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Why Noble Midstream Partners Could Be Top-Performing MLP in 2018

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Noble Midstream Partners

Noble Midstream Partners (NBLX), the MLP subsidiary of Noble Energy (NBL), was among the top MLP gainers in 2017. It has risen more than 41% over the past year. It also had a strong start to 2018. It has already risen ~8% in first four trading sessions. Overall, NBXL has risen ~105% since its IPO (initial public offering) in September 2016. The crude oil and natural gas gatherer leads on all major parameters, including valuation, leverage, and growth.

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Valuations

Noble Midstream Partners was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 8.6x as of January 5, 2018. That’s below the historical average of 10.0x. Its forward EV-to-EBITDA multiple is also below the peer median of 11.7x. However, its current distribution yield of 3.5% is slightly lower than the historical average of 3.6%.

Leverage

NBLX’s net debt-to-EBITDA multiple was 1.2x at the end of the third quarter of 2017. That is within the industry standards. MLPs generally target a leverage ratio between 4.0x and 4.5x.

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Earnings growth

Noble Midstream Partners is expected to post 28.3% YoY (year-over-year) EBITDA growth in 2018. Analysts expect it to grow its EBITDA by 42.2% CAGR (compound annual growth rate) during the 2018–2020 period. Strong EBITDA growth is expected to be driven by strong throughput volume growth from the DJ (Denver-Julesburg) and Delaware Basins, organic expansions, and dropdowns from its sponsor, Noble Energy.

Strong EBITDA growth is expected to translate to strong distribution growth. The partnership is expected to grow its distribution by 15% YoY in 2017 compared to the annualized distribution in the fourth quarter of 2016. It’s expected to grow its distribution by 20% CAGR during the 2018–2020 period. It’s also expected to maintain a strong distribution coverage despite its strong distribution coverage.

Analyst recommendations

Credit Suisse recently initiated coverage on NBLX with an “outperform” rating, which is equivalent to a “buy.” Now, 90.9% of analysts rate NBLX a “buy,” and the remaining 9.1% rate it a “hold.” NBLX’s average target price of $59.70 implies a ~13% upside potential from its current price levels.

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