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Devon's STACK joint venture no quick fix for EnLink's equity woes, analysts say

EnLink Midstream LLC shares spiked on news of producer customer Devon Energy Corp.'s joint venture with Dow Inc. to develop shale oil and gas acreage in Oklahoma's slumping STACK play, but midstream analysts and investors said the master limited partnership has more work to do before its equity value can more fully bounce back.

EnLink's stock price ended Dec. 10 trading up 14.5% at $5.62 per unit after independent driller Devon — which sold its stake in the MLP to Global Infrastructure Partners in 2018 — announced a four-year, $100 million deal with Dow that will cover about 133 undrilled locations beginning in mid-2020.

Devon, which will remain the operator, said the joint venture would not only help it with the drilling carry but through reduced well costs from focused infill drilling. Those benefits will likely trickle down to EnLink, according to analysts at energy investment bank Tudor Pickering Holt & Co., since the "incremental [Devon/Dow] JV activity in 2021 serves to moderate system volume declines" that EnLink is facing in the STACK.

"We do not envision a no-activity case. We don't think that's realistic at all," Benjamin Lamb, executive vice president and COO of Enlink Midstream Manager LLC, said Nov. 8. "I think that there's been some pretty wild speculation out there about what Oklahoma could look like in a downside scenario, and some of it has been a bit overblown."

Still, the joint venture itself is likely not enough to overcome EnLink's balance sheet woes, sector observers said. Analysts at UBS said the partnership's investors expect the company "will cut its distribution by 50%," while analysts at Tudor Pickering Holt anticipate a roughly 65% cut before 2020 given "no change to fundamental equity view as deleveraging remains priority number one."

EnLink recorded a 4.2x debt/adjusted EBITDA ratio for the third quarter of 2019 but aims to get below 4x in the long term. The MLP also plans to cut its growth capital expenditure by 50% in 2020, according to a Dec. 11 investor presentation.

EnLink's severe stock price decline since the Global Infrastructure Partners acquisition has cut the value of the private firm's equity investment by $2.13 billion to just $1.26 billion as of the Dec. 10 closing bell. The partnership has also come under fire for a provision of that transaction linking EnLink's governance to a $1 billion term loan that Global Infrastructure Partners used to finance the deal.