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Why Units of DCP Midstream Rallied 40% in May

By Matthew DiLallo – Jun 3, 2020 at 1:54PM

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The MLP benefited from some optimism last month.

What happened

Units of MLP DCP Midstream (DCP -1.15%) surged 40.1% in May, according to data provided by S&P Global Market Intelligence. Fueling the rally were its first-quarter results and an improvement in the oil market.

So what

DCP Midstream reported surprisingly strong first-quarter results last month. While its earnings and cash flow dipped by about 2%, that was a solid showing considering all the volatility in the oil market. The company benefited from recently completed expansion projects and excellent NGL marketing results.

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Image source: Getty Images.

Unfortunately, DCP Midstream doesn't anticipate a repeat performance for the rest of the year. The market turbulence forced it to slash its distribution by 50%, cut growth capital spending by 75%, and reduce other costs. Those actions will help bolster its liquidity and strengthen its balance sheet, putting it in a stronger position to navigate through this downturn.

Meanwhile, on a more positive note, oil market conditions started improving in May when states reopened their economies as the COVID-19 outbreak started waning. That boosted oil prices and demand, which should benefit DCP Midstream's business in the second half of the year.

Now what

While market conditions are improving, investors still have some concerns about DCP Midstream's distribution. That's why it yields more than 13% even after its big-time rally. Because of the risk that the company might need to cut its payout again, it's not an ideal option for income-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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$37.86 (-1.15%) $0.44

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