5 Distribution Hikes in Less than 2 Years
For income investors, few things are better than a steadily growing stream of distributions. However, they are not always easy to find. Fortunately, there is one midstream partnership providing just that: Rice Midstream Partners LP (NYSE:RMP) stock.
Rice Midstream Partners is a fee-based, growth-oriented master limited partnership (MLP) created by Rice Energy Inc. (NYSE:RICE) to own, operate, develop, and acquire midstream assets in the Appalachian Basin. The partnership’s main client is Rice Energy, to which it provides midstream services under long-term, fixed-fee contracts.
Rice Midstream Partners’ initial assets consist of a 3.3 million dekatherms a day (MMDth/d) high-pressure dry gas gathering system and associated compression in Washington County, Pennsylvania, and a 840 thousand decatherms a day (MDth/d) high-pressure dry gas gathering system in Greene County, Pennsylvania.
Location, Location, Location
Location is important, and not just in real estate. When it comes to midstream service providers, the location of their assets can directly affect their performance. Fortunately, Rice Midstream Partners’ assets are well placed.
The partnership’s initial assets are located within highly concentrated acreage positions in the dry gas cores of the Marcellus Shale in Southwestern Pennsylvania. The location and capacity of the partnership’s initial assets should be able to accommodate further production growth of Rice Energy and third-party clients. This means Rice Midstream Partners can increase its throughput simply by connecting to additional wells, growing its business with minimal capital expenditures.
Solid Financials to Propel Distribution Growth
Rice Midstream Partners is a relatively new MLP on the market but is already impressing investors with enormous growth in its financials.
For the second quarter of 2016, the partnership reported average throughput of 934 MDth/d, representing a 43% increase year-over-year and a 12% increase from the first quarter of 2016. Operating revenue grew 63.0% year-over-year to $46.5 million, while net income more than doubled to $27.9 million. (Source: “Rice Midstream Partners Reports Second Quarter 2016 Financial and Operating Results and Provides 2016 Capital Budget and Guidance Update,” Rice Midstream Partners LP, August 3, 2016.)
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 127% year-over-year to $37.8 million. However, the number represented an 11% quarter-over-quarter decline due to anticipated reduced water volumes from fewer wells completed by the partnership’s customers.
Note that the stock market has noticed the partnership’s rapid growth. Year-to-date, RMP stock has surged more than 70% to $23.00 per unit.
Capital gains are always nice, but for income investors, there is another reason why RMP stock is special: distributions.
Since RMP is a partnership rather than a corporation, its quarterly payout are called “distributions” rather than “dividends”. In its relatively short history as a publicly traded partnership, RMP stock has raised its quarterly distribution rate five times.
The latest distribution hike came in July, when Rice Midstream Partners announced a cash distribution of $0.2235 per unit, representing a six-percent increase from its previous quarterly payout. (Source: “Rice Midstream Partners Increases Quarterly Distribution,” Rice Midstream Partners LP, July 22, 2016.)
Trading at $23.00 per unit, as previously noted, Rice Midstream Partners stock has an annual distribution yield of 3.96%. In the past a year and a half, RMP stock’s quarterly distribution rate has increased by nearly 20%.
If you are wondering whether RMP stock’s impressive distribution rate is sustainable, there is good news. In the second quarter, Rice Midstream Partners generated $34.0 million of distributable cash flow (DCF), which provided a DCF coverage ratio of 1.86x. This means the partnership has plenty of room for future payout hikes, even if business stays the same.
And business is likely going to improve further, as Rice Midstream Partners updated its guidance in August. Full-year adjusted EBITDA is expected to be $120 million, with 25% coming from third-party clients. The company is expected to generate $100 million in distributable cash flow, which would provide 1.5 times coverage of its projected 20% distribution growth.
The Bottom Line on RMP Stock
Rice Midstream Partners is a rare find in today’s stock market. It has strategically located midstream asset, and has great stability in its business due to long-term, fixed-fee contracts. If you want to invest in today’s energy sector, RMP stock is worth taking a serious look at.