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SNMP Stock: This 15.3% Yield Looks Interesting Income Investors 2018-06-14 14:49:22 Sanchez Midstream Partners LP Sanchez Midstream Partners SNMP SNMP stock NYSEAMERICAN:SNMP Sanchez Midstream Partners LP (NYSEAMERICAN:SNMP) stock offers a jaw-dropping yield of 15.3%, but is the payout safe? Here's the story. Dividend Stocks,News

SNMP Stock: This 15.3% Yield Looks Interesting

Sanchez Midstream Partners LP Is an Overlooked High-Yield Stock

Most investors have not heard of Sanchez Midstream Partners LP (NYSEAMERICAN:SNMP)—formerly called Sanchez Production Partners LP—but the partnership currently offers one of the biggest payouts in the stock market.

As the name suggests, Sanchez Midstream Partners operates in the midstream energy sector. Its portfolio of midstream assets includes oil and natural gas gathering systems, natural gas pipelines, and a natural gas processing facility.

Right now, the No. 1 reason to consider SNMP stock is its generous distribution policy. Paying investors a quarterly cash distribution of $0.4508 per unit, the partnership has an annual yield of 15.3%.

Of course, there are plenty of high yielders in the energy sector, but most of them aren’t really safe bets. Due to the downturn in oil and gas prices a few years ago, many energy companies are still deep in the doldrums. And since dividend yield moves inversely to share price, beaten-down energy stocks have become some of the highest-yielding names in the market.

Like its peers, Sanchez Midstream Partners also experienced a sharp drop in its stock price. However, what did not drop was the partnership’s payout to investors.

Rising Payouts From an Energy Stock

You see, in October 2015, the partnership acquired a bunch of energy pipeline, gathering, and compression assets and started focusing on midstream operations. Back then, management recommended that the board of directors of Sanchez’s general partner approve an initial quarterly distribution rate of $0.40 per unit. (Source: “Sanchez Production Partners Completes Midstream Acquisition; Reiterates Distribution Plan and Provides Management Updates,” Sanchez Midstream Partners LP, October 14, 2015.)

Indeed, investors received a cash payment of $0.40 per unit in November 2015.

Since then, that amount has only been increasing. With the quarterly distribution rate currently standing at $0.4508, Sanchez Midstream Partners’ payout has grown by almost 13%. (Source: “Distribution History,” Sanchez Midstream Partners LP, last accessed June 12, 2018.)

Because high-yield stocks aren’t known for their dividend safety, it’s important to check whether this double-digit yielder can make enough money to cover its payout.

On that front, first note that Sanchez Midstream Partners runs a fee-based business. Most of its midstream assets are supported by long-term, fixed-fee agreements. This should allow the partnership to keep making money, even during commodity price downturns. (Source: “Investor Presentation May 2018,” Sanchez Midstream Partners LP, last accessed June 12, 2018.)

Is the Payout Safe?

On the financial side, Sanchez Midstream Partners reports something called “cash available for distribution.” It is calculated by taking the adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) and deducting the cash interest expenses, maintenance capital, and preferred distributions.

In the first quarter of 2018, cash available for distribution came in at $7.1 million. Note that the partnership declared its first-quarter cash distribution on May 9, 2018 and had around 15.2 million common units outstanding at that time. Given its quarterly distribution rate of $0.4508 per common unit, Sanchez Midstream Partners’ cash payout for the first quarter totaled $6.9 million. (Source: “Sanchez Midstream Partners Reports First Quarter 2018 Financial Results; Provides Full Year 2018 Forecast,” Sanchez Midstream Partners LP, May 10, 2018.)

Therefore, the partnership’s cash available for distribution provided more than enough coverage of its actual payout.

At the end of the day, I would like to see a higher distribution coverage ratio, due to the extra margin of safety. And that could become a reality later this year.

According to the latest investor presentation, management expects Sanchez Midstream Partners to spend just $1.6 million in maintenance capital for full-year 2018. This would represent a sizable drop from its maintenance capital expenditure of $2.4 million in 2017. By controlling this expense, the partnership could leave more cash available to pay unitholders, which would translate into improved distribution safety.

Bottom line: SNMP stock is no slam dunk, but if the partnership can improve its distribution coverage ratio, its 15.3% yield could be an opportunity.

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