With crude oil trading back below $30 today, the ability
for energy companies to sustain sizable dividend yields
is wearing thin. In just the first five weeks of 2016,
we've already seen payouts cut or eliminated at Carbo
Ceramics (CRR:NYSE), ConocoPhillips (COP:NYSE), Diamond
Offshore (DO:NYSE), Noble Energy (NBL:NYSE), Rowan
(RDC:NYSE), Tidewater (TDW:NYSE), just to name a few.
This begs the question: who's next? We ran some
fundamental screens this morning, and the following three
names are companies with dividend yields north of 6% that
we believe are at risk of being reduced before the end of
Enable Midstream Partners (ENBL:Nasdaq) is a midstream
play that focuses on gathering and processing oil and
natural gas. The company raised its quarterly
distribution as recently as last October, and will make
its next payment of $0.318 a share (19.2% yield) on Feb.
12, to investors at the close of trading on Jan. 28. The
shares recently changed hands around $6.63.
Management have been borrowing heavily on the company's
revolving credit line in order to cover the distribution
and Enable's credit rating was cut by Standard & Poors on
Feb. 2 to junk status. This will make future financing
more expensive for the company, and we believe the
current payout is not sustainable.
Murphy Oil (MUR:NYSE) is a mid-cap energy name that has
steadily increased its payout over the past several years
and currently offers a quarter dividend of $0.35 a share
(7.4% yield). Investors at the close of trading on Feb.
10 will qualify for the company's next payment on March
1. The stock recently changed hands around $18.85.
That said, we do not believe that readers should grow
complacent about Murphy's dividend. Even though the
company has some refining and marketing (downstream)
assets that are less leveraged to underlying commodity
prices, the consensus analyst estimates call for a loss
of $2.60 a share in 2016, following a loss of $3.08 a
share last year.
Normally, we like to see a company earn at least twice
what it pays out each year in dividends. On the other
hand, Murphy is losing twice as much as it is
distributing to shareholders. In the meantime, the
company has $2.2 billion of debt on its balance sheet and
its bonds are teetering on the edge of investment-grade
and junk status. If push comes to shove, we believe the
dividend, which costs management $241 million a year,
could be sacrificed.
Finally, Targa Resource Partners (NGLS:Nasdaq) is a
midstream name with an unusually high, 40% exposure to
commodity prices. The company boosted its quarterly
distribution as recently as last July and will make its
latest payment of $0.825 a share (27.3% yield), to
investors at the close of trading on Jan. 28. The stock
recently changed hands around $12.13.
Targa is currently in the process of merging with its
related C-Corp, Targa Resources (TRGP:Nasdaq), which
sports an 18.6% dividend yield of its own. Even though
the deal was originally expected to be accretive to
earnings, both companies have junk-rated bonds and we do
not believe the payouts can survive in a lower-for-longer
energy price environment.
David S. Peltier
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