It has been seven months since Chesapeake Energy Corp., once the second-biggest U.S. producer of natural gas, warned investors that its existence might be limited if low oil and gas prices persist. Yes, oil prices have come back a bit, but gas prices remain depressed. During their last quarterly report, the company lost of $8.3 billion and suspended quarterly preferred stock dividends in April. This past week, the Chesapeake filed for Chapter 11 bankruptcy protection to manage its more than $9 billion debt.
Because Chesapeake is go big, it’s sure to adverse affect some of the midstream companies as it spent over $1 billion with these companies to have their gas and oil processed and transport Chesapeake’s gas and oil. Without that money coming in as revenue, that may jeopardize their ability to continue to pay a dividend. Several pipeline operators have contracts with Chesapeake, including Kinder Morgan, Williams Companies, Energy Transfer, Crestwood Equity Partners and Consolidated Edison.
Magellan Midstream Partners, L.P. engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. As of December 31, 2019, it had 9,800-mile refined products pipeline system with 53 terminals and storage facilities with an aggregate storage capacity of approximately 35 million barrels.
So is Magellan Midstream's dividend safe?
Its partnership units, which are down 35% so far in 2020, to about $41, look appealing with a 10% yield. Magellan’s 10% yield does come with some risk. The company cut its 2020 projection for distributable cash flow, an MLP cash flow measure, by roughly 10% to 15% because of a drop in demand for gasoline and other petroleum products during the Covid-19 economic downturn.
Magellan has projected that demand for gasoline, which accounts for 60% to 65% of its products volume, will drop 25% in the second quarter and recover to 2019 levels by August.
Magellan has a moderate debt load of $5 billion and investment-grade bond ratings.
Due to an year over year earnings / share increase of 8%, Magellan Midstream Partners L P 's dividend payout ratio over the past year fell to 84.32%, which is above company average.
If the payout ratio is low (say 33% or below), the dividend should be pretty secure, if the payout ratio is high (say 66% or above) start getting some answers, but if the payout ratio is above 100%, expect the dividend to be cut.
Dividends come from cash flow, not earnings, so whether the payout ratio is suspect or not, one should investigate the cash dividend payout ratio as it gives a more accurate picture of whether the dividend is sustainable or not. Again the lower the number the better because if a company's cash dividend payout ratio is higher than 100%, it means that it's paying more in dividends than it's receiving in cash and not sustainable long term.
An easy way to calculate the cash dividend payout ratio is on a per share basis. In this case, the formula used is dividends per share divided by earnings per share (EPS). The company estimates that it will generate about $1 billion in cash flow this year…about the same as last year. So, the cash dividend payout ratio (TTM) is 157%.
Despite the uncertainty in the energy sector at this time the company's dividend appears to be safe.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
