Shares of master limited partnership (MLP) Hoegh LNG Partners (NYSE:HMLP) fell a dramatic 63% in the first minutes of trading on July 28. There's no question about why the stock nosedived. The partnership, which owns a fleet of ships that provide services to the liquified natural gas industry, announced it was cutting its distribution after the market closed on July 27.
This is no small event. The distribution is being trimmed from $0.44 per quarter to a token penny a share. That's basically to appease institutional investors that have a dividend mandate, meaning that, effectively, the distribution was eliminated. This is massive, given that the MLP structure is specifically designed to pass income on to unitholders.
The reason provided for the cut was that Hoegh needs to preserve cash to deal with near-term refinancing issues. That's well and good and might necessitate this move. But later in the news release the partnership explains that, once that refinancing is put to rest (assuming that happens quickly and without incident, a decidedly positive view that should probably be taken with a grain of salt), any extra cash is going to go toward debt reduction and strengthening the balance sheet. In other words, investors shouldn't expect a swift return of the distribution. Reading between the lines, it appears the partnership's finances are in a fragile state. No wonder the units sold off so sharply.
As if the massive distribution cut wasn't enough, Hoegh LNG Partners also received some analyst downgrades. That's not shocking, but it likely added fuel to the fire. Still, at this point, there's little reason to own Hoegh LNG Partners given the cut, what appears to be material balance sheet risk, and minimal prospects for distribution growth.