What happened
Units of master limited partnership DCP Midstream (DCP) tumbled 25.9% in February, according to data provided by S&P Global Market Intelligence. Weighing on the midstream company were concerns about how much effect last month's crash in crude prices will have on its ability to deliver on its 2020 outlook.
So what
DCP Midstream reported its fourth-quarter results and unveiled its 2020 outlook last month. The master limited partnership (MLP) posted decent numbers as its adjusted EBITDA rose 10% for the year while its distributable cash flow increased by 11%. Because of that, the company generated enough cash to cover its high-yielding distribution by 1.23 times.
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The MLP expects those numbers to improve this year. At the midpoint of its outlook, it sees cash flow rising by about 2%, which should enable it to produce enough money to cover its payout by 1.3 times.
But the company used $60-a-barrel oil as the benchmark for its budget. While oil entered the year around that level, crude prices tumbled 13% last month due to concerns that the COVID-19 coronavirus outbreak would hurt demand for oil. Because of that, DCP Midstream's earnings could come in below expectations since it has greater exposure to commodity price volatility than most other MLPs. If its earnings fall short, then it might need to cut its dividend and allocate that cash toward financing expansion projects so that it doesn't weaken its balance sheet by taking on too much more debt.
Now what
With DCP Midstream's unit price tumbling more than 25% last month, its distribution yield has risen to an eye-popping 21%. That sky-high payout is a clear sign that the market doesn't believe it's sustainable much longer. Unless oil prices bounce back soon, and DCP Midstream delivers on its asset sale goal, it might have no choice but to slash its payout so that it can prevent its financial profile from deteriorating much further.
