Enable Midstream Partners LP: This 8.6% Yield Is Getting Safer and Safer
A High-Yield Stock for Risk-Averse Investors
When you see a beaten-down energy stock with a huge yield, your first question will likely be, “Is the payout safe?”
Well, in the case of Enable Midstream Partners LP (NYSE:ENBL), I’m glad to report that the answer is “yes.”
Headquartered in Oklahoma City, Enable Midstream Partners LP is a master limited partnership (MLP) that owns, operates, and develops natural gas and crude oil infrastructure assets.
The partnership was created in May 2013 and went public in April 2014. We know that oil and natural gas prices crashed in the summer of 2014, so the timing of Enable Midstream Partners’ initial public offering (IPO) probably wasn’t the luckiest.
Unsurprisingly, ENBL stock tanked not long after it went public. And while it has made a decent recovery since 2016, the stock is still down more than 25% compared to its IPO price of $20.00.
Furthermore, due to the downturn in oil and gas prices that started in 2014, plenty of energy companies have cut their dividends. So, has that been the case at Enable Midstream Partners LP?
Not really. When ENBL went public, its first payout was $0.2464 per unit. That was a prorated payment based on a quarterly distribution rate of $0.295 per unit. (Source: “Enable Midstream Partners Increases Quarterly Distribution; Declares Prorated 2nd Quarter Distribution,” Enable Midstream Partners LP, July 25, 2014.)
The partnership then went on to raise its distribution every quarter for five consecutive quarters, bringing its quarterly distribution rate to $0.318 per unit. While management didn’t increase the payout any further after that, they didn’t lower it, either. That is quite an achievement considering what happened to the oil and gas sector during those years. (Source: “Enable Midstream Partners, LP Dividend Date & History,” Nasdaq, last accessed March 11, 2019.)
Trading at $14.86 apiece at the time of writing, Enable Midstream Partners LP offers investors a generous annual yield of 8.6%.
Generous Distributions Backed by Solid Financials
Like I said, this beaten-down energy stock stands out when it comes to distribution safety.
In the fourth quarter of 2018, Enable Midstream Partners LP generated $173.0 million in distributable cash flow, representing an 18.5% increase year-over-year. Since the partnership paid total cash distributions of $138.0 million to shareholders for the quarter, it achieved a distribution coverage ratio of 1.26 times. (Source: “Enable Midstream Announces Fourth Quarter and Full-Year 2018 Financial and Operating Results,” Enable Midstream Partners LP, February 19, 2019.)
In other words, the partnership generated 26% more cash than what was needed to cover its generous distributions for the quarter. Compared to the other high-yield MLPs, that’s a fairly wide margin of safety.
Full-year results were even better. In 2018, Enable Midstream Partners LP earned $760.0 million in distributable cash flow while paying $552.0 million in actual cash distributions. Therefore, the cash generated by the MLP’s operations exceeded its distributions by a whopping $208.0 million, allowing the partnership to achieve a very strong distribution coverage ratio of 1.38 times.
Looking back, you’ll see that, over the years, Enable Midstream’s distribution safety has improved considerably. The chart below shows this high-yield stock’s distribution coverage ratio in each of the last three years.
Enable Midstream Partners LP Distribution Coverage Ratio
Still, if you take a look at what the partnership actually does for a living, its solid distribution coverage shouldn’t come as a surprise. This is because, while ENBL stock hasn’t been a hot commodity due to the downturn in the energy sector, the partnership actually runs a fairly stable business.
You see, Enable Midstream Partners LP’s infrastructure assets consist of approximately 7,800 miles of interstate pipelines, 2,300 miles of intrastate pipelines, 13,900 miles of gathering lines, 15 major processing plants with approximately 2.6 billion cubic feet per day of processing capacity, and eight storage facilities with 84.5 billion cubic feet of natural gas storage capacity.
The neat thing about these midstream assets is that operating them is largely a fee-based business, which allows ENBL to generate predictable cash flows despite the volatility in oil and gas prices.
For 2019, management expects 96% of Enable Midstream Partners’ gross margin to be fee-based or hedged and supported by multi-year, fee-based contracts with large-cap producers and utility customers.
Lock in an 8.6% Yield for 2019 and Beyond
In the partnership’s fourth-quarter earnings report, management reaffirmed their 2019 outlook that was first issued in November 2018.
For 2019, Enable Midstream Partners is projected to generate $435.0–$505.0 million in net income attributable to common units, about $1.1–$1.2 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), and $740.0–$810.0 million in distributable cash flow. The company is also expected to achieve a distribution coverage ratio of 1.3–1.45 times.(Source: “Enable Midstream Announces Third Quarter 2018 Financial and Operating Results, Quarterly Distributions and 2019 Outlook,” Enable Midstream Partners LP, November 7, 2018.)
Note that, in 2018, Enable Midstream Partners outperformed its own guidance on net income, adjusted EBITDA, distributable cash flow, and distribution coverage. If the partnership manages to meet or exceed its expectations again this year, that would make its 8.6% yield even more attractive.
Most high-yield stocks are not the safest bets. But as it stands, Enable Midstream Partners LP looks like an opportunity for risk-averse income investors.