The Advisor Access Interview
Advisor Access: Why should investors look at master limited partnerships (MLPs) right now?
Barry Davis: The main benefits of investing in an MLP are the following: 1) they are a great way to invest in our country’s shale revolution, which has created unprecedented demand for new energy infrastructure; and 2) the fact that distributions (which is MLP jargon for “dividends”) are not taxed.
MLPs combine the tax benefits of a limited partnership (which does not pay taxes from profits) with the access to capital of a publicly traded company.
The combination of steady growth and reliable, tax-advantaged distributions can make an MLP an excellent investment vehicle, but not all MLPs are created equal.
AA: How can the two parts of your company, the GP and the LP, be a fit for a portfolio?
BD: There are two distinct ways to invest in EnLink Midstream: through the purchase of units in EnLink Midstream Partners, LP (NYSE: ENLK), an MLP, or the purchase of shares in EnLink Midstream, LLC (NYSE: ENLC), the GP. This business model provides institutions that are unable to make direct MLP investments with a way to participate in EnLink’s growth through common unit ownership of the GP.
There are meaningful differences between the two entities, and they each offer their own benefits. ENLK has a higher yield (currently ~6%), a guidance projection of ~7.5% distribution growth in 2015 and the tax advantages that come with an MLP. ENLC has a lower yield (currently ~3%), and a guidance projection of ~17.5% distribution growth due to incentive distribution rights.
AA: How does the structure of Enlink benefit investors over other MLPs?
BD: The biggest differentiator in EnLink’s structure is the sponsorship from Devon Energy Corp. (NYSE: DVN), which is a premier E&P company and is EnLink’s largest customer. Devon owns ~34% of ENLK and ~70% of ENLC. This is a significant strategic advantage to both EnLink and Devon investors.
EnLink is incentivized to provide Devon with reliable service and midstream capital investments when needed, and Devon is incentivized to provide EnLink with high-quality contracts and drop-down transactions (which are essentially acquisitions by ENLK of Devon’s midstream assets). Both Devon and EnLink are incentivized to grow in new areas together because, all else being equal, Devon has the added financial and operational benefits associated with its EnLink ownership.
AA: How does EnLink stack up against other MLPs?
BD: EnLink has significant competitive advantages because of the sponsorship from Devon, the quality of our contracts which are ~95% fee-based, the investment-grade balance sheets of both ENLK and DVN, the diversity of our basins and midstream services, and the fact that we have a long history of organic growth separate from Devon. There are a few other MLPs that have upstream sponsors, but none have the history of organic growth and the high-quality balance sheet that EnLink maintains.
Furthermore, EnLink still has ample room to grow. We expect to double in size by the end of 2017, which means growing EnLink’s adjusted EBITDA from ~$690 million in 2014 to ~$1.4 billion by the end of 2017.
That’s a bold plan, but we believe it is achievable through our Four Avenues for Growth, which are: (1) drop down transactions, (2) growing with Devon, (3) organic growth and (4) mergers and acquisitions. We made significant progress on that goal by announcing or completing ~$3.7 billion of growth projects and acquisitions in all four avenues for growth in the last year.
AA: What are some highlights of your holdings, such as geographic and operating diversification, that position you for sustainable growth?
BD: EnLink is positioned in six of the very best shale plays in the U.S., but just as importantly, EnLink has favorable contracts and a diversity of services in these areas. ~95% of EnLink’s cash flows come from fee-based contracts and ~80% of EnLink’s cash flows come from long-term, fee-based contracts with either firm transportation agreements or minimum volume commitments.
Those contracts, coupled with EnLink’s balance of crude, natural gas and natural gas liquids services significantly mitigates risks from commodity price fluctuations. EnLink’s growth plans are bolstered by downstream demand, especially in Louisiana where petrochemical manufacturers like Dow Chemicals have significant demand for natural gas liquids because of low commodity prices.
AA: How is EnLink’s balance sheet positioned and what is the strategy to preserve its strength?
BD: EnLink has a strong balance sheet with an investment-grade credit rating (BBB, Baa3). At the end of 2014, EnLink’s leverage was ~3.4x debt/adjusted EBITDA. That is quite low for an MLP, and we intend to maintain an investment-grade balance sheet in the long term. EnLink also has a heavy appetite for growth, as is evident by the ~$3.7 billion of drop down transactions, growth projects and acquisitions that EnLink has announced in the last year.
Having a strong balance sheet is a vital part of EnLink’s growth plans because new opportunities often do arise in a short time frame, both from the various platforms for growth and the sponsorship from Devon.
Devon also has an excellent balance sheet (BBB+, Baa1), very low leverage of ~1.4x debt/EBITDA at the end of 2014 and a heavy appetite for growth, so it is important for EnLink to be in a strong position financially to support Devon whenever it chooses to make an acquisition or expansion into a new area.
AA: What are some challenges that the MLP market is facing, such as potentially rising interest rates and declining oil prices, and how is EnLlink positioning itself to overcome those hurdles?
BD: The biggest challenge for the industry right now is the decline in oil and gas prices. Both EnLink’s and Devon’s management teams were very mindful of cyclical nature of our industry when EnLink was formed. That is why EnLink has high-quality, fee-based contracts, and a strong balance sheet.
EnLink has operated through many cycles over the years, and we have always been strategic in our adaptability and flexibility. We are confident that we have the necessary financial strength and right growth plan to succeed in any environment.
AA: Thank you, Barry.