Sell-Side Reacts To EnLink Midstream's Proposed MLP Buyout

EnLink Midstream LLC ENLC announced Monday ahead of the market open an agreement for buying all outstanding common units of EnLink Midstream Partners LP ENLK in a bid to simplify its corporate structure.

The Analysts

The sell-side was broadly optimistic on the announcement. 

Baird analyst Ethan Bellamy has Neutral ratings on both EnLink Midstream and EnLink Midstream Partners, with a price target of $18 for both.

Credit Suisse analyst Spiro Dounis upgraded EnLink Midstream Partners from Underperform to Neutral and raised the price target from $17 to $18.

Raymond James analyst J.R. Weston reiterated an Outperform rating with a $19 price target on EnLink Midstream while downgrading EnLink Midstream Partners from Outperform to Neutral. 

Baird: Merger Incrementally Positive For Both Companies

The acquisition addresses the major structural overhang on both companies, Baird's Bellamy said in a Monday note.

"Moreover, this transaction materially advances our positive bias to ENLK/ENLC, which continues to gain from positive volumetric trends," the analyst said. 

Bellamy said he sees the lower cost of capital available to the simplified EnLink as increasing the spread on project returns.

The deal suggests positive dynamism under parent Global Infrastructure Partners, which in June acquired Devon Energy Corp DVN's 64-percent stake in EnLink Midstream and 23-percent stake in EnLink Midstream Partners, according to Baird. 

Credit Suisse: New Company, Wider Investor Base

The takeout premium of 1.1 percent was largely in-line with Credit Suisse's expectation for no premium, although the timing was earlier than expected, analyst Dounis said in a Tuesday note.

The analyst also said the distribution cut was an anticipated risk, given the yield parity between the two companies.

Distribution growth of 5 percent or more was largely unchanged from the guidance, while coverage should increase to 1.3-1.5 times over the next four years, he said. 

The analyst expects the new company to attract a wider investor base due to the IDR removal, 1099 tax status and simplified structure.

Credit Suisse attributed the negative stock reaction to the trimming of EBITDA guidance from a 5-10-percent increase over the midpoint of 2018 EBITDA to 5 percent; the potential tax implications and effective distribution cut to EnLink Midstream Partners; and the event not being credit-enhancing.

"We view the event as the lifting of an overhang which partially drives our upgrade to Neutral." 

Raymond James Remains Positive On EnLink Midstream

The small premium in the acquisition price may have been due to the fact that EnLink Midstream Partners shares have outperformed EnLink Midstream year-to-date, Raymond James analyst Weston said in a Tuesday note.

The analyst said he remains positive on EnLink Midstream based on the pro forma entity's relatively strong financial metrics.

"The transaction is expected to result in $700 million-plus in cumulative retained cash flow from 2019-2021, making EnLink less reliant on outside funding and enhancing the pro forma balance sheet." 

Raymond James raised its Q3 estimates for EnLink Midstream Partners but lowered its 2020 estimates.

Given its confidence in the deal's completion, the sell-side firm shifted its valuation framework for EnLink Midstream to 2020 estimates.

With EnLink Midstream Partners shares trading near the implied deal value, Raymond James downgraded the stock to Neutral. 

The Price Action

EnLink Midstream shares were down 4.89 percent at $14.98 at the time of publication Tuesday, while EnLink Midstream Partners shares were down 3.21 percent at $17.51. 

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