Enable Midstream Partners IPO: Mature Opportunity with Strong Presence in America’s Most Prolific Shale Plays; Largest IPO-Stage Asset Play in MLP History
Enable Midstream Partners (NYSE: ENBL) went public on April 11, 2014, at an offer price of $20 per share (the mid-point of its $19 – $21 per share filing range in a market that was down significantly on IPO day). Through the IPO, Enable sold 25,000,000 common units (representing 6% limited partner ownership for public unitholders) and raised net proceeds of about $466 million (after offering expenses and not counting overallotment).
Enable is a midstream energy partnership with two complementary focus areas – Gathering & Processing (G&P) and inter- and intra-state Transportation & Storage (T&S) – which provide operating reach and scale in the Mid-Continent region (primarily for natural gas) and in the Bakken shale (primarily for crude oil).
Shares rose to a high of $23.22 but closed their first day of trading at $22.28 with a first-day gain of 11.40%, giving the company a market capitalization of $9.26 billion and a forward price-to-earnings multiple of 20x.
Quarterly Distribution Delivers 5% Yield
Enable plans to make a minimum quarterly cash distribution of $0.2875 per unit ($1.15 annualized), for a distribution yield of 5% that is consistent with its peers. Distributions will first be paid to common units, and subsequently to subordinated units.
Investment Highlights – Solid G&P and T&S Asset Plays Deliver Revenue Diversification, Scale Benefits and Synergies
Enable has a sizable suite of assets that includes integrated gathering systems (11,000 miles), major processing plants (12), interconnected transportation pipelines (10,200 miles) and storage (8 plants with storage capacity of 86.5 billion cubic feet). These inter-woven assets give Enable valuable synergy savings and diverse revenue streams, and make this the largest assets-at-IPO offering in MLP history.
Enable’s large asset base and sustained history of profitable operation significantly reduce the uncertainty typically associated with an initial public offering. Moreover, the breadth of the company’s assets also reduces income volatility that arises out of fluctuations in demand, particularly when natural gas prices drop.
Enable’s assets are prominently placed in the most promising natural gas and crude producing plays, and are guaranteed to generate revenue for the foreseeable future, with long-term minimum commitment contracts with major oil and gas producers. Moreover, Enable’s extensive presence – and expansion plans – in major producing basins promises steady and growing cash flow for distributions.
Enable has low financial leverage relative to its peers, and investment grade ratings that give it greater flexibility to tap capital markets for expansion opportunities. After its IPO, Enable will have a balance sheet and liquidity profile that will strongly facilitate its growth strategy with $574 million in cash and a $1.4 billion credit facility. Going forward, Enable plans to keep leverage at relatively low levels where it can maintain investment grade ratings on new debt issues.
As of 12/31/2013, Enable had total debt of $2.45 billion and expects next-twelve-months adjusted EBITDA of $848 million, giving it a Net Debt/NTM Adjusted EBITDA leverage of 2.2x which is well-below most of its peers.
As is, Enable will not depend on asset dropdowns for growth, and will divert less money to its general partner sponsors, which bodes well for new unitholders.
And the company’s significant strengths are nurtured and developed by a highly-experienced and proven management team with excellent prior MLP structuring and operational experience.
Strategic Presence in Four Key Oil and Gas Plays with Significant Expansion Upside
Enable operates in four primary oil and gas producing regions, all of which represent significant growth opportunity – Bakken, Anadarko, Ark-La-Tex (Arkansas, Louisiana ad Texas) and Arkoma (Arkansas, Oklahoma) – with pipelines and storage assets strategically linked to G&P assets.
Enable has a large, diverse, loyal and high-quality customer base for both G&P and T&S services, with loyalty reinforced through exemplary customer service and reliable project execution. Enable has minimum volume commitments from top producers such as Encana, Shell, Exxon Mobil, Chesapeake Energy, Apache and other key producers in America’s shale fields.
Favorable Industry Trends Foster Organic Growth, New Projects
Enable is well positioned to benefit from several key industry trends in its operating geographies. In Gathering & Production, Enable operates in basins that offer enhanced economics to midstream service providers with new pad drilling and increased producer efficiencies driving returns. The company’s embedded assets provide access to high-demand NGL and natural gas markets, while new production plays will require proven and established midstream infrastructure partners.
In the Transportation & Storage segment, active Mid-Continent producers need secure pipeline routes to active hubs such as Perryville, in an area where existing capacity is highly subscribed and could result in demand for new pipelines with committed volumes. The company is also benefiting from an increase in natural gas demand as coal plants and factories convert to cleaner-burning natural gas, and as global instability raises demand for LNG exports.
Stable, Long-Term Cash Flows
For the 12 months ending March 31, 2015, about 75% of Enable’s cash flow will be fee based with 37% from G&P and 38% from T&S, a roughly even split between the two divisions. 25% of the company’s cash flow has low-level exposure to commodity prices primarily from the realization of natural gas, NGL and condensate positions from the company’s G&P operations.
The company’s T&S segment has long-term contracts with a weighted average life of over four years, with many keep-whole contracts recently converted to fee-based for additional cash flow stability.
Sound Operating Strategy for Steady Growth and Expansion without Dropdown Dependence and Related GP Overhang
Enable has sizable assets and plans on primarily growing through organic expansion by building additional gathering and processing infrastructure for volume growth, and by diversifying G&P into synergistic basins such as Williston. The company plans to increase fee-based revenue through strategic pipeline and storage expansions into active end-user markets for higher fee structures, and plans additional T&S expansion through selective growth projects. In addition, Enable plans to pursue crude opportunities in Bakken and NGL transportation and fractionation in Ark-La-Tex fields.
Sound Financial Strategy with Investment Grade Rating
Enable has a $1.4 billion revolving credit facility and IPO proceeds will further augment expansion capital and the pre-funding of certain demand fees. The company’s target credit profile is consistent with investment grade midstream MLPs, and it plans to take a measured approach to future equity issuance to maximize access to equity capital markets, minimize dilution to existing unitholders and optimize execution of its financial strategy.
Enable plans to have 1.15x distribution coverage by diversifying revenue (across business, contracts, customers and suppliers) and proactively managing commodity and interest rate exposure.
Enable MLP Holding Structure – Subordinated Units and IDRs
Enable was formed in May 2003 as a joint venture between CenterPoint Energy Field Services LLC and Enogex LLC (an OGE Energy subsidiary).
In exchange for assets and capital contributed, CenterPoint Energy owns a 54.7% limited partner stake and a 50% general partner stake, OGE Energy owns a 26.7% LP stake and a 50% GP stake, and friendly private equity firm Arclight Capital Partners owns a 12.4% LP stake. Additionally, CenterPoint Energy owns 40% of the GP incentive distribution rights (IDRs) while OGE Energy holds 60%.
OGE Energy (NYSE: OGE) is the parent of Oklahoma Gas and Electric Company, a regulated utility that serves over 800,000 customers in Oklahoma and western Arkansas. CenterPoint Energy (NYSE: CNP) is a public utility holding company that owns electricity and natural gas transmission and distribution systems, and serves over 3 million customers in six states.
CenterPoint and OGE own all subordinated units which qualify for quarterly cash distributions and convert to common units by June 30, 2017.
Asset Rich Play with Relatively Low Dilution to New Shareholders
Enable had an offering-adjusted pro forma net tangible book value of $17.23 per share. At the offering price of $20, new Enable unitholders suffer immediate dilution of merely $2.77 per unit, which is significantly below dilution levels for most IPOs. This net tangible book value excludes $1.45 billion of net intangible assets.
Underwriters – Morgan Stanley, Barclays, Goldman Sachs and others as a group – may
purchase 3,750,000 additional units within 30 days (15% standard overallotment option).
Strong Management Team with Significant Midstream MLP Experience
Enable will be managed by its general partner, with little input or control by public unitholders. Enable hired Lynn Bourdon as President and CEO in February 2014 from Enterprise Products Partners where he served as Group Senior Vice President. Mr. Bourdon has substantial prior experience in senior executive positions in energy related businesses. Rodney Sailor was appointed CFO in March 2014 and was recruited from WPX Energy where he was also CFO. Mr. Sailor has extensive finance experience in the energy industry with companies such as WPX, Williams Partners and Apco Oil. E. Keith Mitchell has served as Chief Operating Officer since July 2013 and comes to Enable from Enogex LLC where he served as President and COO.
Enable’s board includes industry veterans in senior leadership positions at CenterPoint and OGE Energy, who bring deep industry expertise to the partnership. The bottom-line is simple – Enable is a joint venture of two highly successful midstream operations that have been delivering consistent revenue growth and profitability before MLP formation, and are staffed by managers and employees who are well versed with existing midstream operations.
Consolidated Financials – Solid Revenue Growth, Stable Balance Sheet, Growing Cash Flow
Enable grew revenues 22% from FY 2012 to FY 2013, to $3.12 billion, but profits suffered on higher cost of goods sold. In FY 2013, the company delivered pro forma net income of $454 million and $1.08 per diluted unit.
Enable ended the year with total assets of $11.7 billion, long-term debt of $2.12 billion and partners’ capital of $8.6 billion, about $0.6 billion shy of its IPO-day market capitalization.
Enable faces relatively few risks because it has a proven track record, is well capitalized and is run by industry veterans. Its primary challenge is expanding its existing footprint and growing margins, which appears fairly doable given its experienced management team, strategic footprint and favorable industry growth trends in its operating geographies. However, subordinated units and incentive distribution rights will divert a significant amount of available cash to the general partner. Even so, shares are attractively valued with little dilution on IPO and a valuation that is close to net tangible book value, with 5% dividend upside.