Please ensure Javascript is enabled for purposes of website accessibility

Why Units of DCP Midstream Are Surging Today

By Matthew DiLallo – Aug 6, 2020 at 11:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The MLP navigated the oil market downturn much better than expected.

What happened

Units of DCP Midstream (DCP -0.10%) are rising today, up nearly 15% as of 10:30 a.m. EDT, after the MLP reported better-than-expected second-quarter results.  

So what

DCP Midstream generated $311 million of adjusted EBITDA during the second quarter, up 12% year over year, and well ahead of the analysts' consensus estimate of $249.3 million. Meanwhile, it produced $220 million of distributable cash flow, up 27% year over year. Those were impressive numbers considering that the second quarter was the most challenging period in the oil market's history after demand and pricing cratered because of COVID-19. 

Stacks of money with a arrow pointing up next to a large dollar symbol

Image source: Getty Images.

DCP Midstream more than offset those issues by cutting costs and generating strong logistic and marketing earnings. That segment benefited from recently completed expansion projects and good results from its natural gas liquids (NGLs) marketing operations. 

That excellent showing enabled the MLP to deliver one of the best first-half performances for adjusted EBITDA and distributable cash flow in its history, as they rose 5% and 11% year over year, respectively. As a result, DCP Midstream reissued its original financial guidance for the full year. That would put adjusted EBITDA between $1.205 billion and $1.345 billion and distributable cash flow between $730 million to $830 million. This forecast has it on track to produce more than enough cash to cover its reset distribution -- which currently yields 10.9% -- and capital expenses, with significant room to spare. 

Now what

DCP Midstream delivered a surprisingly strong performance in what was a brutal period for the oil market. As a result, it's still on track to achieve its original guidance, which it issued before pricing collapsed. That has it on pace to end the year in a much stronger financial position since its cost-reduction initiatives will enable it to generate substantial free cash to bolster its balance sheet. That's making it an increasingly appealing option for income 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.