EnLink Midstream LLC's surprise leadership change underwhelmed analysts and investors, raising governance concerns less than a year after the midstream operator merged with its master limited partnership.
The share price fell 12% on Aug. 7 as EnLink reported disappointing second-quarter earnings and announced Executive Chairman Barry Davis' unexpected return to the CEO role. Analysts at Stifel Nicolaus & Co. also raised concerns over what they consider EnLink's "underwhelming" relationship with private equity owner Global Infrastructure Partners, which acquired Devon Energy Corp.'s stakes in the company and the MLP in 2018 ahead of an internal consolidation announced in October.
Davis ended his tenure as EnLink CEO in 2018 and was replaced by Michael Garberding. MUFG Securities America Inc. midstream analysts wrote in an Aug. 7 note to clients that the sudden change at the top could alienate investors "preferring a clean slate."
"While we see the logic of bringing in someone who has been with the organization since the beginning, Davis is a polarizing figure to some investors, having been at the helm for many challenging years at EnLink," MUFG analysts said.
The incoming CEO's strategy for aggressive expansion was on display during an Aug. 7 earnings conference call when he emphasized plans for growth in the Permian Basin, Oklahoma, north Texas and Louisiana without getting specific on projects.
"I think to be successful in this business you have to have capabilities across the value chain. And so [being in] four basins doing everything across the value chain is where we need to be," Davis said. "[Global Infrastructure Partners] invested in this platform with an intent to use it to grow the business not in a small way, but to be a big player in this business. We have the same mindset."
But the MUFG analysts responded that "management ... seems to consistently operate with an overly optimistic view of how quickly it can grow and the outlook for the basins in which it operates," while analyst peers at Stifel said EnLink's segregated assets inhibit the company's "ability to capture margin across the value chain."
EnLink Executive Vice President and COO Benjamin Lamb, meanwhile, touted a 20-year, fixed-fee agreement for natural gas transportation services with Venture Global LNG to supply its planned Calcasieu Pass LNG export facility in Louisiana, which has not yet reached a final investment decision, as a "down payment" on both the pipeline firm's expansion in that state and serving similar customers.
"This is a first step to have firm service for an LNG export customer. I don't think it's the last one that you will see us do, whether the next one is with Venture Global or with others," he said.
The midstream operator's distribution growth reduction to up to 5% from a previous range of 5% to 10% also disappointed some sector observers, who questioned why EnLink was not following many of its peers by retaining more cash for paying down debt and returning capital to investors through share repurchases.
"Why grow it at all versus debt pay-down, buyback units, and simultaneously [improving] coverage by not raising distribution?" UBS' Shneur Gershuni said in an Aug. 6 note. MUFG added that a distribution growth hiatus makes sense given "the more challenging environment" for EnLink's producer customers, who are under pressure to cut spending and increase shareholder returns amid falling commodity prices.