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Why Units of DCP Midstream Rallied More Than 10% in August

By Matthew DiLallo – Updated Sep 3, 2020 at 10:37AM

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The high-yielding MLP surprised investors last month.

What happened

Units of DCP Midstream (DCP 0.56%) surged 10.7% in August, according to data provided by S&P Global Market Intelligence. Fueling the MLP's rally was its stronger-than-expected second-quarter results.  

So what

DCP Midstream overcame many obstacles to produce record-setting results during the first half of the year, thanks largely to its strong showing in the turbulent second quarter. The energy company's adjusted EBITDA rose 12% to $311 million, which was well ahead of the analysts' consensus estimate of $249.3 million. Distributable cash flow was also strong, up 27% year over year to $220 million. Fueling that excellent showing was a combination of its solid operational results and cost reduction efforts. 

A pipeline and an oil pump at sunset.

Image source: Getty Images.

Because of its excellent performance during the quarter, DCP Midstream reissued its original 2020 guidance. That forecast has adjusted EBITDA coming in the range of $1.205 million to $1.345 million and distributable cash flow of $730 million to $830 million. This outlook implies that the company will generate a significant amount of free cash flow this year after covering its 12.2%-yielding distribution. 

Now what

DCP Midstream made several moves earlier this year to help it weather the storm in the oil market, including cutting its distribution in half. Those decisions are paying dividends as they enabled the company to generate more cash than expected, which is giving it the money to pay down debt. Because of that, the company's reset payout is starting to look like an attractive option 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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Stocks Mentioned

DCP Midstream, LP Stock Quote
DCP Midstream, LP
DCP
$37.57 (0.56%) $0.21

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