By: Dividend Sensei
My high-yield income growth retirement portfolio is focused on three core strategies:
- Maximum safe yield
- Very fast long-term payout growth
- Highly undervalued stocks (high margin of safety)
Every week I put my savings to work into the best long-term investing opportunities I can find. Let’s take a look at why this week I increased my position by almost 400% in Noble Midstream Partners (NBLX), a high-yielding, hyper growth MLP. Specifically, find out why I expect this fast growing energy stock to be one of the best income investments of the coming decade, and likely capable of over 30% annualized returns over the next five years.
Noble Midstream Partners: One Of The Best High-Yield Hyper Growth Stocks You Can Own
Noble Midstream Partners was set up by Noble Energy to own and operate the various midstream infrastructure needed to support that oil company’s fast growth in the Denver-Julesburg Basin of Colorado and the Delaware Basin, part of the red hot Permian shale formation in West Texas. These assets include oil & gas gathering, processing, transportation and storage systems (think pipelines). Noble Midstream also owns water infrastructure necessary to supply the average of 6 million gallons of water per fracked well.
Noble Midstream is 46% owned by Noble Energy, who is the sponsor and owner of its incentive distribution rights or IDRS. The way it works is that NBLX raises external debt and equity capital from investors to build and buy midstream assets from Noble Energy. These come with 15 year fixed-fee contracts that deliver stable distributable cash flow or DCF which has low sensitivity to volatile gas & oil prices. DCF is the MLP equivalent of free cash flow and what funds the distribution. Because it owns so much of NBLX, as well as the IDR rights, Noble Energy gets most of the fast growing cash flow that NBLX generates returned to it. All while still being able to raise funds to invest in its own ambitious growth efforts (21% long-term EPS growth according to analyst consensus). Meanwhile NBLX investors benefit from one of the safest and fastest growing yields in the midstream MLP industry.
NBLX has three long-term growth strategies. The first is organic growth, meaning it invests ($278 million in 2018) to build out its existing assets. Since its 2017 IPO the MLP has invested about $670 million via this approach, and has earned impressive 15% returns on invested capital (industry average about 10%). A second growth strategy is drop downs from its sponsor, NBL. Noble Energy’s midstream assets are structured in what’s called “development companies” or devCos. This means that NBLX is able to buy them in small pieces, owing to its small size and limited capital raising abilities. As it buys larger stakes in these projects its contracted cash flow grows at a very quick pace (42% in 2018 per management guidance).
Finally, there’s third party acquisitions, including joint ventures with other midstream MLPs and oil & gas companies. In the last two years NBLX has been targeting one drop down per year (the plan going forward) and has made two major joint ventures. In total it’s invested $1.3 billion into growing its stable cash flow. That’s allowed it to raise its payout at a 20% annual rate, in the form of 4.6% quarterly increases.
Going forward NBLX plans to continue this three pronged growth strategy, with a short-term focus on NBL’s large Colorado operations. But over the medium-term it has big plans to grow its Permian midstream assets. That’s because the Permian, which analyst firm McKinsey estimates has 75 billion barrels of remaining recoverable oil, is expected to double its production over the next five years (over 6 million barrels per day). Noble Energy plans to play a big part in that and NBLX estimates that by 2020 50% of its cash flow (and the majority of its growth) will be coming from the Permian basin.
To fund its growth NBLX has secured a new $500 million term loan, priced at 3.3% (variable LIBOR +1%), that is repayable at any time. This boosts its total liquidity to $780 million, sufficient for funding two years of rapid growth all on its own. More importantly NBLX is pursuing what’s called a self funding business model. That means that rather than raise growth capital via equity issuances (selling new units) it’s funding 50% of this year’s growth and 90% of long-term growth with retained cash flow. The remainder will be funded with modest amounts of low cost debt.
As a result NBLX management estimates that it will be able to continue 20% annual distribution growth through at least 2022. And that’s purely based on organic growth potential. Steady drop downs and third party acquisitions and joint ventures will likely extend that growth horizon for several more years.
As importantly, NBLX plans to maintain one of the most conservative balance sheets in the industry. By the end of 2018 it expects its debt/EBITDA or leverage ratio (used by credit rating agencies and lenders to determine the safety of its balance sheet) to be 2.8. For context the average MLP leverage ratio is 4.4 and credit rating agencies consider 5.0 or less to be safe.
But because 90% of its growth funding will come from retained cash flow (the MLP is paying out 50% of DCF as payouts and investing the rest into growth), the leverage ratio is expected to fall steadily over time. By 2022 NBLX expects its debt/EBITDA ratio to be under 2.0, which will earn it one of the strongest credit ratings in the industry. That will ensure continued access to low cost borrowing power even should interest rates rise sharply. The bottom line is that NBLX is one of the fastest growing MLPs in America. Its toll booth like business model, supported by long-term (15 year) fixed fee contracts ensures highly stable cash flow to support a generous, very fast growing, and safe distribution.
This creates a payout profile that’s likely to make NBLX one of the best performing income investments of the next five years and likely far beyond.