Please ensure Javascript is enabled for purposes of website accessibility

Why NGL Energy Partners Units Plunged 15% Today

By Reuben Gregg Brewer – Oct 27, 2020 at 3:08PM

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 midstream partnership provided investors with an update that was not well received. Here's what you need to know.

What happened

Units of midstream energy player NGL Energy Partners (NGL 4.85%) nose-dived 15% by 2:30 p.m. EDT on Oct. 27. The units started the day off in the red and then continued to trickle lower and lower as investors digested the master limited partnership's business update. It wasn't good.

So what

The big news from NGL Energy's update can be summed up pretty quickly: another distribution cut. After trimming the payment from $0.39 per unit per quarter to $0.20 in April, the partnership has now cut the payment to just $0.10 per unit per quarter. All in, that's a roughly 75% haircut for income-oriented investors. It's not surprising that NGL Energy's units sold off.    

A man holding his head with a candlestick chart heading lower behind him

Image source: Getty Images.

But that's not all the news the company provided. While management stressed that the business was performing as expected, it also noted that it was working with its banks to extend the maturity of its credit facility. In addition, the partnership continues to look at assets that it might sell to further reduce debt. Basically, leverage is a problem here, and it's not likely to be an easy fix, noting that financial debt to EBITDA was over 10 times at the end of the second quarter. While management tried to put a positive spin on things, highlighting that the dividend reduction will help on the leverage side of the equation, the debt update was really no better a piece of news than the dividend cut.   

Now what

It would be an understatement to say that the energy sector is facing headwinds today. Things are pretty bad, and it could be some time before there's a sustained recovery. And much depends on the path of the global pandemic. While dealing with that, NGL Energy also has to contend with a heavily leveraged balance sheet. At this point, most investors should probably sit on the sidelines here.

Reuben Gregg Brewer 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.