EnLink Continues Wave Of Midstream Consolidation

EnLink Midstream LLC (NYSE: ENLC) said Oct. 22 it will acquire its MLP subsidiary EnLink Midstream Partners LP (NYSE: ENLK) in an all-stock simplification transaction as legacy MLP structures become increasingly rare.

The EnLink simplification transaction will also continue the evolution of Dallas-based company that began earlier this year with the sale of Devon Energy Corp.’s (NYSE: DVN) ownership interests in EnLink to fund manager Global Infrastructure Partners (GIP) for $3.125 billion.

“Well-telegraphed transaction comes as little surprise given year-to-date wave of midstream consolidation transactions and management messaging that corporate restructuring was on its near-term priority list,” said analysts with Tudor, Pickering, Holt & Co. (TPH) in a research note.

The trend for midstream consolidation kicked off earlier this year following a newly changed tax policy by the U.S. Federal Energy Regulatory Commission (FERC) that removed certain benefits for MLPs.

The FERC tax overhaul led several midstream companies, including Enbridge Inc. (NYSE: ENB), Williams Cos. Inc. (NYSE: WMB) and Cheniere Energy Inc. (AMEX: LNG), to consolidate pipeline assets under single-listed entities.

At the time, Enbridge said that under the newly changed FERC tax policy, holding certain interstate pipelines in MLP structures is “highly unfavorable to unitholders and is no longer advantageous.”

Most recently, Antero Resources Corp. (NYSE: AR) launched plans for consolidating its midstream affiliate into a simplified corporate structure and TPH analysts predicts Western Gas Equity Partners LP (NYSE: WGP) will be next up in “the queue of LP-GP consolidation transactions.”

As part of the EnLink simplification transaction, ENLC will acquire all outstanding common units of ENLK not already owned by ENLC in a unit-for-unit exchange transaction. The implied price of $18.46 per unit is roughly a 1% premium to close on Oct. 19, according to estimates made by TPH analysts.

The EnLink simplification transaction eliminates ENLC's incentive distribution rights in ENLK and consolidates ENLC's 16.1% minority interest in the Tall Oak Midstream gathering and processing complex.

Additionally, ENLC expects the transaction to result in minimal federal income taxes through at least 2023, which TPH analysts believe will allow the company to maintain a long-term dividend guidance of roughly 5% or greater. However, the transaction is expected to be taxable to ENLK common unitholders.

Michael J. Garberding, president and CEO of EnLink, said the company’s business model will remain unchanged as it continues to execute on its growth strategies with a strengthened ability to achieve greater returns on capital deployed.

"EnLink has been on a journey to evolve for long-term success,” Garberding said in a statement. “Today, we took another right step in our journey through the announcement of our simplification transaction, which will be immediately accretive to both ENLC and ENLK common unitholders.”

Analysts with Credit Suisse agree with the merits of the EnLink simplification transaction and are generally proponents of simplification, but noted specific items that offset some of the firm’s positive take on the transaction.

First, Credit Suisse analysts said ENLK unitholders effectively see a roughly 20% distribution cut based on the 1.15 times takeout ratio.

“We rated ENLK Underperform partially due to the risk of a large distribution cut as a result of simplification,” the Credit Suisse analysts said in a research note.

Lastly, the Credit Suisse analysts noted the transaction is taxable to ENLK holders and regaining investment grade status remains unclear for ENLC.

“Debt held up at the GIP level could add about one-turn to leverage [in the eyes of the ratings agencies] which may prevent ENLC from regaining investment grade status quickly,” the Credit Suisse analysts said.

Upon closing of the transaction, expected first-quarter 2019, ENLC will have a $13 billion enterprise value. The company will continue to operate as EnLink Midstream with assets in several top U.S. shale basins including its three core growth areas in the Permian’s Midland and Delaware basins, Oklahoma’s Midcontinent and Louisiana’s Gulf Coast.

Following close, TPH analysts estimate the “resolution to outstanding corporate structure strategic review should shift market attention to ops, as Stack downspacing results likely a hot-button issue for third-quarter earnings.”

Baker Botts LLP is legal adviser to ENLC and Citi is the company’s financial adviser to ENLC. Gibson, Dunn & Crutcher LLP is ENLK’s legal adviser. Potter Anderson & Corroon LLP is legal counsel and Evercore is financial adviser to ENLK’s conflicts committee. Richards Layton & Finger is legal counsel, and Barclays is financial adviser to ENLC’s conflicts committee. Latham & Watkins is GIP’s legal adviser and Intrepid Partners LLC is the company’s financial adviser.

Emily Patsy can be reached at epatsy@hartenergy.com.