Please ensure Javascript is enabled for purposes of website accessibility

Why Units of DCP Midstream Plunged More Than 25% in February

By Matthew DiLallo - Updated Mar 3, 2020 at 1:56PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Several factors weighed on the master limited partnership last month.

What happened

Units of master limited partnership DCP Midstream (DCP -4.92%) 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.  

A siluette of oil pumps with globes in back ground with the word oil price written at the top.

Image source: Getty Images.

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.   

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

DCP Midstream, LP Stock Quote
DCP Midstream, LP
DCP
$28.24 (-4.92%) $-1.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.