What happened

Shares Antero Midstream (AM 0.57%) declined by 13.5% in February, according to data provided by S&P Global Market Intelligence. Among the factors weighing on the midstream company was its outlook for 2020 and the continued weakness in the oil and gas markets.  

So what

Antero Midstream reported its fourth-quarter results last month. The number that stood out was the $159 million of distributable cash flow it produced during the quarter. Not only was that total down 5% year over year, but it also only covered its dividend by a tight 1.1 times. Because of that, it wasn't able to retain much money to fund capital expenses, which totaled $126 million during that quarter. As a result, its leverage rose to 3.5 times debt-to-EBITDA

Red arrows slamming into pavement.

Image source: Getty Images.

Antero also provided investors with its outlook for 2020. It expects to generate between $625 million and $675 million of distributable cash flow, which would only be enough money to cover its current payout by a tight 1.1 times. As such, it won't retain very much cash to finance capital spending, which it sees in the range of $300 million to $325 million. Given that outlook, its leverage ratio will continue rising. 

Delivering on its cash flow guidance might be challenging, given the weakening oil and gas market and financial profile of Antero's main customer Antero Resources (AR 1.11%). If market conditions continue deteriorating, Antero Resources might need to reduce its capital budget to conserve cash. That would impact the volume of natural gas gathered and processed by Antero Midstream, cutting into its cash flow. 

Now what

After slumping again last month, Antero Midstream's dividend now yields an eye-popping 30%. That sky-high yield is a clear sign that the market doesn't believe the payout is sustainable much longer. Antero Midstream's financial metrics agree with that assessment since it has a tight coverage ratio and rising leverage, which would only get worse if Antero Resources reduces its drilling activities. As such, it seems like only a matter of time before the company slashes its payout so that it can redirect that cash toward funding capital expenses and paying down debt.