While DCP Midstream Partners (DPM +0.00%) is not immune to the energy market downturn, it is currently managing through the weak market quite nicely. Thanks to the ramp-up from new projects as well as having solid commodity hedges in place, the company was able to overcome weak spots in the market to drive strong growth in distributable cash flow. That being said, with fewer hedges through the rest of the year, it will become more exposed to the weak market, which will likely put pressure on future results.
DCP Midstream Partners results: The raw numbers
|
Metric |
Q1 2016 Actuals |
Q1 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Adjusted EBITDA |
$173 million |
$162 million |
6.8% |
|
Distributable cash flow |
$165 million |
$140 million |
17.9% |
|
Distribution coverage ratio |
1.36 times |
1.17 times |
N/A |
Data source: DCP Midstream Partners, LP.
What happened with DCP Midstream Partners this quarter?
DCP Midstream Partners delivered solid results:
- Adjusted EBITDA in DCP Midstream Partners natural gas services segment increased to $131 million, up $10 million from the year-ago quarter. Fueling this increase was the ramp up of the company's Lucerne 2 plant and the Keathley Canyon project at Discovery, helping it offset lower volumes on its Eagle Ford and East Texas systems. Meanwhile the company's commodity hedges helped it overcome much of the impact from lower commodity prices.
- Growth in the NGL Logistics segment was also solid, with its adjusted segment EBITDA increasing by $11 million to $50 million. Driving this growth was higher pipeline throughput volumes on Sand Hills and Southern Hills, higher fees from new connections on some of its NGL pipelines, and higher fractionated volumes at both of its Mont Belvieu fractionators.
- Unfortunately, its Wholesale Propane Logistics was weaker, with its adjusted EBITDA falling to $13 million, which is down by $10 million from the year-ago quarter. This was primarily due to lower propane volumes on account of warmer weather muting demand.
- During the quarter the company placed its fee-based Grand Parkway project into service, which is a low pressure gathering system in the DJ Basin.
What management had to say
CEO Wouter van Kempen, commenting on the quarter, said:
Our results demonstrate the strength our diversified asset portfolio provides in the current commodity and drilling environment. We seized the reigns early in the first quarter building a strong coverage buffer and are pleased at the overall volume uplift both quarter over quarter and sequentially.
Van Kempen notes that DCP Midstream Partners has worked hard to strengthen its foundation. In fact, it has grown its fee-based margin from 65% last year to 75% for 2016. That's a solid foundation, though it isn't quite as strong as a company like Kinder Morgan (KMI 2.20%), which has 91% of its cash flow supported by fee-base assets. To help better insulate its cash flow from commodity prices, DCP Midstream Partners has hedged another 15% of its margin, leaving it with only 10% of its margin exposed to commodity price volatility. Though, that's still less than Kinder Morgan, which has 97% of its cash flow locked in via fees or hedges.
That rather minimal exposure is actually going to grow more noticeable throughout the year, which is why DCP Midstream Partners used its strong first quarter to to provide it with a cash flow buffer. That buffer will enable it to maintain its current distribution should weaker market conditions persist.
Looking forward
While DCP Midstream is off to a strong start to 2016, it does still see weakness ahead. That's partially due to the fact that it has weaker hedges in place for the balance of the year. During the first quarter the company had hedged 75% of its commodity price exposure, however, that drops to an average of 45% over the next three quarters, which will likely have an impact on distributable cash flow for the balance of the year. According to its guidance it expects to generate $465 million in distributable cash flow this year, meaning that its run rate will fall from $165 million in the first quarter to an average of roughly $100 million over the next three quarters, pushing its coverage ratio down as well. In fact, its coverage ratio is only expected to average 1.0 times for the full year after averaging 1.36 times during the first quarter. In other words, it's all downhill from here. However, the company has been planning for this and believes it has built up enough of a buffer to withstand what lies ahead in 2016.
