Fitch Ratings has upgraded EnLink Midstream, LLC's (ENLC or EnLink) and EnLink Midstream Partners, LP's (ENLK) Long-Term (LT) Issuer Default Rating (IDR) to 'BBB-' from 'BB+' and senior unsecured rating to 'BBB-' from 'BB+'.

Fitch has also upgraded ENLK's preferred equity rating to 'BB' from 'BB-'/'RR6'. EnLink Midstream Partners, LP. guarantees the debt at EnLink Midstream, LLC. The Rating Outlook for both entities is Stable.

The upgrade is based on revised projections driven by information from various sources that the volume outlook has improved. EBITDA in 2022 is now forecast to be higher than previously expected. 2023 leverage is now forecast to be approximately 4.0x, slightly better than the previous forecast. The 2023 leverage forecast shows EnLink meaningfully below the 4.5x leverage level that Fitch previously stated justify an upgrade. Year-to-date Sept. 30, 22 volumes exceeded Fitch expectations, and the strong growth seen to that date looks set to continue, as driven mainly by the Permian segment.

The ratings are based on a revenue stream that is mostly fee-based, as well as management's demonstrated commitment to credit quality. The Stable Outlook reflects Fitch's expectations that volumes in the Permian will rise in 2023, that Oklahoma and North Texas in aggregate will show slight volume growth, and that certain Louisiana industrials will continue to demand EnLink service. The Outlook is also based on an expectation of continued balanced financial policies.

Key Rating Drivers

Reliable Steady Volume Growth: Forecasts from a variety of sources portray long-term steady growth for the entire E&P industry in the Permian region, which is EnLink's strongest. EnLink has already enjoyed this trend. EnLink throughout year-to-date Sept. 30, 2022 showed volume increases. The Permian segment's processing volumes have been rising in a relative narrow band of 6%-14% each quarter for the last four quarters, on a sequential basis.

Since midstream companies have to spend capex 10-18 months in advance of new planned wells, the previous era of aggressive growth plans featured many 'busts' that hurt midstream companies. Steady growth is advantageous for midstream companies, and the year-to-date Sept. 30, 22 volume performance by EnLink shows the benefit, with rising EBITDA and moderated growth capex.

Leverage: As noted above, Fitch expects 2023 leverage to be approximately 4.0x. This level, which would be a record low value for the company, in part reflects the slow accumulation of the benefit of moderating certain investing and financing flows a few years ago. In 2022, the company shifted to a moderately acquisitive stance, yet its big recent acquisition features, among other merits, a repetition of a successful practice, i.e., the redeployment of assets. EnLink is experiencing rising EBITDA from its base business, which Fitch expects will continue.

Fee-Based Cash Flow: ENLC has exhibited a focus on fee-based contracts to mitigate commodity price volatility. Fitch expects ENLC will continue to generate about 90% of its gross margin from fee-based services in 2022 and 2023. Gathering and processing (G&P) operations in the Permian and Oklahoma are further underpinned by long-term acreage dedication contracts. In addition, ENLC from time to time hedges a portion of its commodity exposure for the coming twelve months.

Parent Subsidiary Linkage: Per Fitch PSL criteria, EnLink's indirect general partner, GIP III Stetson I, L.P. is regarded as a Parent and EnLink a subsidiary, and EnLink is the stronger entity of the two. EnLink has Independent Directors and a Conflicts Committee. The general partner representatives to the EnLink board and the EnLink board Independent Directors have collaboratively from time to time pro-actively taken steps to bolster credit quality. In addition, ENLC does not guarantee GIP III Stetson I, L.P. debt. Criteria factor 'access and control' reflect one porous sub-factor and one insulated factor. The two sub-factors are judged to combine for 'porous.' With insulated ring-fencing and porous access, the PSL outcome for the entities is 'standalone.'

Derivation Summary

Western Midstream Partners, LP (WES; BB+/Positive) is a gathering and processing company, like ENLC. Both companies have a similar degree of geographic diversification (moderate diversification), but WES has a much higher customer concentration. Fitch believes that WES is moderately better positioned financially relative to ENLC given WES's larger EBITDA and Fitch's forecast of leverage of approximately 3.2x at YE 2022 (versus the forecast for ENLC's of approximately 4.5x in the same year).

WES's overall counterparty credit risk is greater than ENLC's, as WES has a large EBITDA exposure to Occidental Petroleum Corp. (BB+/Positive). A portion of the Occidental Petroleum Corp. exposure is from long-term revenue-assurance-type contracts. In the history of midstream, an E&P customer with such contracts has, in a bankruptcy setting, suddenly terminated such contracts. ENLC has much smaller EBITDA concentrations, in Fitch's view. Historically, ENLC's largest E&P company revenue to exposure is to Devon Energy (BBB+/Stable). However, with ENLC's re-positioning as the Permian (and not Oklahoma) as its most important segment, the Devon exposure has fallen. In 2021, Devon provided 6.7% of ENLC's revenues.

The difference in counterparty credit risk drives the one notch difference between ENLC and WES.

Key Assumptions

EBITDA rises in 2023 on the continuation of aggregate volume growth trends evident throughout 2022.

Capex rises from recent trough levels, in part driven by harvesting of opportunities related to recent acquisitions.

Distribution growth in the out years in-line with the Jan. 18, 2023 board declaration.

Modest common unit re-purchases.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Leverage sustained below 3.5x underpinned by stable performance across the segments.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A significant change in cash flow stability, including a move away from the current profile of fee-based profits;

Leverage expected to be above 4.5x on a sustained basis.

A sustained change in financial policies which tilts strongly to shareholder 'rewards.'

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Ample Liquidity: As of Sept. 30, 2022, there were $70 million of outstanding borrowings under the revolving credit facility and $46.6 million outstanding letters of credit. The $1.4 billion revolving credit facility matures in June 2027. This facility contains a leverage covenant maximum of 5.0x for consolidated net indebtedness to consolidated EBITDA (each term as defined and where EBITDA includes EBITDA from certain capital expansion projects) and consolidated indebtedness excludes the existing preferred securities.

The maximum leverage level may rise from 5.0x to 5.5x for four quarters following an acquisition (with the rise subject to limitations). ENLC has no debt maturities until 2024, which consists of $97.9 million of senior unsecured notes.

ENLC was in compliance with its covenants as of Sept. 30, 2022 and is expected to remain in compliance under Fitch's forecast period. Fitch expects ENLC will continue to fund its capex program with its internally generated cash flow in the near term.

Issuer Profile

EnLink Midstream, LLC is a gathering and processing company that operates mainly in Texas, Oklahoma and Louisiana. Its Louisiana segment also features hydrocarbon transmission and fractionation assets, among others.

Summary of Financial Adjustments

Fitch applied 50% equity credit and 50% debt credit to ENLK's preferred equity securities.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2023 Electronic News Publishing, source ENP Newswire