Altus Midstream (NASDAQ:ALTM) has spent the past year quietly building a large-scale midstream business to support the flow of oil and gas out of the Permian Basin. The energy company has been constructing pipelines and processing plants to gather oil and gas from newly drilled wells in the Alpine High portion of the Permian. It has also participated in funding the construction of several long-haul pipelines that will ship oil, natural gas, and natural gas liquids (NGLs) out of that region to market centers along the Gulf Coast.
Those investments have the company on track to generate high-octane earnings growth over the next two years. Add that upside to the fact that the company's stock has tumbled this year, and shares could skyrocket in 2020 as its expansion-related investments begin paying dividends.
Stomping on the gas
Altus Midstream currently expects to produce between $70 million and $85 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year, along with $40 million to $60 million in distributable cash flow. On the one hand, that's down from its initial view that it would produce between $120 million and $140 million of adjusted EBITDA this year. That's because the company's main customer, oil and gas producer Apache (NASDAQ:APA), cut its spending in the Alpine High, which will result in fewer volume flowing through Altus' gathering and processing systems this year.
However, earnings are on track to skyrocket in 2020. In the company's view, its adjusted EBITDA will rise to between $200 million and $250 million next year, an eye-popping 190% increase at the midpoint. Meanwhile, its cash flow will surge to a range of $110 million to $140 million, a 150% jump at the midpoint.
Fueling that growth will be the startup of several major pipeline projects. The company currently has the option to invest in five pipeline development joint ventures, four of which it has already exercised. Three of those systems have started service in recent months and are in the process of ramping up.
Altus' biggest investment is in the Shin Oak NGL pipeline, developed by Enterprise Products Partners (NYSE:EPD). It owns a 33% interest in that project, which will cost about $1.5 billion to develop. The pipeline started service in June with an initial capacity of 250,000 barrels per day. However, Enterprise Products Partners is on track to expand it to its full capacity of 550,000 barrels per day by the end of the year.
Altus also owns a 16% interest in Kinder Morgan's Gulf Coast Express Pipeline. Kinder Morgan brought that $1.75 billion natural gas pipeline online at the end of September.
Finally, the company has a 15% interest in the $2.1 billion EPIC crude oil pipeline. In addition to those projects, the company could get an additional boost if it exercises its option to purchase a 50% interest in the Salt Creek NGL pipeline. The company has until January to decide whether to invest in the $100-million pipeline, which entered service earlier this year.
Even more growth ahead in 2021
Altus Midstream's fast-paced growth should continue in 2021 as it benefits from the ramp-up of those pipelines, as well as the expected completion of Kinder Morgan's Permian Highway Pipeline. Altus owns a 27% interest in that $2.1 billion project, which should start up in early 2021.
As things currently stand, the company estimates that it could generate between $275 million and $325 million in adjusted EBITDA in 2021, implying a 97% compound annual growth rate (CAGR) from 2019's level. Cash flow, meanwhile, could be between $185 million and $215 million, indicating a roughly 100% CAGR during those two years.
That surging cash flow will come at a time when the company's investment spending is on track to decline sharply. After investing roughly $1.6 billion to expand its gathering and processing business and those pipeline joint ventures, the company's spending will fall to about $350 million next year, mostly for its investment in Permian Highway.
Meanwhile, spending is on track to decline even further, to a range of $15 million to $45 million in 2021 as it makes some incremental investments to expand its gathering and processing business to support Apache's operations. As a result, Altus Midstream is on track to generate a significant amount of free cash in 2021, which will give it the funds to pay a dividend -- that it could initiate as soon as next year -- as well as potentially repurchase stock.
Enticing growth potential ahead
Altus Midstream is on track to more than double its earnings and cash flow in the coming year. That sets investors up for a potentially big payday, given that shares have tumbled this year.
With the stock currently selling for roughly 10 times cash flow -- about average for a midstream stock -- shares could rebound by more than 100% in the coming year. That makes Altus Midstream a high-octane stock that growth-focused investors won't want to miss.