On Thursday, May 16, 2019, natural gas-focused midstream partnership Enable Midstream Partners, LP (ENBL) gave a presentation at the MLP & Energy Infrastructure Conference. As is usually the case for presentations of this type, the company spent a considerable amount of time discussing its position in the midstream industry as well as a few of the projects that it is working on in order to stimulate its forward growth. Perhaps somewhat curiously though, the company did not devote any effort to discuss some of the current fundamentals of the midstream industry, so I will add my own thoughts on this where appropriate. Overall, the company could certainly be somewhat appealing for income-focused investors given its very high current yield, but it does not have the growth potential that some of the other companies in this industry have.

Enable Midstream Partners is one of the largest midstream master limited partnerships, at least among those companies that are focused almost exclusively on natural gas. The company boasts 10,100 miles of natural gas pipelines, 13,900 miles of natural gas gathering pipelines, 2.6 billion cubic feet per day of processing capacity, and 84.5 billion cubic feet of storage capacity. The company’s operations are centered around the Ozarks and the southern part of the central United States.

Source: Enable Midstream Partners

As we can see here, the company’s operations are centered around the Anadarko and Arkoma basins. These are not basins that we frequently hear discussed in the North American energy space, but they are fairly important for the overall story in the industry. As is the case with many of the other resource basins in the United States too, they are undergoing production growth. As we can see here, the number of rigs actively drilling for resources in the Anadarko basin has been steadily increasing over time:

Source: Enable Midstream Partners

This has been driving increasing production of both crude oil and natural gas, but primarily gas, in the basin:

Source: Enable Midstream Partners

Of course, Enable Midstream itself does not actually produce any oil or gas so it does not directly benefit from this production growth. However, the company does benefit from the fact that this rising production results in a higher level of resources moving through its infrastructure network. As we have discussed in various past articles about the companies in the midstream industry, the general business model of these companies is charging a fee for each unit of resources moving through its infrastructure or each unit that it stores. Thus, we would expect these rising volumes to result in cash-flow growth. This has indeed been the case as the company’s adjusted EBITDA has been steadily increasing over the past few years and it is expected to do so again this year:

Source: Enable Midstream Partners

One advantage of this business model is that it provides a great deal of protection against commodity price fluctuations. For the most part, midstream companies do not have to worry about the sometimes volatile pricing of either oil or gas. They only have to be concerned with the quantity of the resources moving through their infrastructure. In addition, the contracts that they have in place with the upstream companies that produce these compounds require a minimum amount of resources to be sent through the network or otherwise be paid for. This results in these companies ordinarily having relatively stable cash flows regardless of what goes on in the commodity markets, which should be somewhat comforting to those investors that are somewhat conservative and just want a source of income. As we can see here, roughly 96% of Enable Midstream’s revenues come from sources that are not dependent on commodity prices.

Source: Enable Midstream Partners

One of the defining characteristics of midstream infrastructure is that there is only a limited amount of resources that can be transported by any given pipeline or held in any given storage unit. Thus, once these things are operating at full capacity, the company will need to construct additional facilities in order to continue to grow. Enable Midstream Partners is doing just this.

The company’s primary growth project is the Gulf Run Pipeline. This pipeline is being constructed in Louisiana, roughly following the course of the Mississippi River:

Source: Enable Midstream Partners

The primary purpose of this pipeline is to transport natural gas from the basins that the company already supports to the Gulf Coast. Once there, it is intended to be used by Golden Pass LNG to support the burgeoning natural gas export industry. I have discussed this industry many times in the past. Thus, Enable Midstream will be helping to support the emergence of the United States as a major exporter of liquefied natural gas. It is also nice to see that the company has already secured an anchor customer in Golden Pass LNG. This ensures that Enable Midstream is not spending a large amount of money on a pipeline that nobody wants to use. The presence of the anchor customer essentially ensures that the pipeline will begin generating a return for the partnership as soon as it is active, which is something that is always nice to see.

As is usually the case with midstream growth projects, the Gulf Run Pipeline will take a couple years from project inception until it actually begins operating. In this case, the project was announced and the partnership began looking for customers for it last year. In April 2019, the Federal Energy Regulatory Commission granted approval for the company to initiate the pre-filing process. There is still a great deal of work to be done before construction even begins. Overall, this project is not expected to be active until late 2022 so we will have to wait at least that long before the pipeline begins to have an impact on Enable Midstream’s results:

Source: Enable Midstream Partners

Enable Midstream boasts a very appealing distribution yield of 9.60% at its current level. It is always important for us to make sure that the company can actually afford its distribution so that we can avoid investing in a company right before the distribution is cut. Fortunately, this does not appear to be a problem for the company. We can see this by looking at the company’s distribution coverage ratio, which tells us how the company’s cash generation compares to the amount that it is actually paying out. As we can see, this ratio has been consistently above 1.00 for the past three years and is expected to be this year as well:

Source: Enable Midstream Partners

This ratio is generally high enough to provide us with a strong degree of confidence that Enable Midstream will not have to cut its distribution in the near future. Indeed, the company is generating considerably more cash than it needs to cover this distribution. Thus, even if some event causes its cash generation to decline somewhat, it still should not have to cut its distribution.

In conclusion, Enable Midstream Partners is a reasonably solid natural gas-focused midstream company that has operations in several of the most notable resource basins in the United States. The company’s upstream customers have been growing their production in these basins, which has had a positive effect on Enable Midstream’s volumes and cash flow. Enable also has some growth potential in the Gulf Run Pipeline, although it does not appear to have the same growth potential as some of its peers. The company does boast a high distribution yield with solid coverage though, so it is well positioned to reward its investors.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-06-17