|Shares Out. (in M):||28||P/E||0||0|
|Market Cap (in $M):||468||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Oasis Midstream is a recent IPO that has been poorly received by the market. I believe this sets up an asymmetric risk/reward where I do not believe various levers available to management are being factored into the stock. Given management’s 10% stake in the IDRs, I believe they are incentivized to pull these levers to increase the distribution sooner rather than later. I believe the yield should compress to levels closer to peers as management establishes credibility in their ability to achieve their targeted 20% distribution growth in the first year (without M&A or dropdowns). A $1.80 distribution at a 7.2% yield would imply a price of $25 (+45% upside).
OMP priced their IPO at $17.00 per unit below the announced range of $19-21. The company has 13.75mm common units and 13.75mm subordinated units for a total of 27.5mm. The GP is non-economic with IDRs. Thus, the market cap is $17 * 27.5mm = $467.5mm. There is zero net debt.
The distribution will be $1.50 per year. Thus, the yield is 8.8% at $17.00.
The organization consists of 3 Devco subsidiaries of which OMP owns varying amounts. OMP owns 100% of Bighorn, 10% of Bobcat and 40% of Beartooth.
Per the S-1, forward twelve month EBITDA for all three entities consolidated is $156.4mm. Standalone costs will be $2.5mm so total OMP fully consolidated EBITDA is $154mm. Given OMP’s ownership in each of the 3 Devcos, the proportionate EBITDA is $55.5mm. The EV/EBITDA is 8.4x.
Maintenance Capex is $5.3mm. EBITDA-Maintenance Capex is $50.2mm. EV/this figure is 9.3x.
What are investors concerned about?
1. Parent company (OAS) counter-party strength
2. Wild Basin inventory depth- no MVC
3. Concerns about the water business’s leverage to completions
4. Investors generally have weak appetites for midstream MLPs currently
What is the quality of the assets?
$32mm of total company EBITDA (55%) comes from Bighorn. Bighorn is a gas processing plant that will be fully utilized by OAS, crude storage and blending, and a crude pipeline from Wild Basin to Johnson’s Corner (access point to DAPL). These assets are likely to be valuable even after Wild Basin production begins to decline.
Specifically, the gas processing plant will likely be used for surrounding areas natural gas production. The crude assets including the pipeline will be valuable to third-parties and will be used for OAS for nearby production.
$18mm of EBITDA (31%) comes from Beartooth. Interestingly, the company says that 85% of the water business is produced water and 15% is freshwater. Freshwater is primarily used for completions so is more sensitive to drilling pace. In actuality, this business will be driven by oil production outside of Wild Basin and thus is not susceptible to the Wild Basin drilling inventory concerns. There is minimal Capex required to connect incremental wells to the water distribution system already in place.
My biggest long-term concern pertains to Bobcat (14% of EBITDA). This Devco consists of crude gathering, natural gas gathering and water distribution all within Wild Basin. While this Devco is forecast to generate $79.3mm in EBITDA, OMP only owns 10% so it is only $8mm of EBITDA.
Wild Basin Volumes
Wild Basin volumes are expected to be 51k Boepd in the next 12 months. Wild Basin inventory is approximately 260 locations. OAS plans to drill 45 wells per year going forward. Based on type curves, production should be flat/slightly up through 2023 and then decline 30% in 2024, 20% in 2025 and less in the future. The company believes the terminal decline rate is 6%. The company believes they can backfill declining volumes with third-party business.
What do you think about OAS’s counter-party risk?
Clearly OAS is not as good of a GP as HESM has in HES. HES 2014 paper appears to trade with a 3.7% yield. OAS 2023 paper appears to be trading at 6.6%. That said, 6.6% is hardly a horrible yield. Simplistically, OAS has debt/EV of ~50% so the capital structure is not terrible.
OAS management claims they set the prices to the market rate and thus OAS is not paying OMP above market. They made some PF adjustments in the 2016 numbers to reflect these new lower rates which gives some comfort they are not completely above market on rates and thus potentially lowers the risk of a rejected contract in a bankruptcy.
What are levers to drive the stock higher?
1. Third-party business: There is no revenue from third-parties in the forecast. It is hard to quantify the potential upside. Besides the gas processing asset which will be fully utilized internally and some portions of the Wild Basin gathering assets, most assets have excess capacity that can be used to generate third-party revenue. Presumably this would have very high incremental margins.
2. Drop-downs: Given zero debt and an ability to borrow at low rates on their facility, acquisitions will be very accretive. The company gave no color on drop-down multiples, but if the company pays the OMP EBITDA multiple or less, the transactions can be very additive to the distribution.
3. Escalator: Starting in 2019 the rates go up by 2% per year.
4. Volumes: Wild Basin volumes will likely increase over the next few years.
CNNX trades at a 7.2% yield while AM and NBLX trade at yields of 4.0% and 3.5% respectively.
Do incentives align management?
In a slightly unusual structure, OAS management will own 10% of the GP which owns 100% of the IDRs. The 15% splits are from $.43125-.46875 per quarter, the 25% splits are $.46875-.56250 per quarter and the 50% splits are above $.56250.
The company expects 20% growth in the distribution growth over the first year. This takes the distribution from $1.50 to over $1.80. At the current price, this would imply a distribution yield of 10.6%.
A $1.80 distribution at a 7.2% yield would imply a price of $25.
CEO Taylor Reid bought 20,000 shares at $17.00 on the IPO. President Michael Lou bought 25,000 shares at $17.00 on the IPO.
1. Adding third-party business onto the systems
2. Distribution increases