Fitch Ratings has assigned a 'BB+'/'RR4' rating to EnLink Midstream, LLC's (ENLC) proposed offering of senior unsecured notes.
Proceeds will be used to tender for outstanding senior unsecured debt due over the next few years. The Rating Outlook is Positive.
The Positive Outlook reflects ENLC's leverage, which is expected to decline below Fitch's positive 4.5x leverage sensitivity by around Dec. 31, 2022. ENLC raised EBITDA guidance on the 2Q22 call, and leverage is falling faster than Fitch expected at its March 2022 affirmation. Sustained leverage below the positive sensitivity threshold over a couple of quarters would be the main trigger for an upgrade.
Key Rating Drivers
Deleveraging Underpinned by Financial Policy: ENLC posted FY21 leverage of 4.8x (total debt with equity credit to operating EBITDA). Leverage has fallen from that level thus far in 2022. The strong leverage metric profile reflects in part strong commitment to credit quality.
During 2020 and 2021, ENLC was able to execute on credit enhancement items, such as distribution cuts, capex reduction, and cost savings, and posted strong 2021 result. ENLC raised its distributions in the 4Q21 by 20%. Given ENLC's current distribution policy and capex program, Fitch forecasts that ENLC's leverage will trend below positive sensitivity threshold of 4.5x by around Dec. 31, 2022.
Fitch expects ENLC's growth in the Permian and Louisiana should keep leverage below positive sensitivity threshold beyond 2022 under the current Fitch's price deck. Fitch believes, following the successful deleveraging in the past two years, ENLC is well positioned to manage its leverage below 4.5x, while at the same time support moderate dividend growth, a modest share buyback program and current capital expenditure levels.
Fee-Based Cash Flow: ENLC has exhibited a strong focus on fee-based contracts to mitigate commodity price volatility. Fitch expects ENLC will continue to generate about 90% of its gross margin from fee-based services in 2022 and 2023. Gathering and processing (G&P) operations in the Permian and Oklahoma are further underpinned by long-term contracts. In addition, ENLC hedges its commodity exposure for the current year, further limiting any commodity price volatility impact on earnings.
Permian and Louisiana Growth: The Permian and Louisiana segments remain the two steadily growing segments for ENLC, both looking at recent annual results, and in Fitch's forecast. Fitch projects ENLC's Permian segment to continue its recent steep growth in 2022, underpinned by strong natural gas volume production.
ENLC completed relocation of an 80mcfpd natural gas processing plant from Oklahoma to the Permian under project Warhorse. New plant relocation-project Phantom, which will add 200MMcf/d of processing capacity in the Midland Basin-is currently under way and is expected to be completed during the 4Q22. Additionally, ENLC also has long-term contracts with high quality producer customers that have a focus in allocating capital in the Permian in the near term. Within Louisiana, ENLC has built an integrated gas and natural gas liquid (NGL) pipeline network that has interconnectivity to key export markets near the Gulf Coast.
Oklahoma and North Texas Stabilizing: The Oklahoma segment profit posted a period of a relatively level trough during a part of 2021, and is now modestly growing, driven by strong natural gas prices. The wider Anadarko region that contains and surrounds the Oklahoma segment is showing modest yoy natural gas volume growth in most months of 2022. Better times are expected by Fitch based on rig activity by several ENLC customers.
ENLC also has exposure in the Barnett, where production volume and segment profit have been in a decline in the past years, but the decline has moderated in 2021. Fitch expects cashflow and volume to stabilize in the near term, driven by expected rig activity by Banpu Kalnin Ventures Corporation, which is the largest source of volumes to the segment.
Derivation Summary
Western Midstream Partners, LP (WES; BB+/Stable) is a G&P comparable for ENLC. Both companies have similar degree of geographic diversification (moderate diversification), but WES has much higher customer concentration. Fitch views that WES is moderately better positioned financially relative to ENLC given WES's larger EBITDA and lower leverage of 3.8x at YE 2021 (versus ENLC's at 4.8x in the same period).
WES's overall counterparty risk is greater than ENLC's, as WES is largely exposed to non-investment grade E&P producer customers. WES's largest counterparty, Occidental Petroleum Corp. (BB+/Stable), contributed approximately 60% of WES's revenue in 2021. ENLC has a customer concentration (greater than 10% of revenue) from higher quality customers, including Devon Energy (BBB+/Stable) and about 80% of its customers are investment grade rated.
Key Assumptions
Natural gas production and commodity prices sales consistent with Fitch's price deck, e.g., for Henry Hub including $4.00/mcf in 2023, $3.25/mcf in 2024 and $2.75/mcf in 2025;
Flat operating results in Oklahoma and Barnett with growth in the Permian and Louisiana in 2022 and beyond; 3% annual growth in the Louisiana segment profit beyond 2022; Moderation of growth in Permian over the forecast period;
Moderate growth in EBITDA in 2023 and assuming flat EBITDA beyond 2023;
Approximately level capex beyond 2022;
Approximately $100 million common unit repurchase annually over the forecast period;
Distribution increase in 2022 (as was announced in the 4Q21), and further modest increases in forecast years.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Leverage and distribution coverage sustained below 4.5x and above 1.1x underpinned by stable segment performances.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A significant change in cash flow stability, including a move away from the current profile of fee-based profits that could lead to a negative rating action;
Leverage above 5.5x on a sustained basis and/or distribution coverage consistently below 1.1x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Ample Liquidity: As of June 30, 2022, there were no outstanding borrowings under the revolving credit facility and $44.6 million outstanding letters of credit (it is Fitch's understanding that this facility was a source of some of the funds for the Crestwood asset acquisition that closed July 1, 2022). Its $1.4 billion revolving credit facility matures in June 2027. This facility contains a leverage covenant maximum of 5.0x for consolidated net indebtedness to consolidated EBITDA (each term as defined, and where EBITDA includes EBITDA from certain capital expansion projects) and consolidated indebtedness excludes the existing preferred securities.
The maximum leverage level may rise from 5.0x to 5.5x for four quarters following an acquisition (with the rise subject to limitations). Following the term loan repayment in December 2021, ENLC has no debt maturities until 2024. A portion of the proceeds from the new issuance will be used to tender for part of the notes due 2024.
ENLC was in compliance with its covenant as of June 30, 2022 and is expected to remain in compliance under Fitch's forecast period. Fitch expects ENLC will continue to fund its capex program with its internally generated cash flow in the near term.
Issuer Profile
EnLink Midstream, LLC is predominately a midstream G&P company that operates in three G&P regions: Oklahoma (STACK play), Permian, and the Barnett. ENLC also operates gas and NGL gathering and transmission pipelines, gas processing facilities, gas and NGL storage, and NGL fractionation business in Louisiana.
Summary of Financial Adjustments
Fitch applied 50% debt credit and 50% equity credit to ENLK's preferred equity securities outstanding.
Date of Relevant Committee
01 March 2022
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
Entity / Debt
Rating
Recovery
EnLink Midstream, LLC
senior unsecured
LT
BB+
New Rating
RR4
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
ENLINK MIDSTREAM, LLC 
