
  • A lot of their revenues are contracted as gathering and transportation contracts.
  • Trends in the Industry:
  • The midstream industry has seen a general positive trend driven by growth in crude oil and natural gas production, primarily due to increased hydraulic fracturing.
  • This industry is largely dependent on the price of commodities, and is subjected to volatility from the same.
  • Also, there are trends of consolidation in the industry which impacts the competitive landscape of smaller companies.
  • Increased demand for LNG export facilities, that can serve the international market.
  • Margins: Margins can be variable due to various pricing components. The company’s revenues depend on throughput, which is highly dependent on their customers and their drilling activities.
  • While their adjusted gross margin for YTD is 61.3%, their income statement indicates a high level of depreciation and amortization, and higher operating costs. So, the net income margin, is very low.
  • Competitive Landscape: The midstream energy sector is characterized by a handful of large companies as well as a larger number of smaller niche competitors. The competition depends on several factors like geography, capacity, relationships with customers, and cost effectiveness.
  • The industry is also highly susceptible to changes in government regulations and political activity.
  • What makes ENLC different?: ENLC, as it stands now, does not appear to be structurally different from competitors. It does not hold any significant patent protected technology. It is mostly tied down by infrastructure and contracts.

Financials: Here is the financial situation of the company based on recent earnings calls and form-10Q documents:

  • Revenue Growth: ENLC has had revenue growth recently, primarily driven by higher commodity prices and higher volume throughput.
  • Enlink has adjusted its 2023 financial guidance as well, increasing their net income expectations.
  • The company expects to have adjusted EBITDA of about $1.28 to $1.345 billion, a net income of roughly $450 million to $540 million, and free cash flow of over $450 million.
  • Profitability: Despite revenue growth, they have been struggling with profitability. Their cost structures including operation, maintenance, and interest expenses, have been significantly high.
  • While they have maintained a positive adjusted operating margin of about 60%, their GAAP net income margin is very low (about 5%). They did manage to have a slightly positive net income of about 0.11 dollars per unit for last year.
  • Debt: The company’s balance sheet reflects significant reliance on debt funding. In spite of the large revenues, this leverage does provide a degree of risk for the company. Their long-term debt as of the latest quarter is about 4.2 billion dollars.
  • Their credit rating has been downgraded to “BB” due to their levered balance sheet.

Understandability (3/5):

ENLC’s business is reasonably easy to understand, but with complexities:

  • The core operations—gathering, processing, transporting, and storing natural resources—are easily grasped.
  • Understanding the nuances of fee structures, contracting, volume dependence, and the complex balance sheet requires a solid understanding of the energy sector and financial analysis.
  • There are a number of different technical terms and acronyms that are used to describe the company’s operations.

Balance Sheet Health (3/5):

ENLC’s balance sheet has some positives and some areas of concern. It’s rated a 3 out of 5:

  • Leveraged: While ENLC has significant assets, these are offset with high levels of debt, which increases risk and financial vulnerability.
  • Debt Coverage: While the overall debt is very high, their interest coverage remains positive.
  • Liquidity: Their liquidity has been very high in recent quarters.
  • They have access to debt financing and also are generating enough cash from their operating revenues, meaning they are unlikely to have problems with liquidity.
  • They have a revolving credit facility of $4.5 billion, which is quite substantial.
    • Their liquidity from debt also means a higher debt-to-equity ratio which may bring concern.

Recent Concerns/Controversies & Management Stance:

  • The company’s large debt has attracted some negative ratings from credit agencies, which has led to management taking more care in spending.
  • Management, in their recent earnings calls, has consistently emphasized their focus on capital discipline and improving financial flexibility. They expect their cost cutting measures and increased revenues to improve their profitability and free cash flow by end of 2023. They also announced a share buyback program of 250 million dollars.

They continue to focus on their operating efficiencies, reducing their costs, and utilizing the most up-to-date technologies and infrastructure. They believe their focus on these measures will enable them to achieve their financial objectives and to remain competitive,