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Why Units of Noble Midstream Partners Cratered 31.5% in February

By Matthew DiLallo - Mar 4, 2020 at 10:51AM

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Several factors weighed on the midstream MLP last month.

What happened

Units of MLP Noble Midstream Partners (NBLX) plunged 31.5% in February, according to data provided by S&P Global Market Intelligence. Several issues weighed on the midstream company, including its fourth-quarter results and lower oil prices.  

So what

Noble Midstream Partners reported its fourth-quarter results last month. It was a busy quarter for the MLP, one in which it closed a transaction with its parent Noble Energy (NBL) to acquire that company's remaining midstream assets as well as eliminate the costly management fees. The timing of the transaction weighed on the company's financial metrics: it covered its high-yielding distribution by only 1.1 times, and its leverage ratio rose to 4.2 times debt to EBITDA by year end. 

A bright red arrow going down.

Image source: Getty Images.

Those metrics, however, should improve as it benefits from owning the acquired assets for a full quarter as well as completes some of its expansion projects. In Noble Midstream's view, it will generate enough cash to cover its distribution by a more comfortable 1.2 to 1.4 times this year. Further, it sees leverage falling to a range of 3.3 to 3.7 times, which is much closer to its target level of 3.5 times. 

That outlook assumes Noble Midstream delivers earnings and cash flow within its guidance ranges. However, it has already reduced its 2020 guidance from its initial projections due to weaker oil and gas prices. That's a concern because commodity prices took a nasty tumble at the end of last month due to worries that the COVID-19 coronavirus outbreak would hurt demand for oil and gas. If consumption falls, it could force drillers to reduce their activity. That could result in lower volumes flowing through Noble Midstream's systems, cutting into its earnings.  

Now what

After last month's sell-off, Noble Midstream now yields an eye-popping 18%. A yield that high is a warning sign that the market doesn't believe the payout is sustainable for much longer. Given Noble's currently tight financial metrics, it might need to reduce its dividend if market conditions don't improve.

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