NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned first-time ratings to EnLink Midstream Partners, L.P. (ENLK) as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB-';
--Sr. Unsecured Debt Rating at 'BBB-'.
The Rating Outlook is Stable.
ENLK's ratings reflect the size, scale, earnings and cash flow stability of the master limited partnership (MLP). In addition, the ratings consider the operating and financial strategic support that ENLK receives from its affiliation with its ultimate sponsor, Devon Energy Corp. (DVN; 'BBB+'/Stable Outlook). The ratings also reflect the prevailing headwinds facing the midstream services sector including low oil, natural gas, and natural gas liquids prices, expected production volume declines, increasing counterparty risk, and the restricted access to capital markets.
ENLK is an MLP engaged in the midstream services sector focused on gathering, transmission, processing, fractionation, brine services and marketing. It serves producers of natural gas, natural gas liquids (NGLs), crude oil and condensate. ENLK has a moderate- to large-scale midstream energy network with significant pipeline, gas processing, fractionating, storage and terminaling assets. Its operations are U.S.-based with a specific focus on West Texas, Oklahoma, and Louisiana.
ENLK's general partner (GP) is EnLink Midstream GP, LLC, which itself is an indirect wholly-owned subsidiary of EnLink Midstream LLC (ENLC) a publicly traded GP holding company which owns a ~23.1% limited partner interest in ENLK and the roughly 0.4% GP interest and all of ENLK's incentive distribution rights. ENLC is managed by a subsidiary of DVN. DVN owns about 63% of the common units of ENLC. DVN also owns a ~24.7% limited partner interest in ENLK.
KEY RATING DRIVERS
Stable Earnings and Cash Flow: ENLK's ratings are supported by Fitch's expectations for generally stable revenues, earnings and cash flow given the production profile of ENLK's areas of operation and contract structures. ENLK has focused strategically on supporting DVN production and operationally is very much tied into DVN's assets within the Permian basin, Barnett shale, and the STACK and Cana-Woodford regions. Roughly 95% of ENLK's gross operating margin is from fee-based contracts with DVN representing roughly 50% of operating margin. ENLK has historically had a strong focus on fee-based contracts in an effort to mitigate commodity price volatility.
Sponsor Support: The ratings consider ENLK's relationship with its ultimate sponsor, DVN, which currently has a long-term IDR of 'BBB+' with a Stable Outlook. DVN, as ENLK's sponsor and largest customer, is a credit positive for ENLK given its operational integration with DVN's favorable basin mix and the ability and willingness of DVN to provide significant operational contractual support. The ratings are not explicitly notched off of DVN's rating, since ENLK receives 50% of cash flows from third parties, largely from investment-grade counterparties. In addition, Fitch believes that ENLK, in a mid-cycle price environment, has a standalone credit profile consistent with the 'BBB-' rating based on mid-cycle expected leverage near 4.5x based on Fitch's leverage calculation described below. However, if DVN were to move down the rating scale Fitch would consider a negative rating action at ENLK, but would also consider moving the ratings between the entities closer.
For example, with DVN at the 'BBB' level, Fitch would not likely change ENLK's rating or Rating Outlook. However, if DVN were to move to 'BB+' or below we would consider a negative rating action at ENLK given the deterioration of the credit quality of their largest customer, and the potential increase in likelihood that DVN would not be as supportive of ENLK's if it were deemed to be deleterious to DVN's own credit profile. Fitch notes that DVN historically has been and continues to be a supportive sponsor.
High Near-Term Leverage: Leverage at ENLK is expected to be high in the near term with Fitch forecasting 2016 leverage above 5.0x as a result of the recent Tall Oak acquisition and expectations for roughly $445 million to $570 million in growth spending. Fitch expects leverage metrics to improve to below 5.0x in 2017 and further improve in 2018 as growth projects come online, Tall Oak is further integrated, and assuming a modest increase in commodity prices. Fitch defines leverage as debt/adjusted EBITDA - giving 50% equity credit for the Tall Oak preferred securities offering and excluding any pro forma adjustments for projects under construction.
Volume Exposure: One of the key risks facing ENLK given its fee-based contract structure is the potential negative impact that decreasing volumes can have on its system and on its profitability. Mitigating some of this risk is a fair amount of minimum volume commitments that have been provided by DVN and other producer customers as part of their fixed-fee contracts. In the near term, these contracts should continue to provide stable earnings and cash flow even for regions like the Barnett where volumes will be declining. Fitch's forecast considers small-to-moderate volume declines within certain regions in ENLK's asset base, particularly North Texas where production is expected to decline.
Counterparty Exposure: Counterparty risk is a concern but should be relatively limited. ENLK's largest counterparty by far is DVN, which represents roughly 50% of gross margin. Roughly 92% of ENLK's revenue comes from counterparties with an investment-grade rating, representing over $3.4 billion in revenue. Generally, Fitch does continue to expect high levels of producer defaults, which averaged roughly 10%-11% in 2015, but expects much of the default activity from high yield producers. ENLK does have some minor exposure to high yield names, but with no real concentration in any single high-yield counterparty.
Capital Market Access Constraints: Capital markets remain largely closed for midstream issuers pursuing traditional common equity or long-term debt issuances. Equity yields and credit spreads have increased across the midstream space, making financing growth-spending needs on an accretive basis using the MLP historical mix of 50% equity/50% debt-funding difficult. Fitch assumes ENLK will largely fund any capital needs with revolver borrowings and there is over $1 billion in availability on its revolver. Fitch does assume, however, some equity issuance from ENLK over the next few years using its at-the-market (ATM) equity program. Continued constraint in capital markets leading to an inability or unwillingness to issue equity or other non-debt funding which then leads to higher than expected leverage would have negative rating implications.
Fitch's key assumptions within the rating case for ENLK include:
--Fitch assumes a base case price consistent with Fitch's February 2015 base case of WTI USD35/bbl for 2016, USD45/bbl for 2017, USD55/bbl for 2018, and Henry Hub of USD2.25/mcf for 2016, USD2.50/mcf for 2017 and USD2.75/mcf for 2018.
--ENLK capital spending between $550 million to $600 million annually for 2016 through 2018,and the remaining $500 million in Tall Oak acquisition costs deferred, so that $250 million is paid in 2017 and $250 million in 2018.
--The $750 million in preferred equity issued January 2016 to fund the Tall Oak acquisition qualifies for only 50% equity credit under Fitch's hybrid methodology.
--Capital funding for growth more heavily weighted toward debt.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--A meaningful reduction in leverage, with debt/adjusted EBITDA of 4.0x or below.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A significant change in cash flow stability profile. A move away from current fee based contract structure with minimum volume commitments on select production could lead to a negative rating action.
--Adjusted leverage above 5.0x on a sustained basis. Fitch defines adjusted leverage as adjusted debt (with 50% equity credit for the $750 million preferred equity) to adjusted EBITDA.
--A downgrade of DVN could lead to a negative rating action at ENLK. If DVN were to move down the rating scale Fitch would consider a negative rating action at ENLK or consider reducing the notching between the two entities.
Liquidity Adequate: ENLK's liquidity is adequate as of Dec. 31, 2015, and had roughly $1.075 billion in availability under its $1.5 billion revolver. The revolver contains a leverage covenant whereby consolidated indebtedness-to-consolidated EBITDA (as defined in the credit facility, which includes projected EBITDA from certain capital expansion projects) must be no more than 5.0x or 5.5x for four quarters following an acquisition at ENLK's election subject to some qualifications. ENLK was in compliance with its covenant as of Dec. 31, 2015 and is expected to remain in compliance for Fitch's forecast period. ENLK's maturities are manageable with no near-term maturities through 2019, when $400 million in notes mature. The revolver matures in March 2020 and has a further accordion feature which could allow for an additional $500 million of borrowing capacity.
With adequate liquidity and a decent runway on pending maturities, ENLK should be able fund any near-term capital needs. To the extent that capital market access remains constricted, ENLK feels it has several options available to it to raise funding if needed.
FULL LIST OF RATING ACTIONS
Fitch assigns the following initial ratings to EnLink Midstream Partners, LP:
--Long-term IDR at 'BBB-';
--Sr. Unsecured Debt Rating at 'BBB-';
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)