Irrational discounting - we've all seen it in the market from time to time, when a sector or sub-industry falls out of favor. If, after you've done your due diligence, no apparent reason surfaces, it becomes a head-scratcher. "Should I average down at this very tempting level or wait until the market starts to support this stock again?"
Such is the case of Oasis Midstream Partners LP (NASDAQ:OMP), a fairly new firm, which continues to exceed its guidance and IPO promises. OMP generates most of its revenues through 15-year, fixed-fee contracts for providing crude oil, natural gas and water-related midstream services for OAS. However, it also has been increasing its amount of third-party contracts - management estimates that more than 15% to 20% of OMP's Q4 2019 EBITDA will come from third parties.
OMP's management has been acquiring larger pieces of the development companies, or Devco's, from its parent/GP, Oasis Petroleum (OAS). It now owns 100% of Bighorn, 70% of Beartooth, ~35% of Bobcat, and will own 100% of the new Panther Devco, a deal which is expected to close in Q3 '19.
Management noted on the Q2 '19 earnings call that, "This (deal) is a huge opportunity for OMP unitholders, which enhances the financial outlook for OMP, while keeping the balance sheet strong."
OMP will own 100% of the Panther property, where it will provide water and crude services. These assets will produce three revenue streams - Crude Oil Gathering, Produced Water Gathering, and Produced Water Disposal.
OMP expects 2019 Q4 EBITDA for Panther DevCo to range between $1 million and $3 million.
Here's a look at OMP's quarterly growth for the most recent four quarters - no lack of growth here in any category:
They've also done very well sequentially, consistently setting company records for revenue, adjusted EBITDA, DCF, and net income, as new assets kick in.
What's also impressive is that, even with some plant downtime in Q2, which constrained volumes in both Bighorn and Bobcat, OMP's EBITDA still increased by ~$5.5M, to $36.07M. EBITDA was adversely impacted by about $5 million for the second quarter, but, both oil and gas volumes were higher during the month of July.
Management commented on the Q2 '19 earnings call: "This impressive ramp up reflects a strong combination of Oasis and third parties. Over the second quarter, third-party volumes approximated 29% of Bighorn's total volumes. We still expect utilization to be above 90% by year-end 2019. Natural gas processing in the Williston remains tight as you have heard from numerous operators in the basin."
All of this quarterly success created outstanding trailing 12-month growth figures in all categories. In fact, even though unit count grew over 45%, the distribution is up by nearly 19%, and will hit management's 20% yearly target in 2019:
All of that good news, and what does the market do? It discounts OMP by -16.9% over the past quarter.
OMP had been performing well, up until its August earnings report, when its parent company adjusted volume guidance slightly, from 86-91 MBOE/day, to a Q3 '19 range of 87-90 MBOE/d (71.5% oil).
OAS also upped its capex guidance to $620-$640M for the upstream segment, vs. the previous $540-$560 figure. Midstream capex also was increased, to a $219-$230 range, vs. the earlier forecast of $195-$219 million, due to an increased asset base.
OAS's management decided to use available free cash flow from its Williston Basin assets in North Dakota to fund expansion in the West Texas and southern New Mexico Delaware Basin. Wall Street didn't agree with the increased capex spending plan for OAS, and dragged down OMP with the parent.
Parent Company Profile:
Oasis Petroleum has a strong presence in 2 prolific basins - the Williston, where it has more than 20 years of inventory, and Delaware, where it has more than 600 locations.
It has one of the lowest net debt/EBITDA leverage in the industry, at 2.7X, with plenty of liquidity, $819 million available on its credit revolver. Management has a strong history of capital discipline.
Management plans ~6% growth in volume for 2019, with 70 new wells being drilled in Williston, and ~10 new wells in Delaware. Free cash flow should range from $75 to $125 million in 2019.
Moody's Investors Service upgraded Oasis Petroleum Inc.'s Corporate Family Rating to B1 from B2, and its senior unsecured notes rating to B2 from B3 earlier in 2019.
The thing is, OMP's management reaffirmed its 20% distribution growth for 2019, 2020, and 2021 in its August Investor Presentation and on the Q2 '19 earnings call.
Here's what that distribution growth represents for an investor who buys OMP at this low price level.
At $16.47, OMP's projected full-year 2019 yield is 12.26%.
That's very attractive, but it gets better - with 20% distribution growth in 2020, that yield will reach 14.72%; and with 20% distribution growth in 2021, your yield would be 17.66%.
Another way to think about this is in terms of breakevens.
By the end of 2021, your breakeven will be $10.62. Even if OMP's distribution stays flat 2022 - 2025, you'd reach a zero breakeven in mid-2025.
OMP should go ex-dividend next in mid-November, ~8/15/19, with a pay date of ~11/29/19.
Distribution Coverage Also Keeps Growing:
Coverage continues to improve each quarter - it's now at a peer-leading 1.70X for the Q2 '19 payout, and...
...management expects coverage to further improve to 1.9X in Q3 '19, and to 2X for Q4 '19:
"As we look to the third quarter of 2019, we expect an improvement in coverage to about 1.8x to 1.9x. Additionally, we expect to exit the year even stronger with fourth quarter coverage of 1.9x to 2x." (Source: Q2 '19 earnings call)
OMP issues a K-1 at tax time to unitholders. It goes ex-dividend and pays its distributions in February, May, August, and November.
Market Sentiment - Looking at the 2019 performance of many midstream or energy-related companies, the market is worried about potentially lower demand affecting the profitability of midstream companies.
Lawsuit - Parent company OAS faces a $100M lawsuit from Mirada Energy, which claims that OAS, OPNA, and OMS violated agreements with Mirada. The trial has been re-scheduled for February 2020. To put this into perspective, OAS generated ~$959M in adjusted EBITDA in 2018 and has a market cap of $1.81B.
"The Company believes that Mirada’s claims are without merit, that the Company has complied with its obligations under the applicable agreements and that some of Mirada’s claims are grounded in agreements which do not apply to the Company.
The Company filed an answer denying all of Mirada’s claims and intends and continues to vigorously defend against Mirada’s claims." (Source: OAS Q1 '18 10Q)
At $16.47, OMP is ~17.65% below analysts' lowest price target of $20.00, and 32.61% below the average $26.44 price target.
OMP's trailing yield is higher than midstream high yield averages, and its coverage is also better.
Its price/distributable cash flow of 6.22X is one of the cheapest we've seen in the midstream space, and is much lower than the average 8.31. It also looks much cheaper on an EV/EBITDA basis.
Since OMP benefits from non-controlling interests in the Bobcat and Beartooth Devcos, it reports two types of EBITDA - one includes the EBITDA from these non-controlling interests, which was $212.87M over the past four quarters.
This gives OMP a very low net debt/EBITDA of 1.89X, vs. an average of ~4X for other midstream operators we cover. As listed in the following debt section, OMP's management uses the EBITDA which doesn't include the non-controlling interest amounts - this was $36M in Q2. Annualized that equals $144M, which still gives OMP a low 2.8X net debt/EBITDA leverage factor.
In addition to having much lower debt leverage, OMP's ROA, ROE, and operating margin are all substantially better than midstream averages.
As of June 30, 2019, OMP had cash outstanding of $6 million and $408 million drawn under its revolving credit facility. Debt to second quarter annualized EBITDA was about 2.8x. It will be driven down throughout the rest of the year, exiting around 2.5 times. The revolving credit facility remains at $475 million committed with the ability to further increase commitments to $675 million.
We rate OMP a long-term buy. It represents a very compelling distribution growth story, with strong coverage that will get even stronger, and a very low valuation for income investors willing to ride out the current negative market sentiment.
All tables by Hidden Dividend Stocks Plus, except where noted otherwise.
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This article was written by
Robert Hauver, MBA, was VP of Finance for an industry-leading corporation for 18 years, and publishes SA articles under the name DoubleDividendStocks. TipRanks rates DoubleDividendStocks in the Top 25 of all financial bloggers, and Seeking Alpha rates us in the Top 5 of several categories, including Dividend Ideas, Basic Materials, and Utilities.
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