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Dividend Investors Should Keep an Eye on This Ultra-High-Yield Stock

By Matthew DiLallo - Jul 18, 2019 at 9:03PM

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This midstream company's turnaround plan is starting to pay dividends.

NGL Energy Partners ( NGL -3.85% ), like most master limited partnerships (MLPs), struggled following the oil price crash of 2014. Units of the MLP plunged more than 75% from their peak at one point because the slump further weakened its already tenuous financial profile.

The midstream company, however, has worked hard to turn things around over the past few years. Those efforts are starting to pay off as evidenced by the more-than-50% rebound in the MLP's unit price this year. Even though the company still has work to do, it's worth watching, if only for its distribution, which yields more than 10%.

The word dividends with a hand drawing an upward sloping-line.

Image source: Getty Images.

NGL Energy Partners 101

NGL Energy Partners operates a diversified midstream business. While the company's name suggests it primarily focuses on natural gas liquids (NGLs), those activities supply only about 10% to 15% of its annual earnings. Instead, the company gets more than half of its earnings from providing water solutions to oil and gas producers. These activities include gathering water produced from wells and treating it for disposal or recycling. Another 30% to 35% of its earnings comes from crude oil logistics activities, such as operating oil pipelines and storage terminals. The final 5% to 10% of its profits comes from refined products and renewables.

Many of these activities provide the company with stable and predictable cash flow backed by long-term, fee-based contracts. The company has set a target to get 70% of its revenue from these steady sources. The rest comes from activities that are more sensitive to commodity prices. That split makes it a bit more exposed to volatility than most other MLPs, which like to get at least 85% of their revenue from stable sources.

Making progress on the turnaround

NGL Energy Partners' outsize exposure to commodity prices put pressure on its earnings and cash flow when oil prices plunged. That caused the company's leverage ratio to rise from its targeted level of around 3.25 times debt to EBITDA up to 4.7 times in 2017. Meanwhile, its distribution coverage ratio fell from around 1.1 to 0.8 last year, meaning it paid out more than 100% of its cash to investors. Those issues caused the MLP's unit price to plunge.

However, NGL Energy Partners has spent the past few years working to bolster its financial position. Last year the company sold several assets, including its retail propane business for $900 million and some noncore water assets for $238.8 million. These sales helped push the company's leverage ratio down to a much more comfortable 2.9 this year.

That gave NGL Energy increased financial flexibility, which it has used to start growing again. Earlier this year the company acquired a wholesale propane business, and it recently bought a water pipeline and disposal system for $890 million. The company is also investing in several high-return expansion projects in both its crude oil and water segments. These growth-related initiatives have NGL Energy Partners on track to increase its earnings from $440 million in fiscal 2019 to between $565 million and $650 million in fiscal 2020, or up 38% at the midpoint. That uptick in earnings should allow the company to keep its leverage at its targeted level. It will also help boost its distribution coverage, currently tight at 1, closer to its target of 1.3.

A high-upside high-yield stock

NGL Energy Partners has done an excellent job of improving its financial profile and growth prospects over the past year. Because of that, the company's gaudy 10.3%-yielding distribution is looking more sustainable than it once was. However, to further bolster its financial profile, it needs to show results from its expansion efforts. If that happens, then its unit price could continue soaring. That upside potential, when combined with the big-time payout, makes NGL Energy Partners an interesting energy stock to watch.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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