Enlink Midstream: Riding The Wave Of LNG Export Growth (NYSE:ENLC)

From 2019 to 2023, EnLink Midstream (NYSE:ENLC) will have invested a total of $2.35B in their midstream assets, and based on the mid-point of their 2023 guidance, they will have grown their net EBITDA by $428.4MM. That’s a ROIC of 5.5x EBITDA or 18% inclusive of declines across their assets. This is net of shortfall payment for minimum volume commitments (MVCs). For an explanation of MVCs, see “Enlink to Outperform in Q4.” Here’s what that looks like:

All figures are in millions of dollars. For details on the components of this chart, see “Enlink: Back in Growth Mode”. The amount of investment for 2023, which currently stands at $440MM, could grow if they find additional properties to acquire. This requires a willing seller and a willing buyer (EnLink). The key point to note with this chart is that EnLink’s EBITDA growth is a function of finding enough projects or acquisitions that meet their threshold for investment. Last year they bought two such properties for roughly $400MM – the Tall Oak Acquisition in North Oklahoma and the Crestwood Acquisition in the Barnett. For further details on this, see “Enlink – Buy the Dip“.

If EnLink has enough projects and acquisitions, their EBITDA will grow, and if their EBITDA grows, their stock price will also grow. In fact, you can build a basic model to show how EnLink, if it continues to invest at the rate it invested in 2022, will grow EBITDA to over $2B per year by year end 2028. To meet that goal, EnLink needs to find about $3.6B in new investments. These can take the form of organic growth on their current assets in places like the Permian or Oklahoma; it can be tuck in acquisitions or it can be growth in their Louisiana CCS business.

We can also modify this a bit knowing that even in the depths of Covid, they still had $250MM per year in growth CAPEX for well connects and small projects. In normal years, this is closer to $325MM. In addition, they have already committed to spend another $160MM for the Exxon Mobil (XOM) CCS project in Louisiana. That leaves roughly $1.8B left to find over the course of 5 years. With that in mind, let’s walk through what might be on the horizon. Specifically, let’s talk about EnLink’s opportunity in the LNG (Liquified Natural Gas) space. In a future article, we will review their recently signed Exxon Mobil CCS deal and the massive carbon capture opportunity in Louisiana and the economics of the impending restart of the Gulf Coast Fractionator in Q1 2024.

LNG Exports

One potential growth area for EnLink is the LNG (Liquid Natural Gas) export market. Make no mistake about it, the advent of fracking in the US has unleashed a huge volume of natural gas – too much to be consumed domestically. Starting in 2016, Cheniere Energy (LNG) completed their first liquefaction trains to super chill natural gas for transport overseas. By chilling the natural gas to -260F, LNG export facilities compress the gas and load it aboard LNG carriers for sales overseas. From that point to 2023, the US LNG export capacity has grown to 12.1 Bcf/d (Billion Cubic Feet per day) or roughly 12% of the entire US natural gas market. That astounding growth is projected to continue with a tsunami of LNG export coming to the Gulf Coast Region.

This massive buildup will affect EnLink in a few ways. As discussed in Enlink – Set to Grow in 2023 EnLink is currently providing firm transport for one facility, Calcasieu Pass owned by Venture Global, and they have another project to increase the capacity for that facility. EnLink signed two contracts to transport a total of up to 500,000 MMbtu/d (about 470 MMcf/d) from Henry Hub down through a portion of EnLink’s Bridgeline Pipeline to an interconnect with VG’s TransCameron pipeline, a 42″ header system that feeds their Calcasieu Pass LNG terminal.

Venture Global’s CP2 Project

Beyond this project, Venture Global is planning to build a twin facility next to the Calcasieu Pass facility, called simply CP2. Although this 2nd project hasn’t reached FID (final investment decision), it is on a very short list of probable LNG export facilities that are slated to come online post 2027. Along with that facility, they will build a 48″ pipeline called CP Express:

Looking through the available FERC publications, it doesn’t appear that EnLink was scheduled to connect their exiting Louisiana natural gas systems to CP2 Express. However, recent permits suggest that CP2’s termination point in southern Jasper County, TX could be connected directly to Matterhorn Express through a 48″ pipeline extension called Blackfin which will be owned and operated by Matterhorn. Matterhorn is a 2.0 Bcf/d pipeline joint venture between Whitewater, Devon Energy (DVN), MPLX (MPLX) and EnLink to transport natural gas from the Permian Basin to Katy, TX. The project is slated to come online in Q3 of 2024 and EnLink owns a 15% equity stake in the project, so it is possible that EnLink may participate in the CP2 project indirectly through Matterhorn and Blackfin.

The Blackfin project hasn’t reach FID, so there is no guarantee that this extension is built.

Beyond the CP2 project we have to do some guesswork and sleuthing because not much has been announced.

Commonwealth LNG

On the LNG growth front, there are potentially more projects on the way that could boost returns directly for EnLink. On November 17th, 2022, the Federal Energy Regulatory Commission, authorized Commonwealth’s application to build an LNG terminal in Cameron Parish, a stone’s throw from Venture Global’s Calcasieu Pass on the opposite bank of the same ship channel.

As part of their FERC Environmental impact statement, they proposed a 3 mile long, 42″ header system that would collect up to 1.44 Bcf/d of natural gas from 3 pipelines, 2 of which are owned by EnLink’s Bridgeline system – a 12″ pipe and a 20″ pipe (not shown separately in this photo) – the third pipeline is Kinetica – a 16″ diameter pipeline. I think the only way to run 1.44 Bcf/d through these 3 pipelines is to incorporate additional compression and run them bidirectionally (from the East and West) into Commonwealth’s pipeline.

Although Commonwealth has received approval from FERC, the project still has additional regulatory requirements to pass. They need to obtain a non-FTA export license, complete the front-end engineering design (FEED) and the lump-sum turnkey (LSTK) EPC contract, currently scheduled for completion in 2024. That’s the easy part. Then the project needs to be fully financed. Commonwealth has said they might see FID (final investment decision) as soon Q4 of 2023 (the date for the FID keeps getting pushed out), and I wouldn’t be surprised to see the project get pushed out again. There are over 100Mtpa’s worth of US LNG projects, many of which have reached this point, only to get stalled due to financing or other issues. If the project remains on track, the plant could start producing LNG as soon as 2027.

Recently, Commonwealth has signed a 20-year binding agreement with Woodside Energy Trading Singapore for up to 2.5mtpa and an MOU (memoranda of understanding) with Summit Oil and Shipping Co. located in Bangladesh for 1mtpa for up to 20 years, however, Commonwealth is still shy of the goal needed to fully address the plant’s 8.4mtpa capacity.

Financers need to see the plant’s full capacity leased under 20-year binding agreements so the majority of the risk is borne by shippers. Combing through the binding agreements, I believe they are 75% contracted, and that makes this project probable. EnLink’s two pipelines running bidirectional should provide roughly 2/3rds of the feedgas capacity, and the firm capacity agreement might generate somewhere between $35-45MM per year in firm transport fees. We won’t get an official announcement from EnLink until this project reaches FID.

Other LNG Projects

Beyond this project, EnLink has been involved in several other LNG discussions. They were considered for the massive VG Plaquemine project and even written into the FERC/EIS – Environmental Impact Study (as an alternative route for inlet gas) but EnLink was eventually eliminated from the project due to the cost to connect VG’s pipelines to the Plaquemine facility. It would have required an expensive and challenging build through the southern Louisiana region (an environmentally sensitive area) and Venture Global and their other partners developed a plan to route all the required gas through a southern route. As mentioned, there are several other projects being considered and EnLink has been part of some of those discussions, but whether those projects bear any fruit remains to be seen.

LNG Non-Fid Projects Gaining Momentum

As you can see in the chart above, the US LNG export capacity is set to grow from about 13.8 Bcf/d (nameplate capacity) to about 22.5 Bcf/d by 2028 and that’s just the projects that have reached FID. There is a large and growing list of projects racing to the finish line (total potential additional capacity of 14.9 Bcf/d), and while some of these projects may get pushed out or be cancelled, many will come online, and this will grow the feedgas demand to 30 Bcf/d by 2032. Here’s a good sampling of the most probable projects gaining momentum:

Venture Global CP2 (Q3 2027) – 1.14 Bcf/d

Delfin (Q2 2026) – 0.46 Bcf/d

Sempra Energy’s Train 4 expansion (2027) – 0.89 Bcf/d

NextDecade’s Rio Grande LNG in Brownsville, TX (Q1 2027) – 3.61 Bcf/d

Commonwealth LNG (2027) – 1.2 Bcf/d

Altimira FLNG (Q2 2023) – 0.4 Bcf/d

Louisiana FLNG (2Q 2024) – 0.4 Bcf/d

Cameron LNG – T4 (Q3 2027) – 0.85 Bcf/d

Lake Charles LNG (2028) – 2.35 Bcf/d

Cheniere SPL Expansion Project (2028-9) – 2.63 Bcf/d

Sourcing the Gas for new LNG projects

The implications of a buildout this large are profound, and this doesn’t include the planned LNG export projects in Mexico which will source their gas from west bound Permian pipelines. The biggest question surrounding this tsunami of demand is from which basins will all this gas come? Let’s peel this back in stages. Heading into 2023, the US was grossly over producing natural gas. In March of 2022, the US was producing roughly 95.4 Bcf/d in dry gas. By March of 2023, this ballooned to 102.3 Bcf/d and then by April, we hit 104 Bcf/d. The front of the pricing curve bombed out to $2/MMbtu – a price that is not sustainable. In response to that, drilling rigs began dropping, and so far, we’ve lost over 100 rigs in 2023.

Gas prone areas like the greater Anadarko region (excluding Cana Woodford), the Barnett and Haynesville have lost rigs at the fastest rate, while the oil focused regions like the Permian, Cana Woodford, Eagle Ford oil and Bakken have held up. The one region that is bucking the trend is the Marcellas/Utica areas. Completions in Appalachia are up by 7 wells per month while rigs are just now being laid down in the Marcellas region. The Appalachia E&P companies tend to be well hedged so it will take time before their rigs go down.

To fully balance the natural gas and NGL markets, we probably need to lay down a few more rigs or possibly start building drilled but uncompleted wells (DUCs). This will stabilize natural gas production in the 101-103 Bcf/d range. Already, we’re seeing the front of the natural gas pricing curve respond. Sub-$3/MMbtu is not sustainable (we’ll tackle the reasons why in a future article).

As these LNG facilities come online in the next 5 years beginning in 2025, these 100 rigs represent about 5 Bcf/d of additional capacity and certainly, they can return. The Permian can add another 3 Bcf/d by end of 2024 with the addition of Matterhorn (2.0 Bcf/d to start, expandable to 2.5 Bcf/d) and the compression expansions of PHP (0.55 Bcf/d) and Whistler (0.5 Bcf/d). In the next 12-24 month timeline, other projects could be announced including a compression expansion of Gulf Coast Express (0.6 Bcf/d), ET’s Warrior Pipeline (1.5 Bcf/d greenfield pipeline) and Targa Resources’ Apex (another greenfield project) which could add 2.0 Bcf/d to start.

Planned pipeline additions out of the Haynesville will add 4.4 Bcf/d of capacity. The Haynesville (unlike most regions) has spent 3.5 years building up a sizable DUC (drilled but uncompleted) well inventory that could help grow the dry gas production in the Haynesville from 14.5 Bcf/d to 20 Bcf/d. So the obvious answer of where the gas will come from is the Permian (#1), the Hayneville (#2) and then the Tier 2 gas basins like the greater Anadarko region and the gassier portions of the Eagle Ford will also have a role to play (#3). (There are valid questions surrounding the long-term sustainability of the Hayneville region, so we’ll tackle that nuance in a couple of future articles).

Conclusion

The implications for EnLink (and other midstream companies) of this massive LNG buildout are profound. EnLink can participate directly by booking long-term firm capacity on their underutilized Louisiana natural gas pipelines, potentially generating $75MM+ per year in firm transportation fees. They can participate through firm transportation fees on Matterhorn and Blackfin which in this environment will have a high utilization rate. Their Louisiana assets will benefit from the increased activity and higher natural gas volumes will drive interruptible transportation and storage fees.

EnLink also has 15.5 Bcf of natural gas storage in Louisiana. If LNG exports increase to 30 Bcf/d, there will be a call for increased storage capacity. EnLink could expand some of these facilities to manage more gas. If these LNG export facilities come too fast, then demand will outstrip supply and you can bet we’ll get more spikes in the price of natural gas. Although they don’t have a lot of exposure to natural gas prices, it is enough to boost yearly income significantly. Finally, their G&P assets would benefit from the call on natural gas: the Permian will continue to grow, but also their assets in Oklahoma and even the Barnett will see some growth. EnLink’s future looks bright. I recommend buying EnLink in the $9-10/unit price range. In the money puts are also reasonable although the premiums have come down in recent weeks.