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Why DCP Midstream Rocketed 26% in January

By Matthew DiLallo – Updated Apr 26, 2019 at 10:14AM

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Improved finances and analyst boosts helped drive up the midstream company’s value last month.

What happened

DCP Midstream (DCP 0.56%) bounced back big-time last month. After plummeting 20% in December, which pushed its 2018 loss to 25%, units of the master limited partnership (MLP) rebounded 26.6%, according to data provided by S&P Global Market Intelligence. While a bounce back in the oil market helped boost this midstream company in January, it wasn't the only catalyst driving DCP's rally.

So what

Crude oil ended its three-month slide last month and started clawing its way back. Overall, crude rose 18% for the month, which helped reverse some of the 40% plunge it endured to end 2018. The main catalyst was that oil storage levels -- which started ballooning during the fourth quarter -- began to decline as an OPEC-led supply cut took effect. That rebound in oil prices helped boost oil stocks, including DCP Midstream. The company has been under intense pressure; it has more exposure to this volatility than most MLPs because it earns a commodity-based margin on a larger percentage basis than most rivals (about 40% of earnings compared to the less than 15% comfort level of its peer group).

Check out the latest DCP Midstream earnings call transcript.

Red pipelines at an oil storage terminal.

Image source: Getty Images.

In addition to that boost from oil, DCP Midstream benefited from several other catalysts last month. For starters, it made two moves to shore up its finances. In mid-January, the company was able to issue $325 million in senior notes, which was more than the $150 million it hoped to raise. That gave it more cash to repay debt under its credit facility as well as to fund expansion projects. Meanwhile, at the end of the month, the company sold its wholesale propane business to NGL Energy Partners (NGL 0.78%). The deal boosted NGL Energy Partners' existing business while enabling DCP Midstream to streamline its assets and help fund its expansion program.

DCP Midstream also got a boost from analysts last month. Raymond James initiated coverage on the company with an outperform rating and a $36 price target (7.5% above the current level), while Barclays upgraded it from underweight to equal weight, though the bank did lower its price target from $41 to $33 (which is just below its price). However, the rally did cause Jefferies to change its stance near the end of the month, when it downgraded the company from buy to hold, citing its valuation following the big year-to-date gains.

Now what

DCP Midstream has much more exposure to changes in commodity prices due to its operating model, so the company will be more volatile than peers with less direct exposure. While the company is working to boost the stability of its earnings by investing in more fee-based projects, it's not up to the level of its peers just yet, which is why it's not an ideal option for income seekers even though it yields an eye-catching 9.3%.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

DCP Midstream, LP Stock Quote
DCP Midstream, LP
$37.57 (0.56%) $0.21
NGL Energy Partners LP Stock Quote
NGL Energy Partners LP
$1.30 (0.78%) $0.01

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