Rattler Midstream LP: Can Investors Count on This 13.9% Yield?
A High-Yield Stock You Might Not Have Considered
Many income investors prefer companies that have a long track record of paying dividends. The reason is simple: if a company has managed to pay dividends through thick and thin, it likely has some competitive advantage that can allow it to continue doing so in the future.
We’ve covered plenty of those companies here on Income Investors. Today, though, I’d like to talk about a very new stock, simply because its yield is just too attractive to pass up.
The stock in question is Rattler Midstream LP (NASDAQ:RTLR), a midstream operator headquartered in Midland, Texas. The partnership was created in July 2018 by Diamondback Energy Inc (NASDAQ:FANG) to own, operate, develop, and acquire midstream infrastructure assets in the Midland and Delaware Basins of the Permian Basin.
Rattler Midstream completed its initial public offering (IPO) in May 2019, so it’s a very new name to stock market investors.
But despite being around for just over a year, the partnership has already demonstrated its resilience in what has been the most difficult operating environment for a lot of energy businesses—the COVID-19 pandemic.
You see, when the partnership was formed, it had a quarterly cash distribution rate of $0.25 per unit. Its first payment of $0.34 per unit on November 22, 2019 included a third-quarter distribution of $0.25 per unit and a prorated distribution from its IPO through September 30, 2019.
Then, in February 2020, the board of directors of RTLR’s general partner gave the OK to increase the quarterly payout by 16% to $0.29 per unit. (Source: “Rattler Midstream LP, a Subsidiary of Diamondback Energy, Inc., Reports Fourth Quarter and Full Year 2019 Financial and Operating Results; Increases Distribution,” Rattler Midstream LP, February 18, 2020.)
Now, we know that the COVID-19 pandemic—and the resulting economic recession—have led to a major downturn in the energy industry. One of the consequences was that there were plenty of dividend cuts, even among the midstream operators.
But Rattler Midstream LP did not slash its payout. Last month, the partnership paid a cash distribution of $0.29 per unit—the same amount as it was paying before.
With RTLR stock trading at $8.37 per unit, that quarterly distribution rate translates to a staggering annual yield of 13.9%.
And, while commodity prices remain volatile, and there is still pandemic-related uncertainty ahead, the management of this high-yield stock seems to be committed to maintaining the payout.
In the second-quarter earnings release, the partnership reaffirmed its annualized distribution guidance of $1.16 per unit. (Source: “Rattler Midstream LP, a Subsidiary of Diamondback Energy, Inc., Reports Second Quarter 2020 Financial and Operating Results,” Rattler Midstream LP, August 5, 2020.)
“The Board intends to review this distribution policy each quarter, but with peer-leading leverage, significant liquidity, a core business that is expected to be free cash flow positive, a large CapEx cycle in the rearview mirror and differentiated visibility into Diamondback’s future activity, Rattler is well positioned to maintain its distribution with free cash flow generation,” said the partnership’s chief executive officer, Travis Stice, in the latest earnings conference call. (Source: “Rattler Midstream LP (RTLR) CEO Travis Stice on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 9, 2020.)
As Stice pointed out, one of the reasons why Rattler stock can maintain the distribution is the partnership’s relationship with its sponsor, Diamondback Energy Inc. In particular, Rattler provides crude oil, natural gas, and water-related midstream services to Diamondback.
Notably, the partnership’s commercial agreements with Diamondback are structured as 15-year, fixed-fee contracts. As a result, Rattler can limit its direct exposure to commodity price volatility and generate relatively predictable cash flows. (Source: “Investor Presentation August 2020,” Rattler Midstream LP, last accessed August 31, 2020.)
Bottom Line on Rattler Midstream LP
In today’s low-yield environment, Rattler stock’s 13.9% yield certainly stands out. Even though the partnership has yet to establish a long enough distribution track record, being able to sustain those oversized payouts in this challenging time is already an impressive feat.