Top Picks 2016: Archrock, Inc.

01/27/2016 7:00 am EST

Focus: MLPS

Tim Plaehn

Investment Research Analyst, Investors Alley

Our Top Pick for aggressive investors in 2016 is a new pure-play publicly traded MLP general partner, with the potential to produce a nice 25% or greater total return over the next year, explains Tim Plaehn, editor of The Dividend Hunter.

Archrock, Inc. (AROC) is the new name of the company formed as the result of a business split by Exterran Holdings. In November, the company divided into Exterran Corp. (EXTN)—which kept the international business operations—and Archrock Corporation, with the US based business assets.

Those assets consist primarily of the general partner interests of Archrock Partners LP (APLP), formerly called Exterran Partners LP (EXLP).

Archrock Partners is now a pure-play contract compression services provider to natural gas drilling companies. Compression services are required by natural gas producers to move natural gas from the wellhead to the end users.

In spite of (or more likely because of) low energy prices, natural gas demand is forecast to grow by 23% between now and 2020.

The MLP—Archrock Partners—has generated strong growth, with EBITDA compounding at 26% annually since 2011. Of current significance, 2015 EBITDA guidance is up 13.6% compared to 2014, even with the current low energy prices.

Continued growth at the partnership can be fueled by organic growth with existing clients and operational efficiencies, acquisitions, and drop downs of the assets held at the GP level.

As the general partner, AROC's cash flow growth is fueled by a combination of distribution increases from APLP and the equity issuance by APLP to fund growth projects.

General partner incentive distribution rights payments grow at a multiple of the LP distribution growth. AROC claims its GP payments have a six times multiplier of the LP distribution growth rate.

So even with very low distribution growth from APLP, AROC can generate an attractive level of cash flow growth. Now as a standalone GP company, Archrock, Inc. is shooting for 15% annual dividend growth through 2017.

The company has already indicated a 25% dividend increase in February as the new baseline dividend rate. The reported 5.6% yield will jump to 7% after the upcoming dividend rate.

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