Noble Midstream Partners (NBLX) has been expanding its midstream network at a blistering pace over the past couple of years. The master limited partnership (MLP) has completed several acquisitions and organic growth projects, which helped boost earnings 43% last year. That gave the company the fuel to increase its distribution to investors by 20% so that it now yields an attractive 6.6%.
More growth is on the way. Not only does the company have an extensive backlog of organic expansion opportunities, but it also recently secured three additional growth-focused investments, including a 30% stake in the EPIC oil pipeline that's under construction. The only potential problem is access to the funding for all these projects even as it aims to continue growing its payout at a fast pace while maintaining a strong financial profile. But that is now less of a concern after Noble Midstream secured a significant portion of the funding needed for its stake in the EPIC pipeline.
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Thinking outside the box
In the past, MLPs like Noble Midstream would typically sell additional common units (MLPs have units instead of shares) to help fund growth projects. However, investors have grown tired of the constant dilution, which is forcing these entities to change their funding strategies. Most are opting to retain more cash by reducing the distributions to investors or slowing the growth rate of that payout.
Noble Midstream, on the other hand, is going in a different direction. The company recently secured a $200 million preferred equity commitment from private equity fund Global Infrastructure Partners. It will receive the first $100 million this quarter and can access the other $100 million over the next year. In exchange, it will pay a fixed dividend rate of 6.5%, making it cheaper than issuing more units, especially given that the company expects to increase its distribution 20% annually over the next several years.
This financing arrangement will enable Noble Midstream to fund a significant portion of the estimated $300 million to $350 million it needs to contribute toward the EPIC oil pipeline. The company recently made a $104 million catch-up payment upon closing the acquisition and will pay its proportional share of the construction costs over the next several months. As things stand, the pipeline should start interim service by the third quarter of this year and be complete by next January.
Check out the latest earnings call transcript for Noble Midstream Partners.
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All fueled up and ready to grow
Noble Midstream has undergone an impressive transformation since its initial public offering in late 2016. At that time, the company had one customer, parent Noble Energy, and focused primarily on gathering the water, natural gas, and oil produced from newly drilled wells in the DJ and Delaware Basins. The MLP has gone on to significantly diversify its customer roster -- it has about 30 on its systems this year -- as well as its operations.
Noble Midstream, for example, expanded into in-basin transportation services by joining forces with Plains All American Pipeline to acquire the Advantage Pipeline system in 2017. The company recently expanded those capabilities by forming the Delaware Crossing joint venture with Salt Creek Midstream. And it further diversified by agreeing to invest in the EPIC oil and EPIC natural gas liquids (NGLs) long-haul pipelines. As a result, the company can now offer customers a "wellhead to water" system that can move oil and NGLs from newly drilled wells in the Delaware Basin toward export facilities along Texas' Gulf Coast.
These investments should provide Noble Midstream with the fuel to grow earnings at a fast pace over the next several years. The company estimates that it can support 20% annual distribution growth through at least 2022. And it can achieve that top-tier growth and maintain strong financial metrics. While the company sees its distribution coverage ratio declining from between 1.5 and 1.7 times this year to around 1.3 times in the future, it expects leverage to improve from 4 to 4.25 times in 2019 to below 3 times by 2022. Both would be comfortable levels for an MLP.
Well-positioned for high-octane total returns
By creatively securing funding for a portion of its investment in the EPIC oil pipeline, Noble Midstream can finance this expansion project without diluting existing investors, hurting its balance sheet, or slowing distribution growth. Because of that, investors should have increasing confidence in the company's ability to deliver on its ambitious distribution growth plan. That outlook has the company on track to potentially generate significant total returns over the next several years.
