By: Dividend Sensei
I recently decided to concentrate my high-yield dividend growth retirement portfolio on my top 27 highest conviction buys (from 61 stocks). This means only investing in the best combination of:
- High (but secure) yield
- Fast long-term payout growth
- The most attractive valuation (average holding is 38% undervalued)
Let’s take a look at three reasons why Oasis Midstream Partners (OMP) not just made the cut, but is now my second largest holding (9% of my portfolio). That’s because this hidden gem is one of the best high-yield, hyper income growth stocks you can buy today. One that’s not just likely to generate generous, safe, and fast growing income, but market crushing returns over the next decade as well.
Oasis Midstream Partners: One Of America’s Newest, Least Known, But Fastest Growing MLPs
Oasis Midstream was launched in September 2017 by Oasis Petroleum (OAS) to support its fast (20% annual) oil & gas production in the Williston Basin of the Bakken shale formation of North Dakota.
Today the MLP owns full or partial stakes in three development companies, which themselves own various gas and oil gathering, compression, processing, and storage facilities. Oasis midstream also owns assets that provide the copious amounts of water (9.6 million gallons per well) needed to frack shale and begin the flow or oil & gas. Oasis Midstream’s cash flow is supported by 15 year fixed and volume committed contracts ensuring highly stable and commodity insensitive distributable cash flow or DCF. DCF is the MLP equivalent of free cash flow and what funds the distribution, a form of tax deferred dividend.
Oasis has three growth avenues. The first is rising volumes on assets it already owns as Oasis ramps up its production quickly. That’s courtesy of Oasis becoming much more efficient since the oil crash. Through the use of multiple wells per drill pad, longer laterals (how far it drills), and over 5,000 tons of frack sand per well (to prop open cracks in shale and improve flow), it’s managed to greatly reduce its break even prices for drilling.
For example, Oasis currently has 1,432 drill sites capable of generating 10% rates of return (per year) at oil prices of just $45 (oil is currently at $69). And at a price of $55 per barrel its average well produces annualized internal rates of return of between 50% and 96%. Basically at today’s prices Oasis is minting money and using its fast growing cash flow to ramp up production, all of which results in massive growth in OMP’s DCF (45% in the past year and accelerating).
Another growth avenue is expanding its existing assets, including $104 million in growth investment in 2018. That’s to add three third party oil & gas producers to its systems, also under very long-term, fixed rate and volume committed contracts. The midstream projects that Oasis builds usually have cash yields of 20% to 25%, which is among the most profitable in the midstream industry. Adding third party producers to its midstream systems not just helps diversify its cash flow, but further accelerate its DCF growth rate.
Finally, over time OMP plans to acquire the remaining stakes in the Bobcat and Beartooth development companies. In fact, the reason that Oasis set up these assets as it did was so that Oasis could buy more of them gradually over time, rather than all at once. Meanwhile, in 2017 Oasis Petroleum bought prime acreage in the Permian basin, America’s super shale formation which holds an estimated 75 billion barrels of recoverable oil. That means that Oasis Midstream will likely be able to replicate its 3 pronged growth strategy in the world’s hottest oil producing region and extend its growth runway for many more years.
When it IPOed in 2017 OMP was guiding for 20% distribution growth in 2018. After it secured the three third party contracts (adding other producers to its system) it extended that growth guidance through the end of 2019. And now management has extended its guidance even more thanks to the MLPs numerous growth catalysts including in the Permian basin. In its latest earnings release OMP’s CEO said:
“We believe our organic forecast supports our targeted distributions per unit growth of 20% annually past year-end 2021, which is an extended runway from prior guidance.”
This essentially means OMP investors are likely to see 20% payout growth for the next five years. While that sensational growth rate is impressive enough, what makes Oasis Midstream truly a must own MLP (for those that don’t mind a K1) is the overall payout profile. One that’s a near perfect combination of high-yield, fast growth and low risk distributions.