David Peltier is portfolio manager of Dividend Stock advisor, a model portfolio of dividend-paying stocks. This commentary was sent to subscribers Monday Dec. 14, 2015, at 2:45 PM ET. To sign up for a free trial, click here.
The one question that we've continually received at Dividend Stock Advisor over the past week is this: Who will be the next Kinder Morgan (KMI)? So with crude oil breaking below $35 a barrel today, we're wondering which other high-dividend yields out there are unsustainable as we enter 2016?
Last week, we highlighted two other energy master limited partnerships (MLPs), Targa Resources Partners (NGLS) and Vanguard Natural Resources (VNR), whose double-digit dividend yields are at high risk of being cut in coming months.
Today, we begin to blow the doors open and will highlight four energy MLPs that will likely have to cut their dividends in a lower-for-longer commodity pricing environment. As scary as that concept may be, there are more companies that we will highlight throughout the week.
We'd like to point out that this research has been assisted by Carleton English, who has been doing tireless work writing about the energy MLPs for Real Money in the past several weeks, particularly her excellent work covering Kinder Morgan.
Crestwood Equity Partners (CEQP) is a midstream name that has natural gas storage and oil services operations. The shares have dropped 82% in 2015 and recently changed hands around $14. The company has maintained a quarterly distribution of $1.375 a share (38.6% yield) for the past eight quarters.
Management has attempted to bolster finances by merging with brethren Crestwood Midstream Partners, earlier this year. Even so, the combined company still sports a lofty 4.8x debt/EBITDA (earnings before interest, taxes, distribution and amortization) ratio. This figure does not include $500 million of preferred stock, which will also be entitled to cash flow.
In the meantime, we believe that Crestwood will struggle to generate enough cash flow to cover its quarterly dividend for the next several quarters, as will likely be the case for 2015. With a credit rating that is already two levels into junk status, we believe the company will see little sympathy from creditors if management tries to raise more funds to cover the payout.
DCP Midstream Partners (DPM) is a midstream play that processes, transfers and stores natural gas and natural gas liquids (NGL). The stock is down 54% year-to-date and recently changed hands around $20.xx. The company has offered a quarterly distribution of $0.78 a share (15.1% yield) for the past four quarters.
Management will likely be able to cover the dividend for the fourth quarter, but that is largely because of drawing down hundreds of millions of dollar on its credit line and through aggressive commodity hedging.
The hedging is important, as about 35% of DCP's business is leveraged to commodity prices. Those hedges will dwindle in 2016 and/or will become considerably more expensive. In the meantime, the company's credit rating is already two levels below investment grade.
NGL Energy Partners (NGL) is a midstream play that focuses on logistics and water treatment purchases. The stock has lost 69% year to date and recent changed hands around $8. The company has consistently boosted its quarterly distribution since going public in 2011, with the latest increase coming in October, to $0.64 a share (30.1% yield).
Just last week, management said that it will likely freeze future dividend increases in 2016. That said, NGL already cut its capital expenditure guidance last quarter and will have to try to raise hundreds of millions of new debt and tap its credit facility in the next two years, just to meet its current payout. In the meantime, the company's debt rating in three levels below investment grade, which means that future borrowing capacity could quickly dry up if energy prices remain depressed.
NuStar Energy (NS) is a midstream name that has oil pipelines, terminals and storage. The shares have dropped 43% in 2015 and recently changed hands around $32. The company has maintained a quarterly distribution of $1.095 a share (13.4% yield) since 2011.
While NuStar's dividend has been consistent over the past four years, we believe that readers should not expect that trend to continue in 2016. The company is seeing lower EBITDA from its pipeline and marketing business lines. As a result, management can only cover the payout this year by tapping its credit revolver by a couple of hundred million dollars.
The same will be true for 2016, including some expected equity dilution. In the meantime, NuStar's credit rating is already in junk status.