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Why Units of DCP Midstream Partners Skyrocketed 134% in April

By Matthew DiLallo - May 11, 2020 at 9:06AM

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The MLP bounced back big-time.

What happened

It would be an understatement to say that units of DCP Midstream (DCP 3.90%) have been volatile this year. The MLP nose-dived a stunning 73.9% in March and then followed that up with an epic 133.9% rally in April, according to data provided by S&P Global Market Intelligence. Fueling that wild ride were huge swings in energy prices, which forced the energy company to make several changes so that it could navigate the industry's current challenges.  

So what

DCP Midstream made several significant adjustments to its 2020 spending plan as commodity prices cratered in March. The two biggest ones were a 75% reduction in its capital spending plan and a 50% cut to its high-yielding distribution. These moves will allow the company to retain an additional $775 million in cash this year, which would help reduce leverage and strengthen its balance sheet. 

A person in a suit with an outstreched hand that has a bright light and upward chart coming out of it.

Image source: Getty Images.

The MLP made several more cuts in April to improve its financial situation even further. These included reducing its workforce and executive pay as well as some maintenance-related spending. That boosted its year-to-date retained cash rate to $900 million, which will take some additional pressure off its financial profile. 

Despite those moves, analysts at UBS downgraded DCP Midstream to sell last month on the view that it might need to cut its distribution again. The market seems to agree with that sentiment given that DCP Midstream still yields nearly 20% even after its 50% reduction and epic rally in April. 

Now what

DCP Midstream provided investors with another update in early May when it reported its first-quarter results. While it delivered "a very strong first quarter," according to CEO Wouter van Kempen, it's "prepared for the remainder of the year to be challenging for our industry." On a positive note, conditions have started improving over the past few weeks, which helped fuel last month's rebound. However, the oil market remains oversupplied, which could keep commodity prices down and the pressure on DCP Midstream's financial profile. Because of that, it's still too risky for yield-seeking investors.

Matthew DiLallo 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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DCP Midstream, LP Stock Quote
DCP Midstream, LP
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