Last month, Permian Basin-focused oil driller Diamondback Energy (FANG 0.88%) quietly completed the initial public offering (IPO) of its midstream subsidiary Rattler Midstream (RTLR). The company raised more than $750 million by selling a 29% stake in Rattler, making it the biggest energy-related IPO of the year.
Given the recent onslaught of IPOs, Rattler has quietly flown under the radar of both Wall Street and most investors, with its stock barely budging from the IPO price. However, what the company might lack in name recognition it certainly makes up for with its growth prospects. Here's a closer look at why investors will be keeping an eye on this recent energy IPO.
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Rattler Midstream 101
Diamondback Energy has been quietly building out midstream infrastructure in recent years to support its operations in the Permian Basin. The company constructed a network of pipelines and other assets to gather oil, natural gas, and water produced from its wells in the region. Rattler Midstream collects fees as those volumes flow through this infrastructure, backed by long-term contracts with Diamondback Energy.
In addition to that gathering infrastructure, Rattler Midstream owns stakes in two long-haul oil pipelines that are currently under construction. The company holds a 10% interest in the EPIC project, which will be able to transport 600,000 barrels of oil per day from the Permian Basin to Corpus Christi, Texas. The company also holds a 10% interest in the Gray Oak pipeline; this system will transport up to 900,000 barrels of oil per day from the Permian to Corpus Christi. Long-term, fee-based contracts back both projects, which will enable Rattler to collect a steady stream of cash flow when they come online later this year.
Dual high-octane growth engines
Rattler Midstream's gathering infrastructure is crucial to support the growth of Diamondback Energy. As Diamondback Energy drills more wells, this oil and gas will flow into Rattler's pipeline network. As a result, Rattler Midstream will collect more fees. During 2018, Rattler's earnings tripled thanks to Diamondback Energy's rapidly increasing volumes.
Meanwhile, its cash flow should continue growing at a rapid rate in 2019, given that Diamondback Energy expects its volumes to soar another 29%. That fast-growing cash flow will give the company the money to invest in expanding its infrastructure. Not only will Rattler be able to build additional gathering pipelines, but it could eventually invest in other midstream assets like natural gas processing plants and oil storage terminals.
In addition to the fast-paced growth of its gathering business, Rattler Midstream is about to experience a big uptick in cash flow from its investments in those two long-haul oil pipelines. Phillips 66 Partners, the developer of the Gray Oak pipeline, expects that project to be online by the end of this year. Once it enters service, the pipeline will provide an immediate burst of cash flow to the project's partners, given the Permian's desperate need for new oil pipeline capacity. Meanwhile, volumes flowing into the pipeline should increase in coming years as producers like Diamondback continue drilling new wells in the region, which will fuel healthy cash flow growth for the project's partners.
Likewise, Rattler will enjoy a meaningful uptick in cash flow when the EPIC oil pipeline starts up next January. In addition to that near-term boost, the developers of EPIC can increase its capacity up to 900,000 barrels per day by installing additional pumps and storage tanks. Given the growth potential of the Permian, it seems likely that EPIC will eventually reach that expanded capacity. As that happens, it will fuel another meaningful uptick in cash flow to Rattler and the project's other owners.
High-octane growth ahead
Rattler Midstream's earnings and cash flow will grow at a fast pace over the next few years. Not only will the company continue to benefit from additional oil and gas volumes as parent Diamondback Energy drills more wells, but its investments in two large-scale oil pipelines are also about to pay dividends. Those dual growth engines could give Rattler Midstream the fuel to produce market-crushing returns, making it an intriguing energy stock to watch.
