What happened

Shares of oil and gas midstream company NGL Energy Partners (NYSE:NGL) were down as much as 10% in early morning trading, and were still down 6.7% as of 2:30 p.m. EDT today. The decline comes after the company announced a major refinancing deal that will also require it to suspend its distribution to its investors. 

So what

NGL Energy Partners isn't a very large company. It has a market capitalization of about $3.7 billion, and a large portion of that was debt as part of its revolving credit facility -- a line of credit. 

Oil and gas pipelines.

Image source: Getty Images.

Today's announcement was that it was paying off a large portion of that credit facility by issuing $2.05 billion in new secured debt (meaning it had to post collateral) due in 2026 and with a new $500 million credit facility that expires in 2026.

As part of that deal, its lenders have specified a covenant that it has to suspend distribution payments on both its common units and its preferred units until its net leverage ratio is below 4.75 times.

Now what

NGL Energy Partners has been in pretty dire straits lately. It has not yet announced fourth-quarter results, but its debt-to-EBITDA over the prior 12 months was 9.78 times. I'm sure there are some minor differences between its definition of net leverage and debt to EBITDA, but they are likely pretty close. It goes to show that NGL Energy Partners has some significant debts to pay down before it can resume paying a distribution.

When that does happen, though, there is no guarantee that its new distribution will be the same as the one it just suspended. So it's best to avoid this stock at least until management cleans up the balance sheet and can start paying investors again, and even then it will be worth keeping a critical eye on things. 

This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.