Enable Midstream Earnings: Terrible 2015 and Things Might Get Even Worse in 2016

Source: Enable Midstream Partners

Thanks to the oil crash Wall Street is pretty much abandoning all energy stocks which provides income investors with amazingly undervalued long-term dividend opportunities. However, as always, the risk is that investors might end up investing in a seemingly attractive high-yield dividend stock that turns out to be cheap for good reason. Take for example Enable Midstream Partners (ENBL), which has been butchered by the market over the past year and now offers one of the highest yields in the midstream MLP industry.

ENBL data by YCharts

Let's take a look at this troubled MLP's 2015 results and why 2016 might get even worse to see just why investors should steer clear of this value trap.

Rising volumes BUT falling earnings and cash flows

Source: 2015 10-K, Yahoo Finance

Despite a year-over-year increase of 14% in processing, and intrastate transport volumes Enable Midstream Partners saw substantial decreases in both Adjusted EBITDA and distributable cash flow. Since the midstream MLP business is a toll-booth like business with cash flows supposedly protected by long-term, fixed-fee contracts, what explains this troubling performance?

The answer lies in Enable Midstream Partners' weak contract mix, which resulted in just 81% of gross margin coming from fixed-fee contracts, and only 54% of its contracts having minimum volume commitments.

Given that Enable Midstream has direct commodity exposure via its gathering pipelines which support drilling rigs in Oklahoma's SCOOP and STACK shale formations, falling natural gas prices have resulted in declining gas rig counts which threaten to cause further volume declines in 2016.

Henry Hub Natural Gas Spot Price data by YCharts

While management guidance was cautiously optimistic about 2016's DCF increasing by about 2% or so, as well as its ability to maintain a coverage ratio above 1, I am skeptical of this outlook for three reasons.

Payout out profile at first seems appealing BUT ...

• Yield: 22.5%
• 2016 Coverage Guidance: 1.0 or greater
• Analyst 5 Year Annual Distribution Projections: 0.6%

Management's 2016 DCF assumptions and coverage guidance are predicated on natural gas and oil prices averaging higher in 2016 then their current market prices.

In addition, Enable Midstream's gathering pipelines are currently still servicing 32 gas drilling rigs operating in the STACK, SCOOP, Haynesville, and Western Oklahoma. This means that should gas prices stay low, or fall further in 2016, its customers could cut back on production and decrease the MLP's volumes and cash flows even further.

With its 2015 coverage ratio already balancing on the knife's edge of sustainability, it's no surprise that Wall Street isn't too confident about Enable Midstream's ability to maintain its current distribution in these market conditions which explains its sky-high yield.

...Credit rating downgrade and another reason to avoid this MLP
The midstream MLP industry is incredible capital intensive and in order to secure its current payout, much less grow it Enable Midstream Partners needs access to cheap debt and equity financing since it pays out all of its DCF to fund its current distribution.

Unfortunately, with its unit price in free fall access to equity markets is cut off, and on February 2, 2016 S&P downgraded Enable Midstream's credit rating from investment grade to junk. This means that the MLP's future debt refinancing costs on its $3.1 billion in debt, are going to be substantially higher than its average interest rate of 2.9%.

In fact, in order to pay off $363 million in debt it owed one of its sponsors, CenterPoint Energy (NYSE: CNP) the MLP recently sold Center Point $363 million in preferred equity that pays a 10% dividend.

This represents a major problem for Enable Midstream because its return on invested capital for the last 12 months was already -6.34%. This indicates that the MLP isn't able to grow profitably and its credit downgrade will meal that its cost of capital will only increase, making it harder to grow its way to distribution sustainability and growth.

Finally there's the fact that CenterPoint and OGE Energy Corp. (NYSE: OGE), Enable Midstream's other sponsor and general partner, are a gas, and electric utility respectively. This means that Enable Midstream's growth runway is very limited to begin with because its sponsor's don't have a large amount of midstream assets to drop down to it in order to fuel the MLP's growth, even if it had access to cheap capital.

Bottom line
Being able to determine which midstream MLPs represent great long-term values and which are cheap for good reason is likely to make the difference between whether or not long-term income investors can profit from the current energy crash.

With its: weak contract mix, dubiously sustainable payout, credit downgrade that's sure to increase its cost of capital, terrible profitability, and short growth runway, Enable Midstream Partners is one high-yield energy investment you should steer clear of.