This commentary was originally sent to Dividend Stock Advisor subscribers at 11:50 on Feb.8.
With crude oil trading back below $30 today, the ability for energy companies to sustain sizable dividend yields is wearing thin. In just the first five weeks of 2016, we've already seen payouts cut or eliminated at Carbo Ceramics (CRR), ConocoPhillips (COP), Diamond Offshore (DO), Noble Energy (NBL), Rowan (RDC), Tidewater (TDW), just to name a few.
This begs the question: who's next? We ran some fundamental screens this morning, and the following three names are companies with dividend yields north of 6% that we believe are at risk of being reduced before the end of the year.
Enable Midstream Partners (ENBL) is a midstream play that focuses on gathering and processing oil and natural gas. The company raised its quarterly distribution as recently as last October, and will make its next payment of $0.318 a share (19.2% yield) on Feb. 12, to investors at the close of trading on Jan. 28. The shares recently changed hands around $6.63.
Management have been borrowing heavily on the company's revolving credit line in order to cover the distribution and Enable's credit rating was cut by Standard & Poors on Feb. 2 to junk status. This will make future financing more expensive for the company, and we believe the current payout is not sustainable.
Murphy Oil (MUR) is a mid-cap energy name that has steadily increased its payout over the past several years and currently offers a quarter dividend of $0.35 a share (7.4% yield). Investors at the close of trading on Feb. 10 will qualify for the company's next payment on March 1. The stock recently changed hands around $18.85.
That said, we do not believe that readers should grow complacent about Murphy's dividend. Even though the company has some refining and marketing (downstream) assets that are less leveraged to underlying commodity prices, the consensus analyst estimates call for a loss of $2.60 a share in 2016, following a loss of $3.08 a share last year.
Normally, we like to see a company earn at least twice what it pays out each year in dividends. On the other hand, Murphy is losing twice as much as it is distributing to shareholders. In the meantime, the company has $2.2 billion of debt on its balance sheet and its bonds are teetering on the edge of investment-grade and junk status. If push comes to shove, we believe the dividend, which costs management $241 million a year, could be sacrificed.
Finally, Targa Resource Partners (NGLS) is a midstream name with an unusually high, 40% exposure to commodity prices. The company boosted its quarterly distribution as recently as last July and will make its latest payment of $0.825 a share (27.3% yield), to investors at the close of trading on Jan. 28. The stock recently changed hands around $12.13.
Targa is currently in the process of merging with its related C-Corp, Targa Resources (TRGP), which sports an 18.6% dividend yield of its own. Even though the deal was originally expected to be accretive to earnings, both companies have junk-rated bonds and we do not believe the payouts can survive in a lower-for-longer energy price environment.