What if Line paid out less? What if the distribution was, say 20 cents per month? This would translate into an 8% payout if the stock were at $30, and very close to 7% at 35. This would also give a coverage of 1.25, assuming $3.00 per year available for distributuions. The availablity of $$$ to make the monthly payouts would then not be questioned. Other companies like PAA, EPD, have a better coverage ratio, and therefore garner a higher stock price and hence, a lower distribution percentage.
Yet Line choses to pay out every penny they possibly can, an in the process, their stock price suffers because it appears as though maybe they can't continue it in the near future. Heck, if the distribution was lowered, and I have no knowledge and no predictions that it will, it would still be a good investment compared to other similar companies, so why all the worry?
The stock is demanding a 10% to 11% distribution rate because investors seem to require that level of return to accommodate the risk inherent in the business. Cutting the distribution simply to increase the coverage ratio would hugely increase investor perception of risk overall and may cause investors to require an even higher yield. Management needs to deliver some progress with the BRY acquisition to gain investor confidence and position them to raise the distribution in the future. If they do, the premium required will fall, perhaps to 8% to 9%, and the stock will go up into the mid-$30's or higher (with growth). I am a little apprehensive about whether they will show any real progress in the current quarter, but expect them to as the year unfolds.
Why would they do that? If they wanted 1.25 coverage they could just kick up growth capex a couple hundred million, coverage can be managed over the medium term, at least. They cut capex, because they didn't need to drill as much, they ran the numbers and found they could cover with less, and leave the Wolfcamp deal as a kicker to re-start distribution growth. It would be tremendously difficult to make acquisitions with a $20-25 unit price, which is where it would fall if they chopped the distribution. They have no intention of doing so, not in their darkest nightmares.
You haven't seen pain yet compared to what would happen if they lowered the dividend by 15pc. It would just trade down to a 10 or 11 pc yield at that dividend price, maybe lower if the market perceives this not to be a one off.
One comment. IMO, it would trade down not to a 10-11% yield but to a 14-15% yield if there were a modest dividend cut. Not matter what words management used to explain, the market would assume the worst. Maybe after a year or so, the stock would recover but the initial response would IMO be very bad.