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Why Golar LNG Partners Stock Just Cratered 53%

By Rich Smith - Apr 2, 2020 at 11:02AM

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Golar's dividend cut sparks analyst downgrades.

What happened

Units (i.e. shares) of Golar LNG Partners (GMLP) hit an iceberg today, falling 53.3% as of 11:30 a.m. EDT after the Bermuda-based liquefied natural gas tanker operator announced it will reduce its quarterly common unit distribution (a partnership's version of the dividends more commonly paid by stocks) by 95%.

Adding to investor pain, this morning, one analyst downgraded Golar LNG stock, and a second cut its price target on the units -- even as a third analyst demurred, reports

Glowing red stock chart arrow trending down

Image source: Getty Images.

So what

Golar cited "the recent Covid-19 induced deterioration in the macro-economic environment" as its reason for reducing its quarterly common unit distribution from $0.404 per unit to just $0.020 this quarter. By reducing its payout of profits, Golar says it will be able to "retain approximately $109 million of cash flow annually, allowing the Partnership to focus its capital allocation on debt reduction, thus strengthening its balance sheet while providing enhanced financial flexibility to consider capital allocation priorities over time." 

The company is also asking its bond holders to postpone the date for maturation of its senior unsecured bonds maturing in May 2020 by one year, to May 2021.  

Now what

While these are perhaps prudent financial moves, investors reacted with displeasure to the announcement that their payout will be cut. It didn't help either that Evercore ISI analysts downgraded Golar units to "in line" in response to the news, nor that B. Riley FBR analysts cut their price target on the units to $4.

On the other hand, investment bank Stifel argues this is good news, and that while investors probably can't count on a lot of payouts from Golar for the next few years, the conservation of cash will help Golar to quickly pay off its debt and emerge stronger from this crisis than it went into it.

In Stifel's estimation, therefore, Golar units are a buy, worth $6 -- four times what the units currently cost.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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