The energy sector of the economy and stock markets is divided into three groups. The upstream energy companies are the producers of oil, natural gas and natural gas liquids (NGLs).
The financial results in the upstream swing dramatically with changing prices for the energy commodities. Downstream are the refining companies, utilities, and retail businesses. The downstream profits vary with both commodity price swings and the prices they can get for their end-user products. You know how much the price of a gallon of gasoline can swing.
In the middle are energy midstream companies. These are the businesses that own the gathering networks, pipelines, storage facilities and terminals needed to move energy commodities between the upstream producers and the downstream users.
Unlike the other two parts of the energy sector, midstream companies operate with fee-based revenue streams on mostly long term contracts. The revenue and profits of upstream and downstream energy companies can swing high to low to high even on a quarterly basis.
Most midstream companies have stable, predictable revenue and good visibility on future growth. A midstream company will pre-sell the capacity on a new pipeline, for example, so when the pipeline is built, in comes the revenue and profit growth.
The stable revenue and free cash flow businesses of energy midstream companies make them attractive for income-focused investors. Most midstream companies focus on paying steady dividends to investors.
Many are organized as master limited partnerships (MLPs), which allow the companies to pass through the tax advantages of owning capital intensive assets.
Over the last few years, the midstream segment has been the scene of significant financial restructuring. The companies have strengthened their balance sheets and improved free cash flow coverage of the dividends/distributions paid to investors.
These changes have not been reflected in share prices and there is a lot of deep value in the group. One way to start investing is to buy those companies which continue to grow dividends at attractive growth rates.
Most of the midstream sector has announced dividends to be paid in August. Most of the companies below increase payouts every quarter.
Noble Midstream Partners LP (NBLX) is an MLP that provides crude oil, natural gas, and water-related midstream services for Noble Energy, Inc. (NBL) through long-term, fixed-fee contracts.
NBLX was spun-off by Noble Energy with a September 2016 IPO. The initial contracts between NBL and NBLX have 15-year terms. This MLP has a stable and growing revenue stream.
The latest distribution announcement included a 4.7% increase over the first-quarter rate. The NBLX distribution has increased by 20% over the last year.
Current yield is 8.3%.
Oasis Midstream Partners LP (OMP) is a two-and-a-half-year-old midstream MLP sponsored by Oasis Petroleum (OAS). The midstream company currently operates exclusively in the Bakken, supporting Oasis Petroleum.
Oasis Midstream plans to acquire assets in other energy plays and to diversify the companies it services.
For the second quarter, OMP increased its distribution by 4.4% over the first quarter rate. Year-over-year the distribution is up 20%.
The shares currently yield 8.7%.
Delek Logistics Partners LP (DKL) provides midstream services to refining company Delek U.S. Holdings Inc. (DK). The MLP gathers crude oil and transports it to Delek’s refineries in Texas and Arkansas.
DKL also provides pipeline and storage services for the refiner’s refined products. DKL has increased its distribution every quarter since its IPO bringing it currently to a total of 26 consecutive increases. The latest increase was 3.7% higher than in the first quarter distribution.
DKL currently yields 10.2%.