This commentary was originally sent to Dividend Stock Advisor subscribers at 06:32 on Dec. 15.
In our mission to uncover the next potential Kinder Morgan (KMI) in the energy Master Limited Partnership (MLP) space, here are the next three names where we believe current dividends to be at risk in an environment in which energy prices remain lower for longer.
As with the other six names we've mentioned in the past week, these firms have double-digit percentage yields that appear to be unsustainable. Even if the companies have managed to cover the current distributions in 2015, they are usually borrowing to cover the payout, and many face further exposure to lower commodity prices and production volume.
Archrock Partners (APLP) is an energy services provider that focuses on natural gas compression and processing. The shares have lost 44% in 2015 and closed Monday on $12.14. The company has raised its quarterly distribution for 19 straight quarters and currently pays out $0.5725 a share (18.9% yield).
Management are on track to generate enough cash flow to cover the dividend in the fourth quarter, but admitted that visibility has declined regarding future customer activity levels. Given that Archrock needed both an equity raise and its credit facility to help fund the payout this year, it's likely that management would look to more external financing in 2016.
The company has a relatively high 4.4x debt/EBITDA (earnings before interest, taxes depreciation and amortization) ratio. That, and a debt rating which is a full five levels into junk status, will likely make lenders wary of lending management more money in order to fund the dividend.
Enable Midstream Partners (ENBL) is a midstream play that focuses on gathering and processing oil and natural gas. The stock has dropped 63% year-to-date and closed Monday on $7.19. The company just went public last year and raised its quarterly distribution in October, to $0.318 a share (17.5% yield).
After the books are closed on the fourth quarter, Enable should generate enough cash flow in 2015 to cover its dividend. But a look at the internal figures shows that a steady, steep drawdown on its credit revolver was necessary in order to do so.
It's also worth noting that management cut guidance in October, citing both lower energy commodity prices and customer volume. As a result, the company could struggle to maintain its current payout, even with more external funding likely needed.
In the meantime, Enable's credit rating is teetering on the edge of investment grade status. As a result, we believe that new chief executive Rodney Sailor may face a Kinder-like moment, where the current dividend may need to be sacrificed to maintain an investment grade credit rating.
Rose Rock Midstream (RRMS) is a midstream name that focuses on gathering and transportation of crude oil. The shares are down 64% in 2015; it closed Monday at $16.38. The company is another recent IPO, from 2011. Management last raised the quarterly distribution in October, to $0.66 a share (16.1% yield).
Last month, Red Rock cut its guidance because of lower customer oil production and increased pipeline competition. The company also postponed offering a long-term guidance outlook until next February, during which time we believe that management will be forced to question the validity of the current dividend.
The distribution has been regularly supported with asset drop-downs from the parent company, SemGroup (SEMG). That said, Red Rock will likely struggle to finance future acquisitions, given a relatively high 4.4x debt/EBITDA ratio and a credit rating that is five levels below investment grade.