What happened
Units of DCP Midstream (DCP +0.00%) plummeted in December, falling 22.3% for the month, according to data provided by S&P Global Market Intelligence. While the midstream company had lots of good news last month, a slump in oil prices more than offset those positives.
Check out the latest DCP Midstream earnings call transcript.
So what
DCP Midstream started the month off on the right foot by unveiling a new expansion project. It is working with fellow midstream company SemGroup (SEMG +0.00%) to develop the Gladiator Pipeline, which would move oil from SemGroup's storage hub in Oklahoma to markets along the Gulf Coast. The project would enable DCP Midstream to leverage part of its existing Southern Hills pipeline while boosting its fee-based earnings. If the companies secure enough shippers to move forward with the project, it could be in service and generating cash flow by the end of next year.
Image source: Getty Images.
Another positive for DCP Midstream last month was that an analyst at Jefferies upgraded the company, along with several peers, from hold to a buy. The analyst believes that DCP Midstream and these peers are trading at a meaningful discount to their valuation average over the past couple of years even though they have stronger balance sheets and should benefit from rising oil and gas production in the U.S.
A sell-off in the oil market, however, more than offset those positive catalysts. Overall, crude slumped 9% for the month, coming down 19% for the year and 40% below its peak in early October due to fears that slowing demand and too much supply will cause oil storage levels to balloon. This slump in crude prices hit DCP Midstream harder than most midstream stocks because it has greater exposure to oil. The company makes nearly 40% of its money by earning a commodity margin -- which is the difference between where it buys oil and gas and sells higher-valued products -- as opposed to generating fee-based income. As a result, lower oil prices will compress the margin it makes by providing these services.
Now what
DCP Midstream has been working hard to reduce its direct exposure to commodity prices by building more fee-based pipelines. Investors should see if the company and SemGroup move forward with Gladiator, as that will help reduce cash flow volatility. However, until it builds more of these projects, the company will remain a riskier option for income-seeking investors.
