Oasis Midstream Partners LP: Pick up a 13% Yielder on the Cheap?
This Double-Digit Yield Deserves a Look
Picking up a beaten-down, ultra-high-yielding stock can sound like a dangerous move for a conservative income investor. But in the case of Oasis Midstream Partners LP (NYSE:OMP), it just might be worth the risk.
Oasis Midstream Partners LP is a master limited partnership (MLP) headquartered in Houston, Texas. It was created by Oasis Petroleum Inc. (NYSE:OAS) to own, operate, develop, and acquire midstream assets in North America. In particular, OMP’s assets are not only integral to the oil and natural gas operations of Oasis Petroleum, but are also strategically positioned to capture volumes from other producers.
If you take a look at Oasis Midstream Partners LP’s stock chart, you’ll see that this midstream MLP hasn’t exactly been an investor favorite lately. Over the past six months, OMP stock is down more than 20%.
Oasis Midstream Partners LP Stock Chart
Chart courtesy of StockCharts.com
And since there is an inverse relationship between a company’s dividend yield and share price, the downturn in OMP stock has boosted its appeal to income-seeking investors. Trading at $15.06 per unit, Oasis Midstream stock offers an annual distribution yield of 13%.
Like I said, this is a beaten-down stock with a yield in the double-digits, which doesn’t exactly scream the world “safety.” But here’s the thing: while a falling stock price has put upward pressure to this midstream MLP’s yield, another reason why its yield has gone up is the partnership’s continuing effort to grow the payout.
Returning Cash to Investors
You see, Oasis Midstream Partners LP completed its initial public offering in September 2017. Since then, management has raised the partnership’s cash distribution every single quarter. (Source: “Oasis Midstream Partners LP Dividend Date & History,” Oasis Midstream Partners LP, last accessed August 23, 2019.)
The latest distribution hike came on August 6, when the Board of Directors of OMP’s general partner declared a quarterly cash distribution of $0.49 per unit. The amount represented a 19.5% increase year-over-year and a 4.3% increase sequentially. The new cash distribution was paid on August 28, 2019 to unitholders of record as of August 16.
Judging by the MLP’s lackluster stock price performance lately, you might be wondering whether the partnership can afford that sizable payout increase.
To answer that question, let’s take a look at OMP’s financials.
Maintaining a Safe Payout
Oasis Midstream Partners LP reported second-quarter 2019 financial results on August 6. It showed that during the quarter, the partnership generated $28.8 million in distributable cash flow while declaring $17.1 million in cash distributions. That resulted in a distribution coverage ratio of 1.7 times. (Source: “Oasis Midstream Partners LP Announces Quarter Ended June 30, 2019 Earnings,” Oasis Midstream Partners LP, August 6, 2019.)
In the first half of this year, Oasis Midstream Partners LP generated $55.0 million in distributable cash flow. Its actual cash distributions to unitholders, on the other hand, totaled $33.2 million for this period. Therefore, the partnership achieved a distribution coverage ratio of 1.7 times in the first six months of 2019.
What this means is that despite OMP stock’s jaw-dropping yield and consecutive quarterly distribution increases, the partnership actually manages to generate around 70% more cash than what was needed to cover its payout. In the world of high-yield MLPs, that is considered a very, very wide margin of safety.
Is the Best Yet to Come?
And that’s not all. According to the latest investor presentation, Oasis Midstream Partners LP is targeting organic distribution per unit growth of 20% per year beyond 2021. Note that the partnership assumes no drop-down acquisitions to deliver that distribution per unit growth rate. (Source: “August 2019 Investor Presentation,” Oasis Midstream Partners LP, last accessed August 23, 2019.)
At the same time, OMP expects to achieve higher distribution coverage in 2019 on top of delivering 20% growth in annual cash distribution per unit.
“Our coverage outlook for the second half of 2019 remains unchanged,” said Chief Executive Officer Taylor Reid. “We remain in a compelling position to simultaneously grow our distribution as well as our coverage.” (Source: “Oasis Midstream Partners LP (OMP) CEO Taylor Reid on Q2 2019 Results – Earnings Call Transcript,” Seeking Alpha, August 7, 2019.)
The Bottom Line on Oasis Midstream Partners LP
And there you have it. In this day and age, most people would be content to earn a safe yield of 13%. But with OMP stock, investors get a chance to collect a growing 13% yield with improving distribution safety.