10-Q: EnLink Midstream Reports First Quarter 2024 Results, Impacted by Commodity Prices and One-Time Items

EnLink Midstream's first quarter 2024 results were influenced by lower commodity prices, a one-time rate reset, and an impairment charge, while also seeing increased volumes in the Permian segment.

Summary

• EnLink Midstream reported a net income attributable to ENLC of $14.5 million for the first quarter of 2024, a decrease from $58.2 million in the same period of 2023.
• The company's total revenues decreased to $1.6479 billion from $1.7675 billion year-over-year, primarily due to lower natural gas and NGL prices.
• Adjusted gross margin was $497.5 million, slightly up from $495.6 million in the first quarter of 2023.
• The company recorded an impairment expense of $14.2 million related to certain non-core assets in the North Texas segment.
• Operating expenses increased to $152.6 million, up from $132.4 million in the prior year period.
• The company repurchased 5,447,442 common units for an aggregate cost of $68.6 million during the quarter.
• Capital expenditures totaled $103.4 million for the quarter.
• The company expects to complete the relocation of the Tiger II processing plant in the second quarter of 2024 and the GCF assets to become operational in the third quarter of 2024.

Sentiment

Score: 4

Explanation: The document presents mixed results with a decrease in net income and increased operating expenses, offset by a slight increase in adjusted gross margin and strategic growth projects. The overall sentiment is cautiously negative due to the financial performance, but there are some positive aspects related to future growth.

Positives

• Adjusted gross margin increased slightly year-over-year.
• The company is progressing with strategic projects such as the Tiger II processing plant relocation and the restart of GCF operations.
• The company continues to repurchase common units, indicating confidence in its value.
• The company's Permian segment saw a robust increase in volumes.
• Approximately 90% of the adjusted gross margin was derived from fee-based contractual arrangements with minimal direct commodity price exposure.

Negatives

• Net income attributable to ENLC decreased significantly year-over-year.
• Total revenues decreased due to lower commodity prices.
• Operating expenses increased by $20.2 million.
• The company recorded an impairment expense of $14.2 million.
• A one-time rate reset negatively impacted processing revenues in the North Texas and Oklahoma segments.
• Derivative losses increased by $40.9 million compared to the same period last year.

Risks

• The company is exposed to commodity price volatility, which can impact revenues and profitability.
• Changes in production levels by exploration and production customers can affect demand for midstream services.
• Regulatory changes, including climate-related disclosures and methane emissions rules, could increase operating costs.
• Competition for crude oil, condensate, natural gas, and NGL supplies could adversely affect the company's financial condition.
• The company is exposed to interest rate risk on its floating rate debt.
• The company is involved in various litigation and administrative proceedings, which could result in liabilities.

Future Outlook

The company plans to expand the natural gas transmission capacity of the Bridgeline pipeline, complete the relocation of the Tiger II processing plant, and restart the GCF assets, all expected in 2024. The Matterhorn Express Pipeline is expected to be in service in the third quarter of 2024. The company expects to fund its remaining 2024 capital requirements from operating cash flows.

Management Comments

• The company manages its consolidated operations by focusing on adjusted gross margin.
• Approximately 90% of the adjusted gross margin was derived from fee-based contractual arrangements with minimal direct commodity price exposure.
• The company believes its existing asset footprint, operating expertise, and customer relationships provide an advantage in building a carbon transportation business.

Industry Context

The midstream energy business is affected by production levels of natural gas and crude oil, which are driven by commodity prices, capital markets, competition, and regulatory changes. The company is experiencing increased volumes in the Permian Basin, while other basins have seen reduced investment. The demand for NGLs along the Gulf Coast remains strong, supported by industrial activity and export markets.

Comparison to Industry Standards

• The company's adjusted gross margin of $497.5 million is comparable to other midstream companies of similar size, but the net income of $14.5 million is lower than some peers due to the impact of commodity prices and one-time items.
• The company's focus on fee-based contracts is a common strategy in the midstream sector to mitigate commodity price risk, similar to companies like Enterprise Products Partners and MPLX.
• The company's capital expenditure of $103.4 million is in line with other midstream companies investing in growth projects, such as pipeline expansions and processing plant upgrades.
• The company's debt levels and leverage ratios are within industry norms, but the company's exposure to floating rate debt is a risk factor that is common among midstream companies.
• The company's focus on carbon capture and storage (CCS) is a growing trend in the industry, with companies like Kinder Morgan and Energy Transfer also exploring opportunities in this area.

Legal Proceedings

• The company is involved in various litigation and administrative proceedings arising in the normal course of business.
• In April 2024, the company reached an agreement to settle a dispute related to Winter Storm Uri.

Related Party Transactions

• The company has transactions with the Cedar Cove JV, processing natural gas and purchasing related residue natural gas and NGLs.
• The company has a repurchase agreement with GIP, repurchasing common units on a quarterly basis.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the impact of commodity price volatility.
• Employees may be affected by changes in operations and strategic initiatives.
• Customers may be impacted by changes in service offerings and pricing.
• Suppliers may be affected by changes in the company's purchasing patterns.
• Creditors may be concerned about the company's debt levels and ability to meet its obligations.

Next Steps

• The company plans to expand the natural gas transmission capacity of the Bridgeline pipeline.
• The company expects to complete the relocation of the Tiger II processing plant in the second quarter of 2024.
• The company expects the GCF assets to become operational in the third quarter of 2024.
• The Matterhorn Express Pipeline is expected to be in service in the third quarter of 2024.

Key Dates

Keywords

Midstream, Natural Gas, NGL, Crude Oil, Processing, Fractionation, Pipelines, Permian Basin, Commodity Prices, Impairment, Adjusted Gross Margin, Capital Expenditures, Carbon Capture, CCS