The first initial public offering of a master limited partnership this year enjoyed a strong market debut, as Noble Midstreeam (NYSE: NBLX) priced at $22.50 per unit, above the early line of $20, then soared above $26 once trading began.

Sponsor Noble Energy (NYSE: NBL) pulled this offering late last year after failing to drum up sufficient investor interest at a projected yield of 6.3%. In an indication of the vastly improved sentiment following the MLP rally from the winter lows, NBLX was projected to initially yield 7.5% this time around, but yields 5.6% just a week later.

According to MLP data provider Alerian, there have been two spurts of MLP IPOs in the past 30 years. The first happened from 2004 to 2008, as the shale gas boom was picking up steam. Then oil and gas prices crashed in 2008, and IPOs dropped to zero in 2009. But then came a strong price recovery, along with an accelerating shale oil boom, and there was a second surge from 2010 to 2015:

Just as with the 2008 oil price crash, the drop in oil prices from mid-2014 had a chilling effect on the MLP IPO space. IPOs were down by more than half from 2014 to 2015, and it looked for a while as if 2016 might be a repeat of 1997 and 2009, when there were no MLP IPOs.

Noble Midstream’s IPO ended the shutout, raising $281 million from the sale of 12.5 million units.

Noble Midstream is a fundraising vehicle for Noble’s midstream infrastructure assets. The MLP currently provides crude oil, natural gas and water-related midstream services for Noble in the Denver-Julesburg, or DJ Basin, in Colorado, under long-term, fixed-fee contracts. Noble is one of the largest producers of liquids in the DJ Basin, where it pumped an average of 115,000 barrels of oil equivalent (Boe) per day of crude oil, condensate, natural gas and natural gas liquids (NGLs) in the first half of this year. Crude and NGLs accounted for 66% of the production volume.

Noble Midstream will also operate in the Delaware Basin within the Permian Basin in Texas. Noble entered the Delaware Basin in 2015 via its merger with Rosetta Resources. Noble has dedicated to Noble Midstream approximately 40,000 net acres in the Delaware Basin for crude oil and produced water services.

In addition to the agreements in the DJ and Permian Basins, Noble has granted NBLX an option to provide midstream services in the Eagle Ford Shale (approximately 31,000 net acres in Dimmit and Webb counties, Texas) and on all U.S. land acreage that Noble might acquire in the future, excluding the Marcellus.

Substantially all current cash flow comes from two locations in Weld County, Colorado — the Wells Ranch integrated development plan area (IDP), and the East Pony IDP. Core assets generate substantially all current cash flows, and include:

• Approximately 35 miles of liquids pipelines that carry crude oil and saltwater serving the Wells Ranch IDP
• Approximately 40 miles of natural gas gathering pipelines serving the Wells Ranch IDP
• Storage capacity for up to 96,000 barrels (bbls) of crude oil and 32,000 bbls of saltwater at the Wells Ranch centralized gathering facility
• Approximately 20 miles of fresh water pipelines serving the Wells Ranch IDP
• Approximately 25 miles of crude oil gathering pipelines servicing the East Pony IDP
• The Briggsdale and Platteville crude oil treating facilities
• A 3.33% ownership interest in the White Cliffs pipeline, which has a current capacity of approximately 215,000 bpd of crude oil and connects the DJ Basin to storage facilities in Cushing, Oklahoma

The SEC filing specifies a minimum quarterly distribution of $0.3750 per unit, which translates to an annualized 6.7% yield at the IPO price of $22.50 per unit. Pro forma distributable cash flow was $54.1 million in 2015 and is forecast at $54.9 million over the next 12 months. That would produce a coverage ratio of 1.15x based on the minimum quarterly distribution.  

Like most midstream MLPs, NBLX will soon owe incentive distribution rights (IDRs) to its sponsor. That will happen once quarterly distributions reached $0.4313 per unit, which is 15% above the quarterly minimum. The top tier is above $0.5625 per unit, at which point subsequent increases in distributions will increase the sponsor’s take via IDRs dollar-for-dollar.

NBLX is promising “top-tier” distribution growth, which these days can mean anything from 10% annually to the 30% increases for the fastest growing MLPs.

Overall, this IPO is a better deal than when it was first attempted in late 2015. The partnership has more assets and cash flow and IPO investors got a higher initial yield even after paying up for the units. But it’s not cheap or promising enough to warrant our recommendation at this point.    

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