EnLink Midstream, LLC (NYSE:ENLC) Q1 2024 Earnings Call Transcript

EnLink Midstream, LLC (NYSE:ENLC) Q1 2024 Earnings Call Transcript May 1, 2024

EnLink Midstream, LLC  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the EnLink Midstream Q1 2024 earnings call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Brungardt, Senior Director of Investors. Please proceed with your quest. Thank you, Brian. You may begin.

Brian Brungardt: Thank you and good morning everyone. Welcome to EnLink’s first quarter of 2024 earnings call. Participating on the call today are, Jesse Arenivas, Chief Executive Officer; Dilanka Seimon, Executive Vice President and Chief Commercial Officer; and Ben Lamb, Executive Vice President and Chief Financial Officer. Walter Pinto, Executive Vice President and Chief Operating Officer is also in the room to answer any questions during the Q&A session. We issued our earnings release and presentation after the markets closed yesterday and those materials are on our website. A replay of today’s call will also be made available on our website at investors.enlink.com. Today’s discussion will include forward-looking statements including expectations and predictions within the meaning of the federal securities laws.

Forward-looking statements speak only as of the date of this call and we undertake no obligation to update or revise. Actual results may differ materially from our projections and a discussion of factors that could cause actual events to differ can be found in our press release, presentation and SEC filings. This call also includes discussion pertaining to certain non-GAAP financial measures. Definitions of these measures, as well as reconciliation to comparable GAAP measures are available in our press release and the appendix of our presentation. We encourage you to review the cautionary statements and other disclosures made in our press release and our SEC filings, including those under the heading Risk Factors. We’ll start today’s call with a set of brief prepared remarks by Jesse, Dilanka and Ben and then leave the remainder of the call open for questions and answers.

With that, I would now like to turn the call over to Jesse Arenivas.

Jesse Arenivas: Thanks, Brian and good morning everyone. Thank you for joining us today to discuss our first quarter 2024 results. All our operations were not immune to the impact of the winter weather during the quarter, our results showcase the resiliency of our business. We continue to be encouraged with the longer term setup for EnLink given our diverse systems and incremental demand potential for natural gas to help power our nation’s growing industrial and power needs including the developing industries around data centers and artificial intelligence. For the quarter, we generated $338 million of adjusted EBITDA, driven by the strength of our Louisiana system and offset by temporary volume impacts from the winter weather impacts of our G&P systems.

These results were in line with our expectations and drove solid free cash flow after distributions of approximately $74 million. Consistent with our approach to return capital to investors, we repurchased approximately 50 million of units outstanding taking our total buyback execution to nearly 10% of the units outstanding over a little more than two years, all while continuing to invest and grow our business. Last quarter, we discussed our commitment to provide safe, reliable and cost-efficient CO2 transportation solutions linking emitters with sequestration providers. Despite recent progress on the regulatory front, and while we continue to develop our CO2 transportation expertise by operating both newbuild and converted CO2 pipelines, the CCS industry as a whole has been slower to develop than we initially anticipated.

However, we are continuing our discussions regarding CCS opportunities of ExxonMobil, as well as other parties and look forward to providing an update when we reach definitive terms. Overall, we continue to see positive momentum for our business. We have spoken at length in prior quarters about the next wave of LNG demand coming starting in earnest in 2025 and how that is reshaping the landscape and driving our three phases of growth in Louisiana. Dilanka will provide more color around our Louisiana natural gas strategy and I’m impressed with the quick execution. We are seeing customers respond to the shifting market dynamics as they look to secure the natural gas critical to their operations. To that extent, we’ve executed our first project to help resupply the eastern part Louisiana through a capital-efficient quick-to-market de-bottlenecking project that is fully subscribed the high-quality customers.

Beyond just Louisiana though, the need for natural gas to help power our modern society becomes more apparent as industries look to secure reliable and affordable energy. Like you, we’ve been amazed at the rapid emergence of the data center demand for power, particularly driven by the AI revolution. This is occurring across the country, even right here in North Texas. We understand and appreciate that these are early days and that consultants, policymakers, utilities and the investment community are still trying to get their collective arms around the ultimate impact of this growth in demand. But the initial forecasts are staggering. While data center electricity consumption was approximately 2.5% of the US total in 2022. Their forecast for this demand tripled more by 2030.

To help put that in perspective, according to the Boston Consulting Group this growth in consumption is equivalent to adding 40 million homes. What is key for our industry is that these AI data centers are not only voracious users of energy, but they run 24/7 that do not turn on at all. Renewables will surely play a key part, that because of this dynamic we expect natural gas to be a large contributor to meet the increased baseload demand for power generation. We consider this to be a potential incremental growth driver creating a rising tide that will lift all boats in the natural gas industry, and one that is likely to drive rapid and exciting change to our business. Wells Fargo analysts predict forecast that additional natural gas demand could be 7 Bcf to more or more by 2030, assuming that natural gas accounts for 40% of the fuel mix.

To wrap up my comments EnLink is executing today to meet customer needs and excited about the growing need for natural gas to provide reliable, and affordable energy to power our modern society. So with that, I’ll turn it over to Dilanka to provide an update on our commercial opportunities.

Dilanka Seimon: Thanks, Jesse and good morning, everyone. Last quarter, we discussed the shifting Louisiana gas supply and demand market, and how we are focused on creating shareholder value. Today, I would like to provide a quick update. As I mentioned during the last call, we are approaching the Louisiana gas opportunity in three phases, on our first phase of opportunities which is realizing the full value of our existing assets through renewing capacity at higher rates, our commercial team has worked with our customers and we have successfully renewed the vast majority of the contracts up for renewal in 2024. This renewal represents an incremental annual margin opportunity, which is included in our 2024 financial guidance.

The second phase of opportunities, is leveraging our assets to drive attractive quick-to-market projects. Last night, we announced the first execution of such a project, through some additional compression, we are increasing gas supply to the Mississippi River Corridor by approximately 210 million cubic feet per day. The project is expected to cost approximately $70 million, with an in-service date in the fourth quarter of 2025. This debottlenecking project results in a mid single digit EBITDA investment multiple. We are pleased to have fully contracted the capacity, with a diverse mix of highly creditworthy customers. The third phase of opportunities, is to add new projects to increase supply to our gas pipelines, to meet the increasing demand in the Mississippi River Corridor market, and to expand our gas storage position.

In this regard, we are in the process of marketing our expansion of Jefferson Island Storage & Hub and are very pleased with the response from our existing and new customers. We are excited about this longer-term opportunity, as we can nearly double our working gas storage capacity through brownfield expansions. With that, I’ll turn it over to Ben to provide an overview of our operations and our financial results.

Ben Lamb: Thanks, Dilanka and good morning, everyone. Let’s start with the Permian. For the segment, profit for the first quarter of 2024 came in at $89 million. Segment profit in the quarter included approximately $9.3 million of gross operating expenses tied to plant relocations and $2.4 million of unrealized derivative losses. Excluding plant relocation OpEx and unrealized derivative activity, segment profit in the first quarter of 2024 decreased 10% sequentially but grew 12% from the prior year quarter. In addition to plant relo costs impacting operating expenses, the first quarter results included a one-time utility true-up expense increasing Permian OpEx by approximately $5 million. Our diverse mix of producers remained active during the quarter.

However, results were impacted by the winter weather and producer timing. Average natural gas gathering volumes were approximately 2% lower sequentially but were 13% higher than the prior year quarter. The Tiger 2 facilities in the process of coming online and will enable the next phase of Permian growth. Turning now to Louisiana. We experienced another quarter of solid performance in the gas segment, benefiting from price volatility, along with strong results in the NGL segment driven by normal seasonal effects. Segment profit for the first quarter of 2024 came in at $110.4 million, including 19.5 million of unrealized derivative losses. Excluding the impact of unrealized derivative activity, segment profit in the first quarter of 2024 grew approximately 26% sequentially and grew approximately 23% compared to the prior year quarter.

Moving up to Oklahoma. We delivered segment profit of $85.7 million for the first quarter of 2024, including $4.1 million of unrealized derivative losses. Excluding the impact of unrealized derivative activity, segment profit in the first quarter of 2024 decreased 19% sequentially and decreased approximately 7% from the prior year quarter driven by lower volumes and the one-time contract reset that we discussed in last quarter’s call. During the first quarter, we saw operators remain active with Regeneron acreage. However, average natural gas gathering volumes were 7% lower sequentially and 3% lower compared to the prior year quarter and as a result of the winter weather and a few cases of price-related shut-ins. Wrapping up with North Texas, segment profit for the quarter was $59.8 million, including $0.1 million of unrealized derivative losses.

Excluding unrealized derivative activity, segment profit in the first quarter of 2024 decreased 12% sequentially and decreased 18% from the prior year quarter, driven by lower volumes and the one-time contract reset. Natural gas gathering volumes were 6% lower sequentially and 10% lower compared to the prior year. Like Oklahoma, volumes were impacted by winter weather and a small number of price-related shut-ins. These solid results reflect the benefits of our diverse asset mix, which are weather was a modest headwind for our G&P businesses. While our Louisiana gas segment benefited from the short-term volatility. In total, our segments drove another robust quarter with $338 million in adjusted EBITDA. We are tracking toward the midpoint of our adjusted EBITDA guidance of $1.31 billion to $1.41 billion for full year 2024.

While we don’t give quarterly guidance, let me remind you that our Louisiana NGL segment experienced some seasonality with the second and third quarters being seasonally weaker. Capital expenditures, plant relocation expenses net to EnLink and investment contributions were $111 million in the first quarter of 2024. Free cash flow after distributions for the first quarter came in at approximately $74 million. On the balance sheet side, we continue to be in a very strong position with a leverage ratio of 3.3 times at the end of the first quarter and we retain ample liquidity. During the quarter, S&P recognized our strong credit profile and upgraded us to BBB minus, moving us into investment grade following the prior upgrade from Fitch. Consistent with our capital allocation plan, we maintained the common unit distribution of $0.1325 per unit in the first quarter, which represents a 6% increase over the first quarter of 2023.

Additionally, we remain active with our common unit repurchase program with approximately $50 million spent in the first quarter. This puts us on pace to complete our $200 million unit repurchase program for 2024. Since the end of 2021, we’ve now repurchased approximately $46 million common units or nearly 10% of units outstanding. In summary, the EnLink team delivered solid results in the first quarter of 2024 and we expect the momentum to continue for the rest of the year. With that, I’ll turn it back over to Jesse.

Jesse Arenivas: Thank you, Ben. The EnLink team delivered another quarter with solid execution in the first quarter of 2024 that showcase the resiliency of our diverse assets. We’re excited for the future and remain committed to meeting the needs of our customers in 2024 and beyond. With that, you may now open call for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from a line of Spiro Dounis with Citi. Please proceed with your question.

Spiro Dounis: Thanks, operator. Good morning, guys. First question on carbon capture if we could. I was hoping for a little more detail on the status of Pecan Island specifically. As you all noted last call, it sounded like all the parties were incentivized to really come to a resolution quickly just given some of the capture obligations coming in 2025. So I’m just sort of curious, should we read anything into anything on the lack of the update here? And are you in a better position now than where you were a few months ago to maybe narrow the bands on any potential outcomes?

Jesse Arenivas: Yeah. Hi, Spiro. Thanks for the question. Yeah, I think last quarter we talked about the pause and Pecan Island and the broader opportunity to address additional or alternatives to the Pecan Island project. Those can those discussions continue. We don’t have an update today, but we have made a lot of progress on defining the scope of additional projects. However, remember this is a new industry and it’s been more challenging to find a mutually beneficial transportation option. We’re still working that and we’ll have an update as soon as we have one for you. As I noted earlier, this has taken longer for the industry as a whole, has taken longer than we had predicted. But remember, we have to proceed at the pace of the emitters and sequesters, until they define the definitive agreements then our role can’t be consummated.

So at the same time, we’re gaining experience in the CCS space. Our Bridgeport facility is now operating and giving us valuable, practical experience, both transporting CO2, capturing, new build and repurposing of pipe. So we think this is key. We’ve said we are very well positioned along Mississippi River Corridor with pipe in the ground, decades-long experience with regulators, customers and so we believe we have not lost conviction at all. We think CCS will play a major role in decarbonizing the industrial sector. We think we’re very well positioned to take advantage of that. And ultimately, timing hasn’t been as planned, but longer term, we believe we will win.

Spiro Dounis: Got it. Thanks for that, Jesse. The second one maybe for you, Ben, just thinking about some of the items that impacted the first quarter and how to think about moving forward with 2Q. You mentioned some shut-ins in Oklahoma. I’m curious if that you see a bigger impact there as we head into 2Q, if you think maybe well connections are enough to offset some of that. And then in the Permian, obviously, you mentioned weather impact early in the quarter. Just maybe give us a sense of how you exited 1Q and what that looks like for 2Q.

Ben Lamb: Yeah, Spiro, starting in Oklahoma, I think most of the shut-in activity is either in the rearview mirror or will be here very shortly. It was very isolated, but between a little bit of that and the winter weather, volumes were a bit soft for 1Q. Actually, have a pretty robust schedule of well connects for Oklahoma in the coming days here, so we feel good about Oklahoma for the rest of the year. In terms of the Permian, but for the winter weather, volume would have been about flat in 1Q versus 4Q, and that’s not surprising when you think about the way we’ve talked about the growth in the basin this year. After we had this furious pace of growth in the Midland Basin last year, this year Midland is flatter, and the growth is in the Delaware.

The Delaware has been full for us. In fact we’ve been offloading some volumes waiting on the plant to come online. Good news is the plant is coming online literally as we speak and that’s what will enable that next leg of Permian growth.

Spiro Dounis: Got it. I’ll leave it there. Thank you, gentlemen.

Jesse Arenivas: Thanks.

Operator: Thank you. Our next question come from the line of Praneeth Satish with Wells Fargo. Please proceed with your question.

Praneeth Satish: Hi, guys. Good morning. I guess, unless I missed it. Can you can you give us an update for where you see CapEx trending in 20z4 and 2025 in light of the Henry Hub to River project at anything change there as it relates to CapEx guidance? And then I think you’ve got 50 million if I remember correctly for the Exxon for a kind of a placeholder for Exxon CCS projects in the budget this year. Could that be reduced given some of the delays that you mentioned?

Jesse Arenivas: A good morning, Praneeth. Big picture CapEx. You know the midpoint of the 2024 guidance is for 65 and that has not changed with the Henry Hub to River project. We reserve some dollars in the capital budget for these Phase 2 Louisiana gas expansions. So there’s no addition for this year. It too early of course to talk about a 2025 CapEx. But I would just say that sitting here today we don’t have any reason to believe it is materially different than the run rate we’ve been on in 204 and even back in 2023. On the CCS side, you’re right. We did allow for 50 million of CCS spending in arriving at our FCFAD guidance for 2024. And you’re also right that as the year goes on and things have been slower to develop than we would have hoped. It becomes less likely that we spend all 50 million of that. We don’t have an update for you today, but it potentially could result in an increase in 2024 FCFAD.

Praneeth Satish: Got it. Thanks. And then I guess as I look at your Phase 1 of your Louisiana growth strategy. I think you’re getting a $20 million uplift this year. How much of your remaining Louisiana transport contract portfolio is still under legacy rates where you could kind of reprice it to current market rates? And I guess do you think you could see another $20 million bump in 2025?

Dilanka Seimon: Hi. It’s Dilanka here. Good morning. We are indeed very happy with the recontracting we’ve been doing now. Louisiana gas system speaks very well to the value of assets. As you indicated correctly, most of the recontracting rates already baked into the 2012 budget. We don’t see a similar uplift in 2025. We at this point substantially recontracted for the rest of 2024? And we are working on renewables of 2025. There might be a marginal uplift but majority comes in the number that was baked in this year.