Rod Sailor, chief executive officer of Enable Misdtream Partners, LP (ENBL - $5.52) reminded analysts on the recent 4Q:15 earnings call that the owner/ operator of natural gas and crude oil infrastructure assets retains an "investment grade rating."
Yes, the limited partnership has an attractive footprint in four of the most prominent natural gas and crude oil producing basins in the country, including the SCOOP and STACK plays in Oklahoma.
Yes, though S&P recently revised its outlook to negative - citing an opinion that "continued hydrocarbon pricing pressure could further erode Enable's cash flow gross margins and gathering volumes" - even the reduced BBB- rating is still "investment grade."
That said, if it were really true that the company stands on a solid financial foundation, why did it swap $363 million in notes coming due in 2017 (bearing an average-weighted fixed costs of about 2.2%) for $363 million of Fixed-to-Floating Perpetual Preferred Units ($25 face value) yielding 10.0% -- otherwise known as JUNK YIELD?
Under the debt-to EBITDA (leverage) covenant, a ratio higher than 5.0 would be a violation and restrict access to further debt borrowings. Enable's media and investor relations contact, Kevin White, confirmed that the swap from debt to equity would proactively help the company stay within its debt limit. Unfortuately, given the current lending environment, this balance sheet maneuver does increase cash outflows by some $27 million (due to dividend payments on the new preferred units).
The current payout yield of 23% on the limited partnership shares suggests the smart money on Wall Street thinks the $1.27/share distribution is unsustainable.
Given that key customers - such as Chesapeake Energy (CHK) - are looking to lower expenses, it's likely that gas gathering fees will be renegotiated. Should natural gas prices remain near or at multi-year lows, Enable will be struggling in coming quarters to maintain a distribution coverage ration of 1.0 times.
Though Enable Midstream does remain one of the more "healthier" midstream master limited partnerships, it is far from investment grade beef: the redress of debt to equity is nothing more than lipstick on a pig.
Editor David J Phillips holds a financial interest in the stock mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
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