July 11, 2016 - 12:01 PM EDT
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Fitch Rates EnLink Midstream Partners' Offering 'BBB-'

Fitch rates Enlink Midstream Partners, LP's (ENLK) 10 year senior unsecured note offering 'BBB-.' Proceeds from the offering are expected to be used to repay outstanding borrowings under ENLK's revolving credit facility and for general partnership purposes.

ENLK's ratings reflect the size, scale, earnings and cash flow stability of the master limited partnership (MLP). In addition, the ratings consider the operating and financial strategic support that ENLK receives from its affiliation with its ultimate sponsor, Devon Energy Corp. (DVN; 'BBB+'/Negative Outlook). The ratings also reflect the prevailing headwinds facing the midstream services sector including low oil, natural gas, and natural gas liquids prices, expected production volume declines, increasing counterparty risk, and the restricted access to capital markets.

KEY RATING DRIVERS

Stable Earnings and Cash Flow: ENLK's ratings are supported by Fitch's expectations for generally stable revenues, earnings and cash flow given the production profile of ENLK's areas of operation and contract structures. ENLK has focused strategically on supporting DVN production and operationally is very much tied into DVN's assets within the Midland and Permian basins, Barnett shale, and the STACK and Cana-Woodford regions. Roughly 95% of ENLK's gross operating margin is from fee-based contracts with DVN representing roughly 50% of operating margin. ENLK has historically had a strong focus on fee-based contracts in an effort to mitigate commodity price volatility.

Sponsor Support: The ratings consider ENLK's relationship with its ultimate sponsor, DVN, which currently has a Long-Term Issuer Default Rating (IDR) of 'BBB+' with a Negative Outlook. DVN, as ENLK's sponsor and largest customer, is a credit positive for ENLK given its operational integration with DVN's favorable basin mix and the ability and willingness of DVN to provide significant operational contractual support. The ratings are not explicitly notched off of DVN's rating, since ENLK receives 50% of cash flows from third parties, largely from investment-grade counterparties. In addition, Fitch believes that ENLK, in a mid-cycle price environment, has a standalone credit profile consistent with the 'BBB-' rating based on mid-cycle expected leverage near 4.5x based on Fitch's leverage calculation described below.

Volume Exposure: One of the key risks facing ENLK given its fee-based contract structure is the potential negative impact that decreasing volumes can have on its system and on its profitability. Mitigating some of this risk is a fair amount of minimum volume commitments that have been provided by DVN and other producer customers as part of their fixed-fee contracts. In the near term, these contracts should continue to provide stable earnings and cash flow even for regions like the Barnett where volumes will be declining. Fitch's forecast considers small-to-moderate volume declines within certain regions in ENLK's asset base, particularly North Texas where production is expected to decline. Fitch notes that results in the both the Permian and SCOOP/STACK regions where ENLK has operations have seen volume resiliency and are expected to remain relatively strong areas of growth for ENLK.

Counterparty Exposure: Counterparty risk is a concern but should be relatively limited. ENLK's largest counterparty by far is DVN, which represents roughly 50% of gross margin and EBITDA. Roughly 92% of ENLK's revenue comes from counterparties with an investment-grade rating, representing over $3.4 billion in revenue. Generally, Fitch does continue to expect high levels of producer defaults which averaged roughly 10%-11% in 2015, but expects much of the default activity from high yield producers. ENLK does have some minor exposure to high yield names, but with no real concentration in any single high-yield counterparty.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for ENLK include:

--Fitch assumes a base case price consistent with Fitch's February 2015 base case of WTI USD35/bbl for 2016, USD45/bbl for 2017, USD55/bbl for 2018, and Henry Hub of USD2.25/mcf for 2016, USD2.50/mcf for 2017 and USD2.75/mcf for 2018.

--ENLK capital spending between $550 million to $600 million annually for 2016 through 2018, and the remaining $500 million in Tall Oak acquisition costs deferred, so that $250 million is paid in 2017 and $250 million in 2018.

--The $750 million in preferred equity issued January 2016 to fund the Tall Oak acquisition qualifies for only 50% equity credit under Fitch's hybrid methodology.

--Capital funding for growth more heavily weighted toward debt.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--A meaningful reduction in leverage, with debt/adjusted EBITDA of 4.0x or below and distribution coverage above 1.0x.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A significant change in cash flow stability profile. A move away from current fee based contract structure with minimum volume commitments on select production could lead to a negative rating action.

--Adjusted leverage above 5.0x on a sustained basis. Fitch defines adjusted leverage as adjusted debt (with 50% equity credit for the $750 million preferred equity) to adjusted EBITDA.

--A downgrade of DVN could lead to a negative rating action at ENLK. If DVN were to move down the rating scale Fitch would consider a negative rating action at ENLK or consider reducing the notching between the two entities.

LIQUIDITY

Liquidity Adequate: ENLK's liquidity is adequate. As of March 31, 2016, ENLK had roughly $946.2 million in availability under its $1.5 billion revolver. The revolver contains a leverage covenant whereby consolidated indebtedness-to-consolidated EBITDA (as defined in the credit facility, which includes projected EBITDA from certain capital expansion projects) of must be no more than 5.0x or 5.5x for four quarters following an acquisition at ENLK's election subject to some qualifications. ENLK was in compliance with its covenant as of March 31, 2016 and is expected to remain in compliance for Fitch's forecast period. ENLK's maturities are manageable with no near-term maturities through 2019, when $400 million in notes mature. The revolver matures in March 2020 and has a further accordion feature which would allow for an additional $500 million of borrowing capacity.

FULL LIST OF RATING ACTIONS

Fitch currently rates ENLK as follows:

--Long-Term IDR 'BBB-';

--Senior unsecured debt rating 'BBB-'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Feb. 25, 2016.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008702

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Peter Molica
Senior Director
+1-212-908-0288
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kathleen Connelly
Director
+1-212-908-0290
or
Committee Chairperson
Shalini Majahan
Managing Director
+1-212-908-0351
or
Media Relations:
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[email protected]


Source: Business Wire (July 11, 2016 - 12:01 PM EDT)

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