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Western Midstream Partners LP: This 14.8% Yielder Deserves a Second Chance Income Investors 2021-01-08 03:50:13 Western Midstream Partners LP WES stock Western Midstream stock NYSE:WES MLP high yield high yield stocks Western Midstream Partners LP (NYSE:WES) stock has not been a market favorite, but here's why it could be a good opportunity for income investors. Dividend Stocks,Western Midstream Partners Stock

Western Midstream Partners LP: This 14.8% Yielder Deserves a Second Chance

A High-Yield Turnaround Opportunity?

There’s no other way to put it: Western Midstream Partners LP (NYSE:WES) stock’s performance has been disappointing. Year-to-date, WES stock is down more than 55%.

It doesn’t help that the partnership cut back its payout. At the beginning of this year, Western Midstream had a quarterly distribution rate of $0.622 per unit. Today, the amount is $0.311 per unit. That’s a 50% reduction! (Source: “Distribution History,” Western Midstream Partners LP, last accessed November 4, 2020.)

But don’t cross WES stock off your watch list just yet. For investors who are searching for yield, this beaten-down stock might be an opportunity.

Let me explain.

Western Midstream Partners is a master limited partnership (MLP) that owns, operates, develops, and acquires midstream energy assets. The MLP provides a wide range of services, such as the gathering, compressing, treating, processing, and transportation of natural gas and the gathering, stabilizing, and transportation of condensate, natural gas liquids (NGLs), and crude oil.

With the COVID-19 pandemic and the resulting economic recession, the energy industry has taken a big hit. Production cuts were often followed by layoffs and dividend cuts. Even midstream operators like Western Midstream Partners were deep in the doldrums.

In other words, the company was caught in an industry-wide downturn.

Here’s the thing: while existing energy investors are likely in the red, the drop in many energy companies’ stock prices have created new yield opportunities.

You see, at a given cash payout, a stock’s dividend yield moves inversely to its share price. In the case of Western Midstream Partners, the drop in its unit price was so massive that it’s now offering an extremely high yield, even after the distribution cut.

Trading at $8.38 apiece, WES stock has an annual distribution yield of 14.8%.

Of course, high-yield stocks are not known for dividend safety, especially in the case of companies that have slashed their payouts before. So let’s take a look at the financials.

In the second quarter of 2020, Western Midstream generated $208.6 million in free cash flow, which is a metric that management uses to assess the MLP’s ability to pay distributions. (Source: “Western Midstream Announces Second-Quarter 2020 Results,” Western Midstream Partners LP, August 10, 2020.)

Considering that the partnership paid total cash distributions of $140.9 million for the second quarter, it had $67.7 million in free cash flow after distributions. This not only created a margin of safety in the distribution policy, but also allowed the MLP to improve its balance sheet.

In the MLP’s second-quarter earnings conference call, Michael Ure, chief executive officer, said, “Year-to-date we have repurchased approximately $165 million of debt and reduced our leverage ratio to under 4.2 times which compares favorably to our targeted year-end 2020 leverage of 4.5 times. Furthermore, the realization of $1.1 billion of annualized cash flow enhancements comprised of [operating expense] and [general and administrative] savings, [capital expenditure] reductions and lower distributions has accelerated leverage reduction and eliminated any near-term need to access for capital markets.” (Source: “Western Midstream Partners, LP (WES) CEO Michael Ure on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 11, 2020.)

Bottom Line on Western Midstream Partners LP

Ultimately, we’re looking at an MLP that says that its business objective is to “increase our cash distribution per unit over time.” And before the COVID-19 pandemic, it was doing a good job at achieving that objective: Western Midstream had raised its payout for 28 consecutive quarters, up until February 2020. (Source: “Overview,” Western Midstream Partners LP, last accessed November 4, 2020.)

If the economic environment starts to improve, I wouldn’t be surprised to see management bring distribution growth back to Western Midstream stock. Meanwhile, a well-covered 14.8% yield already makes this MLP stand out in today’s market.

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