Not all midstream MLPs are created equal. Whereas some pipeline operators have almost no exposure to crashing commodity prices, Enable Midstream Partners (ENBL) just reported a massive $985 million loss, $2.33 per unit, because of a $1.1 billion non-cash goodwill impairment.
Yet as bad as that quarterly loss sounds, it's rather inconsequential over the long term. Here's a look at what long-term dividend investors need to actually focus on, and how that might affect the future safety and growth prospects of Enable Midstream's payout.
Results not as bad as they appear
| Metric | Q3 2015 | Q3 2014 | First 9 Months 2015 |
First 9 Months of 2014 | Q3 YoY Change |
|---|---|---|---|---|---|
| Revenue | $646 million | $803 million | $1.852 billion | $2.632 billion | (20%) |
| Adjusted EBITDA | $221 million | $231 million | $622 million | $670 million | (4.3%) |
| Distributable cash flow (DCF) | $153 million | $161 million | $431 million | $503 million | (5%) |
| Quarterly distribution | $0.318 | $0.3025 | $0.9465 | $0.549 | NA |
| Distribution coverage ratio | 1.14 | 1.26 | 1.08 | 2.17 | (10%) |
Data Source: Enable Midstream Partners earnings release, 10-Q
The headline-grabbing $1.1 billion in impairments were from two goodwill writedowns tied to three acquisitions associated with the formation of Enable Midstream Partners or its predecessor. While the impairments were brought on by plunging energy prices, because this is a non-cash charge it doesn't threaten the distribution or the MLP's long-term business prospects.
What investors really need to pay attention to is Enable's Distribution Coverage Ratio, which is the best metric for determining how safe the current distribution is. This quarter's fall in DCF resulted in a decline in the quarterly coverage ratio. However, it's actually an improvement over the Q2 DCR of 1.01, which was right on the cusp of payout sustainability.
This quarter's DCF decline was mostly due to declining margins in Enable Midstream's product sales segment.Natural gas gathered volumes also declined slightly in two key basins. However, this was mostly offset by payments from its existing minimum volume commitment contracts.
Some good news
On the plus side, recent volume growth in the Anadarko basin and new oil well hookups resulted in a 17% and 265% increase in natural gas processing and oil gathering volumes, respectively.
Further good news came from the awarding of a 300,000 MMBTU-per-day fee-based contract to provide natural gas to a power plant. In addition, Enable Gas Transmission system's expansion, which is scheduled to come online in Q2 of 2017, has thus far received firm commitments on 175,000 MMBTU per day of capacity.
This news represents management's ongoing goal of increasing the amount of margin provided by fixed-fee long-term contracts, which will lower Enable Midstream's exposure to commodity prices. Specifically, Enable's recent fee-based contracts will lower 2016's projected margin exposure to energy prices from 22% to 18%. Furthermore, only 10% of 2016 margins will be unhedged.
That information matters because maximizing the amount of recurring energy price-immune cash flows protected by fixed-fee, and minimum volume commitment contracts is the best way Enable Midstream has to improve its distribution profile.
Distribution profile improves, but growth outlook slows
| Yield | 12-Month Distribution Coverage Ratio | Long-Term Distribution Growth Guidance |
|---|---|---|
| 11.1% | 1.04 | "Up to 3%" through 2017 |
Data source: Enable Midstream investor presentations, 10-Qs, and earnings releases
Since the largest reason for owning a midstream MLP is the income, the most important thing Enable Midstream Partners' investors need to focus on is the distribution profile. The profile consists of three parts: current forward yield, payout security, and long-term realistic distribution growth prospects.
Enable Midstream's current sky-high yield is due to the market's concerns over its exposure to commodity prices and lack of faith in the security of the existing payout. What long-term investors need to keep in mind is that as long as the coverage ratio remains above 1, the payout isn't likely to be cut.
Thus, the small distribution growth management is shooting for over the next 27 months is a very good thing. That's especially true given its outlook for the next two years.
Source: Enable Midstream investor presentation.
Assuming Enable Midstream is able to execute on its growth plan, it should be able to grow DCF by around 4% next year. That's more than its planned payout growth, which should help it improve its coverage ratio and further secure its already generous payout.
To help ensure this rosy outcome, management has around $1.15 billion in growth projects planned over the next two years that are already backed by contracts. It's also identified around $800 million in additional potential growth opportunities it might pursue through 2017.
Bottom line: Ignore the giant earnings loss, and focus on what really matters
Don't get me wrong. Enable Midstream Partners is far from a guaranteed safe 11% yield. Its current coverage ratio is low enough that even the 10% of unhedged margin exposure it's projecting for 2016 means that its payout might not prove sustainable should energy prices remain weak.
That said, this quarter's headline $1 billion earnings loss doesn't represent a threat to the current distribution. Thus, as long as long-term income investors are aware of the greater risk, I think Enable Midstream Partners represents a potentially attractive addition to one's diversified high-yield portfolio.
