In August, oil and gas giant Apache (NYSE: APA) announced the formation of Altus Midstream (NASDAQ: ALTM) to build out the infrastructure it requires to support the growth of its Alpine High discovery in the Permian Basin. Apache completed the transaction that created Altus Midstream in mid-November, and currently owns 79% of that company. The bold expansion plans it has for that entity make it a stock that growth-focused investors should put on their watch lists.
Gathering a windfall of growth
Apache initially seeded Altus Midstream with the assets it had built to support the development of Alpine High. These included more than 125 miles of gathering pipelines that move liquids-rich natural gas from Apache's wells to plants that currently process 380 million cubic feet of natural gas per day, separating natural gas liquids (NGLs) from the raw gas. The company also operates pipelines to move the gas from the processing complex to longer-haul pipelines. Altus Midstream earns fees as it gathers and processes this gas on Apache's behalf.
To support Apache's expected growth in the region, Altus plans on boosting its processing capacity by 1 billion cubic feet per day, as well as building 75 miles of gathering pipelines and another connection to a market pipeline by the end of 2020. These expansion projects position Altus to increase earnings from its gathering and processing business at an 81% compound annual growth rate (CAGR) from 2019 to 2021.
Options for higher-octane growth
In addition to building out a gathering and processing business from scratch, Apache also secured options to buy stakes in five long-haul pipelines that are currently under development, which it handed over to Altus. These include:
- At least a 15% interest in Kinder Morgan's Gulf Coast Express natural gas pipeline.
- As much as a 33% stake in Kinder Morgan's Permian Highway Pipeline, which also transports natural gas.
- A 33% interest in Enterprise Products Partners' Shin Oak NGL pipeline.
- 50% of the Salt Creek NGL pipeline.
- A 15% stake in the EPIC crude oil pipeline.
Altus expects to invest $1.5 billion to $1.8 billion in exercising its options on these pipelines as they come online over the next two years. Kinder Morgan's Gulf Coast Express, for example, should begin operations next October, while its Permian Highway Pipeline is due to start up by late 2020. Meanwhile, Enterprise Products Partners expects to have Shin Oak active by the second quarter of next year. Finally, the Salt Creek NGL pipeline should be operational by the first quarter of 2019, while the EPIC crude system should be in service at the end of next year.
Altus Midstream currently expects that its earnings from these long-haul pipelines should expand at a 149% CAGR from 2019 to 2021. Overall, management expects a CAGR of 106% from next year through 2021 when it anticipates that it will produce between $500 million to $600 million in annualized EBITDA.
Offers it might not be able to refuse
Those dual growth engines have Altus Midstream set up for a bright future. However, the company has several additional avenues to expand, thanks to its strategic relationship with Apache. For example, it has the right of first offer to build and buy water systems to support Apache's Alpine High development, as well as to buy any new long-haul pipelines or Gulf Coast assets Apache acquires, and to develop a crude oil gathering system for its parent in the Alpine High region.
In addition, Altus could also branch out to do business with other producers by expanding its gathering and processing business beyond the boundaries of Alpine High. Further, it could make third-party acquisitions or pursue organic growth projects in other parts of the Permian Basin.
Big-time growth coming down the pipeline
Apache set Altus Midstream up for high-octane growth by seeding it with a rapidly expanding gathering and processing business, as well as the options to buy stakes in several long-haul pipelines. Those two factors have the company on track to expand earnings at a more than 100% compound annual growth rate over the next few years, with additional upside if it provides further support to Apache or moves beyond its current focus area to capture third-party opportunities. That potential makes this a growth stock that investors will want to at least put on their watchlists.
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Matthew DiLallo owns shares of Enterprise Products Partners and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.