EnLink Midstream LLC: A $4.22 Stock That Yields 8.9%
A High-Yield Energy-Industry Stock to Think About
With the Dow Jones Industrial Average and the S&P 500 making new highs recently, the task of finding high-yield stocks seems to be getting more difficult. After all, at any cash payout, there’s an inverse relationship between a company’s dividend yield and share price.
Indeed, it wasn’t that long ago that the average dividend yield of S&P 500 companies was two percent—which wasn’t much to begin with. Today, it’s even lower, just 1.4%. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed April 23, 2021.)
But all a yield-hunter needs to do is look beyond the well-known tickers. Sure, most of the big companies don’t yield much, but among the lesser-known names, there are still plenty of companies with generous distribution policies.
Check out EnLink Midstream LLC (NYSE:ENLC), for instance.
As its name suggests, EnLink Midstream is in the midstream energy business. The company’s services span the midstream value chain, providing natural gas, crude oil, condensate, and natural gas liquid (NGL) capabilities. Headquartered in Dallas, TX, EnLink has purpose-built, integrated asset platforms in major production basins and core demand centers, including the Permian Basin, Oklahoma, North Texas, and Gulf Coast.
With over 11,000 miles of pipelines, 22 processing facilities, and seven fractionators, EnLink has quite a sizable midstream platform. However, the company has a market capitalization of just over $2.0 billion, so it’s not really that big by energy industry standards. And that’s why we don’t often hear about ENLC stock in the financial media. (Source: “Quarterly Report,” EnLink Midstream LLC, November 4, 2020.)
That under-the-radar status could be one of the reasons behind the company’s appeal to yield hunters. ENLC stock has a unit price of $4.22 at the time of this writing. With a quarterly cash distribution rate of $0.09375 per common unit, the stock offers an annual yield of 8.9%.
Of course, like most ultra-high yielders from the energy sector, it hasn’t always been sunshine and rainbows for EnLink Midstream. In light of the extraordinary economic environment last year, the company reduced its payout to investors. (Source: “ENLC Distributions,” EnLink Midstream LLC, last accessed April 23, 2021.)
Cutting dividends certainly wasn’t good news for ENLC stock investors. However, the lower distribution rate still translates to a massive yield at the current share price. And because the payout is lower than before, the company was able to achieve a stronger distribution coverage.
Consider this: in the fourth quarter of 2020, EnLink Midstream generated $160.0 million in distributable cash flow, which was down quite a bit from the $203.1 million it earned a year earlier. But because the company paid less in cash distributions in the reporting quarter, it had $91.6 million in free cash flow (FCF) after distributions. In the year-ago quarter, EnLink’s FCF after distributions was $22.4 million. (Source: “EnLink Midstream Reports Fourth Quarter and Full-Year 2020 Results, Provides 2021 Financial Guidance,” EnLink Midstream LLC, February 16, 2021.)
The improvement in FCF after distributions was even bigger if you look at the full-year results. In 2020, EnLink Midstream LLC generated $679.9 million in distributable cash flow, compared to $723.8 million in 2019. Despite the lower amount of cash generated, the company paid less in distributions and spent a lot less on capital expenditures in 2020, resulting in $310.5 million in FCF after distributions. To put that in perspective, the company’s FCF after distributions in 2019 was negative $375.9 million.
At this point, the operating environment is still uncertain for many midstream energy companies. But EnLink Midstream LLC’s management team has presented its financial guidance.
They expect the company to generate adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $940.0 million to $1.0 billion in full-year 2021. Meanwhile, the company plans to spend $105.0 million to $135.0 million on growth capital expenditures and plant relocation costs and $35.0 million to $45.0 million on maintenance capital expenditures.
Based on the current annualized payout of $0.375 per unit, the company is projected to have $275.0 million to $325.0 million in FCF after distributions this year.
In the fourth-quarter earnings conference call, EnLink Midstream’s chief financial officer, Pablo Mercado, said, “The free cash flow generation of our platform is tremendous with all four segments contributing. (Source: “EnLink Midstream, LLC (ENLC) CEO Barry Davis on Q4 2020 Results – Earnings Call Transcript,” Seeking Alpha, February 17, 2021.)
He continued, “We are committed to a disciplined and balanced allocation of our free cash flow, while deleveraging the balance sheet remains our top objective, we have the financial flexibility to pursue other high return opportunities and return capital to unitholders. We feel our distributions are at a very sustainable level.”
Bottom Line on EnLink Midstream LLC
In the stock market, the general rule is that the higher the yield, the riskier the payout. Looking back, EnLink Midstream LLC’s distribution history is less than stellar.
However, the company seems to be on the right track now. And if it can achieve management’s guidance (meaning it delivers $300.0 million in FCF after distributions at the midpoint this year), it would make ENLC stock one of the few high-yield names worth considering in today’s market.