Published Tue, 30 Jun 2020 03:32:04 -0400 on Seeking Alpha
Seeking AlphaDividend Ideas | Basic MaterialsDCP Midstream: Dividend Reduction To Pay DebtJun. 30, 2020 3:32 AM ET|| About: DCP Midstream, LP (DCP), Includes: DCP.PB, DCP.PCby: Long PlayerLong Player Oil & Gas Value ResearchGet analysis on under followed Oil & Gas companies with an edge.SummaryDebt reduction is the priority.
Covenant violation is not an issue.
The recovery of the distribution from the 50% reduction is an excellent probability.
The deferral of growth projects, combined with cost reductions, enhances cash flow available to pay down debt.
The partnership has an excellent location in some low-cost basins.
DCP Midstream (DCP) is yet another midstream that has raised the priority of debt reduction due to the challenges presented by the coronavirus issues and the OPEC price war. The demand destruction that followed these major events may have changed how midstream operates yet again for the foreseeable future.
Any type of sudden (and significant) demand destruction will pressure financially leveraged companies to reduce their leverage. Even though midstream is seen as relatively steady due to the take-or-pay contracts, a leveraged midstream operator is more likely to post unsatisfactory ratios than an unleveraged operator. Therefore, it looks as though the definition of aggressive financial leverage is due for another downward adjustment as the industry adjusts to the consequences of the latest financial shocks.
(Source: DCP Midstream First Quarter 2020, Earnings Conference Call Slides)
Of course, as of the first quarter, the company was in compliance with all covenants. Interestingly, the banks do not count the $500 million bond maturity as debt. It is considered equity for the covenant calculation. That gives the partnership considerable leeway to avoid any covenant violations in the near future. The second quarter will not be posing the challenge posed by lower earnings that some in the industry face.
Therefore,... Read more
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