A dividend yield above 10% is usually a sign of trouble. The market will push yields to such heights when it's concerned about the payout's long-term sustainability.
That warning sign is flashing brightly for several energy stocks. Three that seem to be most at risk for a dividend cut in the near term are Oasis Midstream Partners (OMP), Antero Midstream (AM 0.25%), and Shell Midstream Partners (SHLX). Here's why income investors should avoid their sky-high yields right now.
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A problematic parent
Oasis Midstream Partners currently yields an eye-popping 24%. One reason it has risen to such heights is that its primary customer is financially strapped oil producer Oasis Petroleum (OAS). That company's banks recently slashed its available credit from $1.3 billion to $600 million, which left it with little liquidity since it had already borrowed $522 million on that facility. Now there's an increased risk that Oasis Petroleum could file for bankruptcy. If that happens, the courts could alter its midstream contracts, affecting Oasis Midstream's cash flow.
Oasis Midstream also has some liquidity concerns. Having borrowed $488 million on its $575 million credit facility, and given its ties to Oasis, this company seems destined to reduce its cash distribution, which would provide it with a bit more financial flexibility.
A razor-thin margin of error
Antero Midstream also currently yields a jaw-dropping 24%. Likewise, its yield has risen to that level because of its substantial ties to a financially strapped producer -- in this case, Antero Resources (AR 1.93%). That company has been working hard to shore up its balance sheet so it can stay afloat.
Another concern with Antero Midstream is its weak financial metrics. The pipeline company only generated enough cash to cover its dividend by a tight 1.1 times during the first quarter. It's not retaining enough money to fund capital expenses, forcing it to cover the difference with more debt. At its current spending rate, it doesn't expect to be cash flow breakeven until 2022. Given all these issues, the company seems likely to reduce its payout so that it can fund capital projects and start chipping away at its debt.
Its parent already made the move
Shell Midstream Partners currently yields more than 15%. One reason for the elevated payout level is its relationship with oil giant Royal Dutch Shell (RDS.A) (RDS.B). The once dividend stalwart shocked investors by slashing its payout earlier this year. That move increased the probability that its pipeline affiliate might follow its lead.
Adding fuel to the fire of those concerns is Shell Midstream's current financial situation. The company generated $170 million in cash during the first quarter and paid out $162 million to support its high-yielding dividend, resulting in a tight 1.0 coverage ratio. The company expects that number to dip below 1.0 in the second quarter because of all the turmoil in the oil industry, which will probably force it to borrow money to make up the difference. That's not a sustainable practice, suggesting the payout is at high risk of a reduction.
Don't get burned by these high-yielding stocks
These energy-fueled dividends are running on fumes. All three companies have worrisome financial metrics, putting their payouts at risk of a reduction that they could announce as soon as this month. Income-seeking investors should steer clear of these stocks.
