Should Investors Consider This Double-Digit Yielder?
For income investors, few things are worse than a dividend cut.
Unfortunately, that’s what unitholders of NGL Energy Partners LP (NYSE:NGL) had to deal with two years ago. In April 2016, this Tulsa, Oklahoma-based energy partnership announced several strategic actions, including a 39% reduction to its quarterly distribution rate. (Source: “NGL Energy Partners LP Announces Investment From Funds Managed by Oaktree Capital Management, L.P., Declares Quarterly Cash Distribution and Provides Partnership Update,” NGL Energy Partners LP, April 21, 2016.)
At that time, it was not uncommon for companies in the energy sector to reevaluate their dividend policies. With the huge downturn in oil and gas prices, production cuts were often followed by layoffs and dividend cuts.
And as you would expect, with business deep in the doldrums, the stock price of NGL Energy Partners did not do very well, either. Over the past two years, NGL stock has tumbled more than 30%.
Now, you are probably wondering why I’m talking about this beaten-down energy stock. Well, the reason is simple: because dividend yield moves in the opposite direction to a company’s stock price, the drop in NGL stock has made it one of the highest-yielding names in the current stock market.
Trading at $12.40 apiece, NGL Energy Partners LP offers investors an annual yield of 12.6%.
Of course, if yield is the only thing you care about, you can find dozens of companies with similar payouts. What makes NGL stock stand out is its outlook, and particularly the outlook on its distribution safety.
NGL Energy Partners LP: Is the Distribution Safe?
NGL Energy Partners is a master limited partnership (MLP) that provides energy producers and end users with a wide range of services, such as the storage, transport, storage, marketing, and blending, of natural gas liquids (NGLs), refined products, crude oil, and water solutions.
Right now, the partnership operates through four business segments: Crude Logistics, Water Solutions, Refined Products/Renewables, and Liquids. Its current strategy is to focus on businesses that generate long-term, fee-based cash flows. For instance, in the Crude Logistics segment, NGL Energy Partners earns a fixed fee per barrel when providing transportation, terminaling, and/or storage services of crude oil and condensate to third parties. This allows the partnership to reduce its exposure to commodity price volatility. (Source: “Investor Presentation June 2018,” NGL Energy Partners LP, last accessed July 23, 2018.)
Like most MLPs, NGL Energy Partners reports something called distributable cash flow. This metric is calculated by taking adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), and then subtracting maintenance capital expenditures, income tax expenses, cash interest expenses, and other costs.
Distributable cash flow is one of the most important performance metrics for energy partnerships. This is because, by comparing distributable cash flow to actual cash distributions, investors can see whether a partnership generated enough cash to cover its payout.
And as you can probably tell by NGL stock’s disappointing price performance, its business hasn’t been going that well. As a result, distribution safety wasn’t really the partnership’s strong suit.
In NGL Energy Partners’ fiscal-year 2016, its distributable cash flow provided 0.9 times coverage of its actual distribution, meaning the partnership didn’t generate quite enough cash to cover its payout. In its fiscal-year 2017, NGL’s distribution coverage ratio improved to a much better 1.2 times, which actually quite safe.
Looking Forward to a Safer Payout in Fiscal 2019
Because the partnership follows a fiscal year that ends on March 31, it has already reported its fiscal 2018 results. For the year, the partnership generated $180.0 million in distributable cash flow. However, during this period, it paid out $225.0 million in distributions. That came out to a distribution coverage ratio of 0.8 times. (Source: “NGL Energy Partners LP Announces Fourth Quarter and Fiscal 2018 Financial Results and Initiates Fiscal 2019 Guidance,” NGL Energy Partners LP, May 30, 2018.)
That coverage ratio seemed disappointing, but NGL Energy Partners did announce something cheerful in the earnings report: its fiscal 2019 guidance.
For full-year fiscal 2019, management expects the partnership to generate more than $300.0 million in distributable cash flow while paying $235.0 million in actual cash distributions. That would allow it to achieve a distribution coverage ratio of 1.3 times, which would be the highest this metric has been in years.
Moreover, if a beaten-down high-yield stock can improve its dividend safety, there’s a decent chance that investors will warm up to it again. That means, if NGL Energy Partners can make the turnaround it projected for 2019, investors might be able to lock in some capital gains on top of those oversized cash distributions.
At the end of the day, it’s yet to be seen whether the partnership can deliver on its guidance. But with a jaw-dropping yield of 12.6%, NGL stock deserves to be on every yield-seeking investor’s watch list.