What: Shares of DCP Midstream Partners took a clobbering in June, with shares declining more than 20% resulting from a decline in the broader market for master limited partnerships as well as a downgrade to "sell" from the bank UBS.
So what: Shares of DCP Midstream Partners have not had a good go of it lately, but it all can't be blamed on the company itself because the entire master limited partnership space has had a pretty rough go of it lately. Over that same one-month period, the Alerian MLP Index has declined more than 9% on fears of a continued decline in oil and gas prices as well as the potential of a rate hike from the Federal Reserve.
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However, DCP Midstream was one of the very few to actually receive a major downgrade in its credit rating, and that rating of "sell" from UBS is rather jarring. UBS downgraded the units of DCP in large part because it also cut its long-term price outlook for natural gas and natural gas liquids, or NGLs. Now normally you can take commodity price swings with a large grain of salt when it comes to a midstream company with a natural gas and natural gas liquids gathering and processing company like DCP Midstream, because most of them generate an overwhelming majority of their gross margin -- normally around 85% -- from fees.
This isn't necessarily the case when it comes to DCP Midstream. Today, about 60% of the company's gross margin comes from fee-based contracts and services. The company does hedge a significant portion of its revenue with futures contracts, but according to the company's most recent investor presentation, a $0.10 change in the price of a gallon of NGLs results in a $3.5 million change in adjusted EBITDA. When you process millions of gallons of the stuff on a daily basis, that sort of price sensitivity can add up.
Now what: Not everything is doom and gloom at DCP. The company has a pretty strong financial standing on a debt-to-EBITDA basis and the parent company has several billion in fee-based assets that can be dropped down to the partnership level and boost that total gross margin, which is generated by fee-based contracts and services. That will help further shield the partnership's results from commodity prices.
Also, natural gas and NGL prices are weak today, but there are several development projects under construction in the Gulf region that, once online, will consume very large amounts of gas and NGLs for chemical manufacturing and export. Once these facilities are up and running, these weaker prices that have affected DCP and so many other companies in the natural gas business could turn around rather quickly, and investors could view these major drops as a chance to pick up shares in these stable midstream investments at a discount.
The article Why Shares of DCP Midstream Partners Plunged 20% Last Month originally appeared on Fool.com.
Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool. The Motley Fool recommends DCP Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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