Noble Midstream (NASDAQ:NBLX) burst on to the scene a few years ago as the best-performing master limited partnership of 2017. But it's been all downhill since its excellent rookie season as a public company. Despite growing its distribution by a 20% annual rate since its initial public offering (IPO) in late 2016, the MLP's unit price has slumped 17% from its IPO price. It's even farther off its all-time high, and its yield has risen to an eye-popping 12.4%.

Given that the market isn't rewarding its growth, Noble Midstream has decided to shift gears. It recently completed a major transaction with its parent, oil and gas producer Noble Energy (NASDAQ:NBL), which will simplify their relationship and sharpen its focus. It will also have the company slowing its distribution growth rate. However, it hopes this new strategy will create more value for investors over the long term.

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Eliminating the overhang and resetting the strategy

Noble Midstream initially planned to increase its distribution to investors by 20% per year through at least 2022. It aimed to fuel that strategy by organically expanding the assets it had previously acquired from Noble Energy and third parties. In addition, it saw further upside potential by purchasing the rest of Noble Energy's midstream assets as well as from completing more third-party transactions.

Investors, however, never fully bought into the company's growth plan. They worried that Noble Midstream would need to stretch itself financially to achieve its goal, which weighed on its valuation. That led the company to pivot from that high-octane growth plan to a more moderate one, with it now targeting 10% annual increases.

As part of that transition, Noble Midstream has agreed to acquire Noble Energy's remaining midstream interests for $1.6 billion in cash and stock, giving it full control over all the infrastructure supporting its parent's U.S. onshore operations. That deal also eliminated the management fee that Noble Midstream paid its parent.

This transaction will do several things for Noble Midstream. Aside from increasing its scale and removing the management fee, the agreement will reduce its leverage and increase distribution coverage, which will create a self-funding entity. As a result, the transaction should wipe away the concerns that the company will need to issue new equity in the future to finance its growth.

Opening the door for new opportunities

On one hand, the deal will further align Noble Midstream with its parent. Noble Energy, for example, will increase its ownership in its MLP from 45% of its outstanding units up to 63%. Furthermore, it's acquiring several additional midstream assets that support the operations of Noble Energy. These include the remaining interests in the Green River, San Juan River, and Blanco River development companies that it didn't already own, as well as 100% stakes in the East Pony Gas complex and the Clayton Williams Pipeline.

However, by acquiring full control over these assets, it frees Noble Midstream up to pursue third-party opportunities on these systems. The company, for example, could expand the capacity of East Pony to serve other producers in the DJ Basin. Meanwhile, the strategic location of the Clayton Williams Pipeline in the Southern Delaware Basin should enable it to secure opportunities to connect newly drilled third-party wells to that system. By adding other customers to these assets, Noble Midstream will further reduce its reliance on Noble Energy to support its growth.

The company has done an excellent job leveraging its midstream footprint to support third-party growth in recent years. When Noble Midstream completed its IPO in 2016, Noble Energy was its only customer. Today, however, it has more than 30 customers on its systems. In addition, it has grown well beyond its initial focus of gathering and processing oil and gas by also investing in several long-haul pipelines, which provide a more predictable cash flow stream. Noble Midstream's diversification will probably continue as the company uses its increased scale to invest in new projects that support the needs of its growing customer roster.

High yield with less risk

Noble Midstream's strategy shift will enhance its financial profile. Because of that, there's an increased probability that the company will achieve its less ambitious distribution growth target since it's freeing up more of its cash flow to invest in expansion projects. That lower risk profile makes it a much more intriguing option for investors seeking a steadily growing income stream. 

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