Oasis Midstream Partners LP: 3 Reasons to Like This 9.7% Yielder
This High-Yield Stock Could Be Special
In today’s market, there are plenty of high-yield energy stocks to choose from. One of the reasons is that investors are aware of the risks associated with the energy sector, especially after seeing what happened as a result of the COVID-19 outbreak last year. To put it simply, not everyone is willing to buy energy stocks.
To give you an idea, even after the recent stock market rally, the S&P 500 Energy index is below where it was at the beginning of 2020. (Source: “S&P 500 Energy,” S&P Global, last accessed May 13, 2021.)
And since there’s an inverse relationship between dividend yield and stock price, the lack of investor enthusiasm means many energy names are still offering very attractive yields.
So at first glance, Oasis Midstream Partners LP (NASDAQ:OMP) looks just like any other high-yield energy stock. Headquartered in Houston, TX, Oasis Midstream is a master limited partnership (MLP) that currently offers a staggering annual distribution yield of 9.7%.
But before you deem it a risky play and move on to the next ticker, here are three reasons why OMP stock deserves a look from income investors.
Reason #1: Durable Business Model
The first reason has to do with the nature of Oasis Midstream’s business. The company was created by Oasis Petroleum Inc. (NASDAQ:OAS) to own, operate, develop, and acquire a diverse portfolio of midstream assets that are integral to the crude oil and natural gas operations of Oasis Petroleum Inc. but are also strategically positioned to capture volumes from other producers.
The MLP’s current operations are performed within the Bakken and Permian Basins, two of the most prolific crude oil-producing basins in North America.
Of course, given the sizable swings that we often see in crude oil and natural gas prices, even midstream operators aren’t immune to volatility. But here’s the thing: Oasis Midstream earns most of its revenues through 15-year, fixed-fee contracts with Oasis Petroleum. The partnership also has fixed-fee agreements with third-party customers. As a result, it can generate rather predictable cash flows. (Source: “Responsibly Transporting Our Natural Resources: May 2021,” Oasis Midstream Partners LP, last accessed May 13, 2021.)
To see how durable the business is, all you need to do is look at the cash that Oasis Midstream stock has been paying to investors. And that brings us to the second reason.
Reason #2: Rising Payouts
The second reason has to do with the company’s dividends. When OMP stock completed its initial public offering (IPO) in September 2017, it had a quarterly distribution rate of $0.375 per unit. Given where the stock was trading at the time, that quarterly rate already made Oasis Midstream stock one of the higher-yielding names in the market.
But there’s more. After its IPO, Oasis Midstream raised its per-unit payout every quarter, to $0.54 per share at the beginning of 2020. (Source: “OMP Dividend History,” Oasis Midstream Partners LP, last accessed May 13, 2021.)
Due to the impact of the COVID-19 pandemic, quite a few energy companies—including midstream operators—reduced their dividends last year. But Oasis Midstream was not one of them. The partnership maintained its quarterly cash distribution at $0.54 per unit throughout 2020.
Then, on May 3, 2021, the board of directors of Oasis Midstream’s general partner declared a quarterly cash distribution of $0.55 per unit, representing a 1.9% increase from the previous payout. (Source: “Oasis Midstream Partners LP Announces First Quarter 2021 Results, Increases Distribution and Updates 2021 Outlook,” Oasis Midstream Partners LP, May 3, 2021.)
In other words, this MLP has paid either steady or increasing distributions since it went public.
Reason #3: Strong Financials
The third reason why OMP stock stands out is the company’s financials.
As mentioned earlier, the COVID-19 pandemic resulted in a very challenging operating environment for the energy sector last year. But Oasis Midstream still handsomely outearned its distributions.
In 2020, the partnership generated $128.0 million in distributable cash flow while declaring $77.1 million in total cash distributions to its partners, achieving a distribution coverage ratio of approximately 1.7 times. (Source: “Oasis Midstream Partners LP Announces Year Ended December 31, 2020 Earnings and Declares Fourth Quarter Distribution of $0.54/unit,” Oasis Midstream Partners LP, February 24, 2021.)
According to its latest earnings report, Oasis Midstream generated $33.0 million in distributable cash flow in the first quarter of 2021. Considering that the MLP declared total distributions of $26.7 million for the quarter, it had a distribution coverage ratio of 1.2 times. On a pro forma basis (regarding the partnership’s simplification transaction), its distribution coverage would have been 1.7 times. (Source: Oasis Midstream Partners LP, May 3, op. cit.)
While uncertainty remains a theme for the energy sector, the management team of this MLP did provide a new guidance. Among other things, they expect Oasis Midstream to achieve a distribution coverage ratio of roughly 1.3 times in the second quarter of 2021.
To sum everything up, Oasis Midstream stock is yielding close to the double-digit mark. The company has a solid track record of paying steady or increasing distributions, and the payouts are backed by a durable business and solid financials.
Among the high-yield stocks in today’s market, OMP is a ticker that stands out.