Today, Investment U’s Income Expert, Marc Lichtenfeld, takes a look at NGL Energy Partners’ dividend safety.
It’s been a tough go lately for stocks in the energy sector.
Energy stocks in the S&P 500 have been sliced in half this year. Others, like NGL Energy Partners (NYSE: NGL), have fared even worse. It’s down 64% year to date.
Tulsa, Oklahoma-based NGL is a master limited partnership (MLP) that transports oil and natural gas liquids through its pipelines.
Earlier this year, it slashed its quarterly distribution (MLPs pay distributions, not dividends) from $0.39 to $0.20 per unit (partnerships have units, not shares). But because the stock has fallen so dramatically, that $0.80 annual distribution still comes out to a 19.8% yield.
Can the company maintain this lower payout?
NGL Energy Partners Dividend Safety Overview
MLPs use one of two forms of cash flow: distributable cash flow (DCF) or cash available for distribution (CAD). NGL uses CAD.
In fiscal 2020, which ended in March, NGL’s CAD was nearly cut in half to $25.8 million from $49.3 million. However, in fiscal 2021 as the company cuts costs, it expects revenue to rebound.
This makes for an interesting case. Currently, NGL’s numbers are terrible. Revenue, earnings and CAD are falling.
In fiscal 2020, the company didn’t come close to affording its distribution, paying out $244.4 million with just $25.8 million in CAD.
However, because of NGL’s shift in focus to the higher-margin water business from lower-margin propane, its CAD is expected to jump to $229.2 million. That should easily cover a lower $103 million distribution.
NGL also has a lot of debt – more than 10 times its earnings before interest, taxes, depreciation and amortization (EBITDA). That debt has to be serviced, which lowers cash flow.
Lastly, NGL cut its distribution this year and in 2016.
So basically, the company has a lot to prove this year. If its numbers aren’t as strong as forecast, another distribution cut seems likely.
We’ll get a better sense of that in the first week of November when NGL reports quarterly results. Considering things haven’t gotten better in the energy sector, I suspect the company will miss analysts’ estimates.
But regardless of what I expect, when the company reports results, with low cash flow in the past year, high debt and a history of cuts, NGL’s distribution cannot be considered safe.
If in fiscal 2021 NGL proves it can afford its distribution, it will be eligible for an upgrade. But until then, it receives the lowest rating possible.
Dividend Safety Rating: F
NGL Energy Partners’ dividend safety is as bad off as it can be right now. In fact, its growing debt and distribution issues seem to indicate the dividend is likely to be cut.
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About Marc Lichtenfeld
Marc Lichtenfeld is the Chief Income Strategist of Investment U’s publisher, The Oxford Club. He has more than three decades of experience in the market and a dedicated following of more than 500,000 investors.
After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report, among other outlets. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer’s TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance.
Marc shares his financial advice via The Oxford Club’s free daily e-letter called Wealthy Retirement and a monthly, income-focused newsletter called The Oxford Income Letter. He also runs four subscription-based trading services: Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits.
His first book, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns, achieved bestseller status shortly after its release in 2012, and the second edition was named the 2018 Book of the Year by the Institute for Financial Literacy. It has been published in four languages. In early 2018, Marc released his second book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazon’s bestseller list. It was named the 2019 Book of the Year by the Institute for Financial Literacy.
