This 11.4%-Yielder Is Worthy of Your Income Watchlist

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EnLink Midstream Partners (NYSE: ENLK) currently yields an eye-popping 11.4%. While a yield in the double digits is often a sign of trouble, that's not necessarily the case for this energy MLP. That's because even though its financial metrics are tight right now, it's on pace to improve them over the next two years. While that doesn't guarantee the payout's long-term sustainability, it does make it an intriguing income stock to put on your watchlist.

EnLink Midstream Partners 101

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U.S. oil and gas giant Devon Energy (NYSE: DVN) formed EnLink Midstream Partners in 2014 by combining most of its midstream assets with those of Crosstex Energy to create a larger MLP. That transaction also formed EnLink Midstream (NYSE: ENLC), which manages the MLP in exchange for lucrative fees called incentive distribution rights (IDRs).

The partnership currently controls midstream pipeline and processing assets, mainly in Oklahoma, Texas, New Mexico, and Louisiana. They provide the company with relatively steady cash flow along with ample expansion opportunities as Devon Energy and other producers expand their production in places like the Delaware Basin of Texas and STACK shale play of Oklahoma.

Last year these assets supplied EnLink Midstream Partners with $621.1 million of distributable cash flow -- up about 2% from 2016 -- and enough to cover the company's high-yield distribution by a tight 1.02 times. The company also sent a large portion of its cash flow to EnLink Midstream, enabling its parent to generate $216.5 million in cash available for distribution, which covered its 5.1%-yielding payout by a much more comfortable 1.16 times last year. While EnLink Midstream Partners' coverage ratio was tight last year, the company did push its leverage ratio down to 3.58 times debt-to-EBITDA, well below its 3.75-4.0 times target range.

Reasons to be optimistic

Thanks to improving conditions in the oil market, EnLink Midstream Partners expects to see an increase in the oil and gas volumes flowing through its legacy systems this year. In addition to that, the company should benefit from the $730 million it invested in expanding its asset base last year as well as those it has under way in 2018. Those two factors drive the MLP's forecast that it can generate between $630 million to $680 million in distributable cash flow this year, which is enough money to cover its high-yielding distribution by 1.0 to 1.1 times. Further, while the company's debt level will rise as it continues funding growth projects, it expects leverage to remain a comfortable 3.7 to 4.2 times this year. Meanwhile, those expansions should make 2019 an even better year for cash flow.

That growing income stream will also benefit its parent company, which expects to pull in $230 million to $240 million in cash available for distribution this year. That's enough money to increase its payout 5% while still covering it by a comfortable 1.16 to 1.22 times.

Some concerns worth watching

There's no denying that EnLink Midstream Partners' 11.4% yielding payout is at the riskier end of the spectrum since the company would barely cover it if guidance comes in at the low end of the range this year. Because of that, it's possible that the company could eventually reduce its payout, especially if it runs into a capital crunch and needs cash to fund future expansion projects.

Another concern worth noting is the growing trend within the MLP sector to eliminate the costly IDRs. Many of EnLink's rivals have undergone transactions to either buy out those fees or merge with or acquire their parent company. More often than not, these transactions result in the MLP reducing its payout. EnLink Midstream Partners is at a higher risk for this outcome given its tight coverage. Further, Devon Energy owns a majority stake in the parent company and a significant slice of the MLP, so it would make sense to combine them into one stronger company while resetting the payout to a more comfortable level.

One to keep a close eye on

On the one hand, EnLink Midstream Partners appears as if it can generate enough cash flow to support its high-yield payout in the near-term, especially since it sees cash flow growth accelerating over the next two years. However, just because it could maintain its lucrative payout, doesn't mean it will since the company needs to continually secure outside funding to keep expanding even as it siphons off a large portion of cash flow to its parent. That uncertainty is why investors should put this income stock on their watchlist for now and see if the future brings more clarity to the payout's long-term sustainability.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.