EnLink Midstream LLC: After Surging 40%, This Energy Stock Still Yields 9.7%

enlc stock

Here’s a High-Yield Stock for Investors to Think About

EnLink Midstream LLC (NYSE:ENLC) was one of my favorite high-yield recovery plays in the energy sector. Back in October 2020, when ENLC stock was in the doldrums, I told Income Investors readers why “the best could be yet to come” for this beaten-down energy stock.

There was a very obvious reason why I liked this midstream energy play. At the time, EnLink Midstream LLC stock had a quarterly cash distribution rate of $0.09375 per unit and a unit price of $2.76, giving it a staggering annual yield of 13.6%.

Since that article was published, ENLC stock has surged by 40%, and the company continues to dish out oversized cash distributions.

Of course, at a given level of cash payout, a company’s dividend yield moves inversely to its stock price. Therefore, because EnLink Midstream LLC stock has climbed, its yield is now lower than when I last wrote about it.

However, the opportunity might not be over just yet. Because the midstream operator’s yield was so high to begin with, its stock remains a high yielder even after the rally.

Trading at $3.87 apiece at the time of this writing, ENLC stock offers investors an annual distribution yield of 9.7%.

Those distributions are backed by a large, integrated midstream portfolio that consists of approximately 12,000 miles of pipelines, seven fractionators, and 22 processing facilities. EnLink’s services span the midstream value chain, providing natural gas, crude oil, condensate, and natural gas liquid (NGL) capabilities. The company’s assets are strategically located in major production basins and core demand centers, including the Permian Basin, Oklahoma, North Texas, and the Gulf Coast. (Source: “Third Quarter 2020 Results,” EnLink Midstream LLC, November 4, 2020.)

One of the reasons that made EnLink Midstream LLC stock stand out last year was that the company delivered strong financial results in the second quarter, which was an extremely difficult period for most energy operators.

For that quarter, the company generated $169.1 million in distributable cash flow while declaring $46.4 million in actual cash distributions, allowing it to achieve a distribution coverage ratio of 3.65 times. That also resulted in excess free cash flow (which is defined as distributable cash flow minus common unit distributions and growth capital expenditures) of $72.0 million. (Source: “EnLink Midstream Reports Second Quarter 2020 Results and Updates 2020 Guidance,” EnLink Midstream LLC, August 4, 2020.)

Fast-forward three months and the financials became even stronger.

In the third quarter of 2020, EnLink’s distributable cash flow came in at $177.7 million. Considering that the company declared $46.4 million in cash distributions for the quarter, it had a distribution coverage ratio of 3.83 times. (Source: “EnLink Midstream Reports Third Quarter 2020 Results and Announces $100 Million Common Unit Repurchase Program,” EnLink Midstream LLC, November 4, 2020.)

Moreover, the company has made solid progress toward reducing its costs and enhancing its financial flexibility. EnLink’s capital expenditures in the third quarter were about 80% lower than a year earlier.

And the company recently announced a new three-year, $250.0-million accounts receivable securitization facility. Thanks to this new facility, EnLink’s $1.8-billion revolving credit facility was nearly undrawn by the end of 2020. Furthermore, the company has no senior note maturities until 2024.

Seeing the improving financials, EnLink’s board of directors decided to authorize a $100.0-million common unit repurchase program. While the company continues to prioritize debt reduction, having a unit repurchase program gives it a flexible way to return capital to investors.

At the time of this writing, the company is yet to report its fourth-quarter earnings, but management has been very optimistic about its full-year 2020 results. In particular, the company expects its full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to meet or exceed the high end of its previously announced guidance range of $950.0 to $1.03 million.

For those concerned with this high-yield stock’s distribution safety, the following comment by EnLink’s chief financial officer, Pablo Mercado, should be reassuring: “With respect to the free cash flow after distribution, we now expect to exceed the high end of our previously guided range, which was $280 million by 5% to 10%, putting us in the zip code of $300 million. We are generating a free cash flow yield of close to 40% setting us apart in our industry.” (Source: “EnLink Midstream’s (ENLC) CEO Barry Davis on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, November 6, 2020.)

Bottom Line on EnLink Midstream LLC

Ultimately, don’t forget that higher returns often come with higher risk. The energy sector faces uncertainty, and the economy still has a long way to go toward making a full recovery from the COVID-19 pandemic. Investing in high-yield energy stocks in these times can be a risky endeavor.

Still, among the high-yield energy names, EnLink Midstream LLC has one of the strongest distribution coverages. With improving financials, ENLC stock could be an opportunity for yield hunters.

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