What: August was a pretty rough month for Memorial Production Partners LP (NASDAQ: MEMP) investors. The company's unit price was down by more than 35% at one point before ending the month down nearly 14%. We can blame weak second-quarter results, a distribution cut, and volatile oil prices for this disappointing performance.
So what: Memorial Production Partners started the month off on a sour note when it reported second-quarter results on Aug. 5. While its production rose 10% year over year, distributable cash flow slipped from $35.8 million to $29.2 million due to the drop in energy prices. That drop could have been much worse as the average price the company realized for its oil and gas production was down 38% from the prior year before taking into account the impact of its commodity price hedges.
That being said, those hedges don't last forever, which is why the company chose to be proactive and reduce its distribution. It's cutting the payout by 45% to better reflect current commodity prices. It plans to use the excess cash this will generate to increase its financial flexibility and to reduce its overall leverage.
The company decided to cut its distribution in part because commodity prices recorrected over much of July and August. In fact, oil prices dropped by double digits through the middle of August before rebounding at the end of the month. This volatility weighed heavily on Memorial Production Partners' unit price because of the impact that oil has on its cash flow.
Now what: The price of oil is still trying to find a firm bottom, which is leading to a lot of volatility among energy stocks. Also, this uncertainty is forcing companies like Memorial Production Partners to make tough decisions, such as reduce its distribution, as there is no clarity as to when prices will stabilize. Suffice it to say, investors can expect this wild ride to continue until prices hold steady, which could still take a while.