Growing in a down cycle

MICHAEL J. GARBERDING |

Unique acquisition opportunities can arise in downward cycles, and EnLink is taking advantage of them

MICHAEL J. GARBERDING, ENLINK MIDSTREAM, DALLAS

As reduced rig counts and plummeting oil prices permeate our industry news, it's a bitter reminder of this simple truth - the energy industry is cyclical.

We have all seen this before. There have been several declines - and rebounds - of commodity prices in the past 30 years. In fact, looking at historical crude oil price trends, there have been five episodes of significant commodity price declines since 1984.

History Lesson

So how will it play out this time? There are many insights that we as an industry have to keep in mind to help us answer this question. The energy industry is vast and complex, driven by global supply and demand forces, in addition to monetary and geopolitical cycles. These underlying forces can create a dynamic environment.

The most recent decline in oil prices, which began in June 2014, represents a falloff of about 55% over 190 days, which is neither the most abrupt nor harshest when comparing past corrections. As we all know, the current cycle has been driven by supply, as the United States has become the world's largest oil producer and OPEC has decided to not cut its production, causing an oversupplied market.

The last time we experienced a major down cycle in the United States was from July 2008 to February 2009. This was due to weak global oil demand and a financial market collapse. Oil prices ultimately dropped 77% and needed 323 days to recover just 50% of the original price. Prior to that, November 2000 through January 2002 saw a 50% correction in oil prices because of a recession and lower demand, which took another 90 days to get back to half of its former peak.

Looking back further, there was a 50% drop in oil prices from October 1997 through June 1998, which recovered to 50% of its pre-correction levels in only 73 days. Lastly, the decrease from November 1985 to April 1986 was 67% with a 50% recovery in 321 days.

This last comparison is the most relevant because it is the only other price correction driven by supply rather than demand. OPEC changed its pricing structure then, and much like today, OPEC created an oversupply of crude.

LESSONS LEARNED

At EnLink, we didn't predict the most recent downturn, but we prepared for it. We've learned that downturns are cyclical, and if you prepare for them, a company can emerge even stronger.

We are students of history. We believe in preparing for all commodity environments, and we purposefully implemented what we learned in past cycles to create EnLink Midstream, formed in March 2014 through a merger of Crosstex Energy with Devon Energy's midstream assets. EnLink is well positioned to work through industry cycles.

EnLink has a strong balance sheet and an investment-grade profile with a lower level of leverage. Balance sheet flexibility is a must when managing through cycles. We also positioned ourselves with excess liquidity to ensure we can continue to execute our growth plan. Our assets are diversified geographically in some of the most prolific producing basins in the United States and service a diverse range of customers across the commodity spectrum - natural gas, natural gas liquids, crude oil, and condensate. Through our breadth of strategic assets, diversified commodity services, and an extensive customer base, we are able to spread out risk and opportunity versus focusing on one core area, product, or customer.

Stability of cash flows is something that is incredibly important in a business that distributes the majority of its cash flows to its equity holders. Approximately 95% of EnLink's contracts are fee based; therefore, EnLink has a low sensitivity to direct commodity price fluctuations. This fee-based structure was created to ensure sustainable cash flow through the energy market's cycles.

In addition, we are very focused on the contractual support of the cash flows through items such as minimum volume guarantees. We currently expect about 80% of our 2015 estimated segment cash flows are supported by long-term, fee-based contracts with either firm transportation agreements or minimum volume commitments.

Devon and EnLink's mutually beneficial relationship is key to EnLink's growth plan. Devon has been a major customer of EnLink and its predecessor company for more than 10 years. We share a commitment to safe, efficient operations with first-rate customer service, and we have very similar company cultures. Both EnLink and Devon are committed to helping each other grow.

EnLink supports Devon by providing reliable, cost-efficient midstream services and reliable cash flows from distributions. Devon, as EnLink's sponsor, supports EnLink through providing excellent contractual support, selling midstream assets to our partnership that are focused on Devon production (also known as dropdowns, such as the condensate pipeline in the Eagle Ford), and offering additional growth opportunities in new areas to support their production.

In early 2014, EnLink launched our "Four Avenues for Growth" strategy, which guides us on our goal to double the size of EnLink by the end of 2017. This was our goal prior to the most recent down cycle and is still our goal today. Our four avenues include dropdowns from our Devon sponsorship, growing with Devon, organic growth, and mergers and acquisitions. We have made tremendous progress toward executing our plan, even in this volatile environment because of our clear vision for how we will grow.

Unique acquisition opportunities sometimes arise in these downward cycles, and EnLink is taking advantage of them. Since the downturn in commodity prices began in June, we have completed three acquisitions that total approximately $900 million. These acquisitions allowed us to expand our strategic platform in both the Midland Basin of the Permian, as well as in southern Louisiana. We were only able to make these acquisitions because of the way we structured EnLink - with a strong financial foundation and flexibility to grow during different cycles.

As we watch this cycle play out, history shows that there will be an end to the downturn, and a rebound in crude oil prices should follow. But, even with historical data, it is difficult to predict how long the current cycle will last. The most important lesson we can learn as an industry is that the adage holds true: The only thing certain is change.

About the Author