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IPO Preview: Noble Midstream Partners

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Current market conditions would suggest that an IPO of a Master Limited Partnership with a single customer might be a difficult deal to close, but lead managers Barclays, JP Morgan and Baird are planning to bring the $250MM offering of Noble Midstream Partners to market on Friday with a midpoint distribution yield of 6.25%.  The company expects 20% of the distributions to be subject to Federal tax through 2018 and projects a narrow 1.15x Distribution Coverage ratio for 2016, generating $8.6MM of excess cash, while borrowing $42MM to fund growth capital expenditures.   The 2016 Pro Forma projects $33.6MM of EBITDA, implying a 20x multiple on the $720MM market cap.   The General Partner will receive Incentive Distribution payments which will increase to 50% once the company reaches a quarterly distribution rate of $0.46875, a 48% increase over the initial $0.3125.  

 

 

ASSETS

 

The below table outlines the initial Colorado DJ Basin assets which are backed by dedicated Noble  acreage agreements through 2030.  Even though these are fixed fee agreements, as highlighted in the second table, the company discloses that there are no minimum volume commitments associated these with these agreements.  Such exposure presents risks to investors that a significant reduction in production will impact the ability of the company to maintain their distributions.  In 2014, Investment Grade Sponsor Noble Energy operated 9 rigs in the DJ Basin, and currently only 3 rigs are operating.  However, this Basin is Nobles lowest cost region which also offers the longest lateral lengths and has been increasing production as indicated in the DJ Performance chart below

 


 

FIXED FEE, DEDICATED ACREAGE AGREEMENTS, BUT NO MINIMUM VOLUME COMMITMENT

 

 

 

 

 

GROWTH

 

Noble Midstream Partners expects to offer a "high distribution growth profile" by way of organic volume growth and Right Of First Offer (ROFO) asset drops for which Noble Energy has JV non controlling interests.  Such drops will be financing by a combination of debt and equity issuance.  As of late, the MLP equity window for secondary issuance has been virtually closed, leading to private unit transactions to fund growth.  

 

 

 

 

MARKET COMPS

 

Below are a few comparative units to Noble Midstream Partners, most of which have reported considerably higher distribution coverage over the past twelve months, which reduces the distribution growth risk as a result of lower EBITDA volumes.

 

 

 

 

CONCLUSION

 

While MLP IPO's often allow investors to realize strong distribution growth prior to reaching high split IDR overhead, the uncertainty of lower capital expenditures and production in 2017 and beyond is a risk that is not fully compensated in the midpoint yield in our view.  Syndicate buyers are likely going to sell their small allocations to a secondary market with few interested buyers given the depressed prices for high quality units with more significant  and diversified drop down EBITDA inventories.

 

 

 

 

 

MLPData will update Q3 Distributable Cash Flows, Coverage Ratios, Unit Metrics and Guidance shortly after the earning call.  Quick Look summaries for select units can be  accessed Here

 

 

Premium Subscribers can access Weekly Fund Flows Here

 

Premium Subscribers can access Risk Metrics Here

 

Premium Subscribers can Monitor Portfolio Income Here

 

Premium Subscribers can access Guidance and Forecast Changes Here

 

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All Data is collected and provided by MLPData LLC

 

All Data is collected and provided by MLPData LLC

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