Voters in Colorado rejected Proposition 112, which was a measure that would have severely limited where oil companies in the state could drill new wells. If passed, it would have effectively banned drilling on 85% of nonfederal land in the state, which the industry believed could have caused Colorado's production -- the fifth highest in the country -- to tumble 50% in three to five years. However, with voters rejecting the proposition, drillers in Colorado can continue developing new wells on privately owned land under the current set of rules.
That defeat not only sent oil stocks with operations in Colorado soaring, but it fueled big gains in midstream companies focused on the state since they'll be able to build new pipelines and processing plants to support continued production growth in the region. Among the biggest gainers were Western Gas Partners (NYSE: WES), Noble Midstream Partners (NYSE: NBLX), and DCP Midstream (NYSE: DCP), which all soared double digits after the vote. Even with their big rallies, though, these midstream stocks still offer investors high-yielding dividends between 5.3% and 8.3%, making them enticing options for income seekers, especially since the voting results put their payouts on much more sustainable footing.
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The green light to keep building
DCP Midstream has been rapidly expanding its footprint in Colorado's DJ Basin in recent years to support the growth of producers in the region. The company recently finished construction of its Mewbourn 3 natural gas processing plant, which helped alleviate some of the region's infrastructure constraints, providing producers like HighPoint Resources with a big boost during the third quarter. Meanwhile, the company also has the O'Connor 2 facility under construction, which it expects to finish early next year.
However, DCP Midstream had been holding off on making additional investments in the region, including the final investment decision on its Bighorn facility, until it knew the outcome of Proposition 112. With voters rejecting that measure, the company will likely give Bighorn the green light.
Meanwhile, Western Gas Partners and Noble Midstream Partners both have significant footprints in the DJ Basin that they expect to expand in the coming years due to the growth prospects of producers on their systems. In the case of Western Gas Partners, the company's main customer is on pace to increase its production from around 250,000 barrels of oil equivalent per day (BOE/D) up to 400,000 BOE/D by 2021, which will require it to build new infrastructure in the region to support that output. Noble Midstream, likewise, has big plans to continue expanding its midstream footprint in the state. That growth is a crucial part of the company's plan to grow its distribution at a 20% compound annual growth rate through 2022.
Image source: Getty Images.
These deals now look like smart moves
Despite the uncertain outcome of Proposition 112, midstream companies have spent heavily on acquisitions to bolster their footprints in the region in the last year so that they could grow at a faster pace if that ballot measure failed. Those deals now look like they'll pay big dividends.
Noble Midstream made a bold move at the end of last year by partnering with privately held Greenfield Midstream to acquire Saddle Butte Rockies Midstream, which they've since renamed Black Diamond. The partners paid $625 million for Black Diamond, which has the rights to gather oil from producers in the DJ Basin. That deal has already paid big dividends, as volumes gathered have already surged 29% since that acquisition closed. Those volumes should continue growing since oil companies can keep drilling in the state without any additional restrictions.
Meanwhile, Williams Companies (NYSE: WMB) recently made a big splash in the DJ Basin after partnering with private-equity giant KKR to buy DJ Discovery Services, which is a natural gas gathering and processing company in the southern part of the Basin. Williams, which will initially own 40% of the company, has pledged to invest $250 million in expanding Discovery's gas processing business through 2020, which will bring its stake up to 50%. In addition to that near-term growth, Williams believes that the acquisition of Discovery could open additional expansion opportunities, which it's now more likely to capture.
High yield and high growth that are still cheap
With voters rejecting Proposition 112, oil companies in Colorado will be able to continue drilling in the state, which should allow them to grow production in the coming years. Because of that, midstream companies focused on the region will need to build new pipelines and processing plants to support that production. As they do, it'll boost their cash flow, which will give them more money to sustain and likely grow their high-yielding dividends in the coming years.
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