What happened
Though DCP Midstream LP (DCP) made several strategic moves last month that arguably will help the company over the long term, its stock price still declined 11%. The impetus for the decline was recent news about the global oil markets more than anything else.
So what
If you didn't know the stock price change already, you would probably predict that DCP Midstream's corporate decisions last month would have led to a higher stock price. It released its first quarterly report as a single corporate entity on May 10, after having acquired all of the assets of its general partner, and retiring its incentive distribution rights. The results were decent, and seemed to suggest that consolidating assets into a single entity had been the right move, even if it will take a while for the business to realize those benefits fully.
Image source: Getty Images.
Two moves that really should be getting more attention are the decisions to sell several of its gathering assets in Wyoming, and to expand the capacity of its Sand Hills natural gas liquids (NGL) pipeline.
Gathering pipeline systems are much more valuable to a midstream operator when they are also connected to long-haul pipelines and processing units. Those Wyoming systems were standalone assets with little connection to the rest of DCP's business. So it makes sense for the company to sell them off and reinvest the proceeds in its Sand Hills long-haul pipeline. This expansion will add 85,000 barrels per day of additional takeaway capacity from the red-hot Permian Basin region to the NGL demand hub that is the U.S. Gulf Coast.
Despite these smart moves, shares of DCP Midstream got dragged down by the larger oil market news that OPEC was going to extend its current production cuts through March 2018 to push prices higher, but that increasing shale oil output in the U.S. is driving crude prices back down again. It doesn't help DCP's case that it struggled through the previous downturn -- so much so that the co-owners of its general partner -- Philips 66 and (now) Enbridge -- had to inject cash and assets into the business.
Now what
DCP Midstream's management is making the right moves, even if the company's stock price doesn't necessarily reflect that. There are still concerns for any investor looking at this stock as a potential long-term portfolio holding, among them a revenue structure that is too exposed to commodity prices and a distribution coverage ratio that leaves something to be desired. If management continues to make moves like the ones it made last month, though, DCP Midstream -- and its 9.3% distribution -- might be worth revisiting.
