Fitch Maintains EnLink Midstream, LLC on Rating Watch Positive

Published: 2025-01-20 05:47:15 ET ENLC

Fitch Ratings maintained EnLink Midstream, LLC's (EnLink) and EnLink Midstream Partners, LP's (ENLK) 'BBB-' Long-Term (LT) Issuer Default Ratings (IDRs) on Rating Watch Positive.

The senior unsecured ratings of 'BBB-' for both entities is affirmed.

The Rating Watch reflects disclosures by ONEOK, Inc. (OKE; BBB/Stable). OKE purchased a partial stake in EnLink in October and subsequently agreed with public common unitholders to purchase the remaining shares in EnLink.

OKE intends to make EnLink and ENLK senior notes pari passu with OKE senior notes. The Rating Watch reflects Fitch's expectation that OKE will execute that plan.

Fitch will resolve the Watch after the public shares have been bought in and OKE has had the time to execute against its aforementioned plan about pari passu. If OKE makes itself the obligor of the EnLink and ENLK senior notes (that is, no EnLink entity remains an obligor), Fitch will withdraw EnLink and ENLK ratings.

Key Rating Drivers

Reliable Steady Volume Growth: Fitch expects long-term steady growth for the entire exploration and production industry in the Permian region, which is EnLink's strongest area of operations. EnLink has already benefitted from this trend. The Permian segment's processing volumes have been increasing in a relatively narrow band of -1% to 6% each quarter on a sequential basis for the last four quarters up to Sept. 30, 2024. The -1% was reported in 1Q24, during which there was a cold snap.

Since midstream companies have to spend capex 10-18 months in advance of new planned wells, the previous era of aggressive growth plans featured many 'busts' that hurt them. Steady growth is advantageous for midstream companies, as reflected in the year-to-date June 30, 2024 volume, with generally rising EBITDA and moderate growth capex.

Fee-Based Cash Flow: EnLink's EBITDA mainly comes from fee-based contracts and fee-type commercial activities (purchase/resell). Fitch expects the company to generate approximately 90% of its gross margin from fee-based services in 2024. Gathering and processing (G&P) operations in the Permian and Oklahoma are further underpinned by long-term acreage dedication contracts. EnLink has also hedged a portion of its commodity exposure (a small amount of its EBITDA) for the coming 12 months.

Solid Leverage: EnLink's financial performance was solid YTD Sept. 30, 2024. Fitch forecasts that EnLink's 2024 leverage will be approximately 3.9x. In 2023, EnLink was FCF positive. Cash generation in 2023 was supplemented by the divestment of the company's Ohio River Valley assets. EnLink's leverage positions it solidly in its rating category, which is important considering the company's exposure to volumetric risk.

Derivation Summary

Plains All American Pipeline L.P. (Plains All American; BBB/Stable) is a comparable peer for EnLink given that both companies have geographical diversity and high percentage of EBITDA from a variety of fee-based activities.

Plains All American has some minimum volume commitments, mainly on its Texas long-haul pipelines, which were constructed in the last decade. This revenue-assurance feature drives Fitch's view that Plains All American has somewhat less business risk than EnLink.

Based on Fitch's view of 4Q24 for each company, Fitch forecasts Plains All American's leverage will be below 3.5x in 2024 vs. approximately 3.9x for EnLink.

Plains All American has a heavy focus on crude oil, whereas EnLink has more of a presence in the natural gas infrastructure chain. Tensions in the Middle East is a macro tailwind for Plains All American while consecutive warm winters are a headwind for EnLink. Such positive and negative factors tend to reverse over time. Other than the leverage forecast, Fitch does not differentiate between the companies' hydrocarbon focus.

The companies have similar financial policies concerning leverage.

The difference in rating is mainly due to Fitch's assessment that Plains All American has moderately less business risk.

Key Assumptions

Fitch Oil and Gas price deck;

EBITDA profile is approximately level from Fitch's 2024 forecast;

Distribution level;

Capex remains higher than in the trough period of 2020-2022.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Upgrade

Fitch may remove the Watch Positive in the event that OKE does not cause EnLink senior notes to be pari passu to OKE senior notes;

A significant change in cash flow stability, including a move away from the current profile of fee-based profits;

Leverage expected to be above 4.5x on a sustained basis;

A sustained change in financial policies that tilts strongly toward shareholder rewards;

A negative rating action of the borrower GIP III Stetson I, L.P. (per Parent Subsidiary Linkage criteria).

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Downgrade

In the unlikely event of an adverse situation for the OKE integration plan (for example, the agreed buy-in of the publicly-traded units transaction is voided somehow), EnLink posts leverage sustained below 3.5x and achieves stable performance across the segments.

Liquidity and Debt Structure

Ample Liquidity: EnLink's liquidity consists of its undrawn $1.4 billion revolver due June 2027 and $10.4 million in cash and equivalents, as of Sept. 30, 2024.

The revolving credit facility contains a financial covenant limiting leverage, defined as consolidated net indebtedness to consolidated EBITDA, to 5.0x. This maximum limit may temporarily increase to 5.5x following and acquisition, subject to certain conditions. EnLink was compliant with its covenants as of Sept. 30, 2024 and is expected to remain in compliance throughout Fitch's forecast.

Near-term refinancing needs are manageable, with maturities totaling $682 million in 2025 and $491 million in 2026.

Issuer Profile

EnLink Midstream, LLC (EnLink) is a gathering and processing company that operates mainly in Texas, Oklahoma and Louisiana. Its Louisiana segment also features hydrocarbon transmission and fractionation assets.

Summary of Financial Adjustments

Fitch applied 50% equity credit and 50% debt credit to ENLK's preferred equity securities.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.