This Little-Known High-Yield Stock Just Became a Whole Lot More Attractive

Earlier this year, I highlighted Oasis Midstream Partners (NYSE: OMP) as an intriguing company that income investors should put on their watchlist. On the plus side, the MLP offered an attractive and well-supported payout that it expected to grow at a high rate for the next few years. However, it was a riskier option since its sole source of income is oil-producing parent Oasis Petroleum (NYSE: OAS). Because of that, I thought the company needed to diversify a bit more to become an attractive option for income seekers.

Oasis Midstream did just that this week, announcing a string of expansion projects that will make it less reliant on Oasis Petroleum to drive growth. Because of that, it’s a much more compelling option for income-seeking investors to consider.

Image source: Getty Images.

Drilling down into the deals

Oasis Midstream recently signed multiple third-party agreements with producers in the Bakken Shale to grow all of its service product lines. These long-term, fixed-fee contracts will support the company’s investments to build new oil gathering and transportation assets, natural gas gathering and processing facilities, produced water gathering and disposal projects, and freshwater distribution systems.

Oasis Midstream will invest an incremental $18 million to $28.5 million in capital across its three midstream development companies this year to support these new contracts, bringing its total investment to between $100.5 million to $108 million. The additional spending will boost earnings by an incremental 14% in 2019.

That faster-growing cash flow stream enhances Oasis’ ability to increase its distribution to investors at a 20% rate in 2018 and 2019. At that pace, the company expects to distribute $2.02 per unit in cash to investors next year, which implies an 11% yield at the current price (up from 8.6% at the moment). Further, Oasis Midstream expects to cover that much higher payout with cash flow by a very comfortable 1.5 times for 2019, up from 1.11 times in the first quarter of this year and the 1.3 times it initially anticipated for next year. That higher level of coverage not only provides Oasis Midstream with more excess cash to fund expansion projects, but it should enable the company to continue increasing its payout at a 20% annual pace for the next few years.

Image source: Getty Images.

This would push it over the top

Securing third-party growth in the Bakken is an important next step for Oasis Midstream Partners because its fate is no longer solely in the hands of one company. However, it’s still focused exclusively on one region (the Bakken), which makes it riskier than its more diversified midstream peers. Because of that, Oasis Midstream isn’t as attractive as it would be if it diversified into another basin.

That could happen sooner rather than later considering that Oasis Petroleum bought land in the fast-growing Permian Basin last year. The company noted that there are ample midstream growth opportunities to support its expansion in the region, including building oil, gas, and water-gathering assets. While Oasis Petroleum could contract this work out to a third-party midstream provider, it would have more control if Oasis Midstream set up shop in the Permian. Not only that, but it would provide its MLP with a foothold in an area that’s undergoing an infrastructure building boom, which could open the door for it to secure more third-party contracts.

The growth opportunities could be significant. Large-scale midstream companies Targa Resources (NYSE: TRGP) and Plains All American Pipelines (NYSE: PAA) currently have billions of dollars of Permian growth projects under way that will significantly increase their cash flow in the coming years. Targa Resources recently secured contracts supporting $500 million of gas gathering and processing investments in the region, which boosted its total backlog of Permian projects to $2.4 billion, or 75% of its total planned spending over the next two years. Those expansions position it to nearly double its earnings by 2021. Plains All American Pipelines, meanwhile, is investing more than 80% of its roughly $2 billion capital budget on the Permian over the next two years, and it could end up spending even more money to meet the demand for oil gathering capacity. Those expansions help position it to grow cash flow at a double-digit annual pace over the next two years. Given Oasis Midstream’s much smaller size, it has the potential to capture needle-moving growth by expanding into the Permian.

It’s getting more intriguing by the day

With an 8.6% current yield, and 20% annual growth on the docket through at least the end of next year, Oasis Midstream Partners is an option that income-seeking investors won’t want to overlook. Especially now that the company has secured contracts with third-party producers in the Bakken, which makes it less risky while enhancing its growth prospects. Meanwhile, it could further improve its appeal by following its parent into the Permian, which could set it up for even faster-paced growth in the years to come. That upside potential makes it a tantalizing option for investors to consider.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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