What happened

Units of EnLink Midstream (ENLC 2.84%) tumbled 24.3% in February, according to data provided by S&P Global Market Intelligence. Weighing on the midstream company was its 2020 outlook as well as sinking oil prices.  

So what

EnLink Midstream reported its fourth-quarter results and unveiled its 2020 outlook last month. The master limited partnership (MLP) produced enough cash to cover its distribution (which it cut by 33.7% earlier this year) by a comfortable 2.2 times during the fourth quarter, bringing its full-year coverage to 1.42 times. But it ended the year with a leverage ratio of 4.3 times debt to EBITDA, which is above its sub-4.0 target. 

A natural gas pipeline at sunset.

Image source: Getty Images.

The MLP expects to generate enough cash this year to cover its reset payout by 1.95 to 2.05 times. That will enable it to retain enough money to fund its capital budget, which it sees in the range of $275 million to $375 million. By covering its distribution and capital spending with cash flow, the energy company expects to keep its leverage ratio to between 4.0 and 4.3 times debt to EBITDA. 

While EnLink believes its earnings and cash flow will grow modestly this year, investors are worried that the company will fall short of its expectations. Fueling that view is last month's slump in oil prices due to concerns that the COVID-19 coronavirus outbreak would affect oil demand. With oil prices falling, EnLink's customers could reduce their drilling programs. As a result, volumes in the Permian Basin might not grow as much as expected, which would hurt EnLink's earnings. 

Now what

EnLink Midstream has already cut its high-yielding payout once this year. But after last month's slump, the MLP's yield remains above 20%, implying that investors expect another reduction. That certainly seems possible given its elevated leverage and all the weakness in the oil and gas market.