i spoke to the invest relations guys and it looks like there is a short fall on the DCF of 10% meaning that the DCF coverage is 90%. NRGY will need to borrow to meet distro obligations. distro is 355 million - you guys do the math.
that is not going to change-i was told- in all of 2012. all new projects coming on line will not fix the shortfall. the weather is very warm making the earnings projections, well lets sa,y nothing to warm up to. the distro might stay the same but i did not get a good feeling it would. that is, as we know up to the board to decide. i decided to sell most of my units today- not comfortable that NRGY
can get it right anytime soon and I think the upcoming CC will be
hard to take.
If the distribution was cut by 10%, the yield would still be over 10%, one of the best in midstream MLPS. I don't think they will cut it though. ETP had coverage of the distribution as low as 85% in 2009-2010 and never cut the dist. With a good story for midstream growth, the lenders will be patient.
nrgy's ipo was created placing all mid stream assets into(nrgn)and nrgn now has mid stream assets once held by nrgy. nrgy owns 75% of ipo nrgp. so the mid stream assets are now an indirect asset class as part of the business model for nrgy. the problem is as the investor relations guy states nrgy can not go positive on DCF all of 2012. some newly acquired assets are under preforming and warm weather in the northeast make the shortfall for DCF more of an issue. look for a poor earnings projection going forward jan 27. nrgy will have to borrow to pay distro. (big dollars) not sure how long this will go on. i would hold off until things settle.
Lots of discussion of the potential for a distribution cut. A couple of things to note.
First, the distribution cut notion may be coming in part from a prediction by a blogger called MLPguy who predicted a distribution cut from one of the propane MLP's. Note that Ferrellgas also seems to be struggling and their yield was over 11% last time I checked. I don't follow Ferrellgas closely, but noted that they just announced layoffs in Kansas City.
Second, the decline nat gas prices is getting lots of publicity. Many posters on different message boards are discussing it and the WSJ just did a story.
Third, NRGY has room on their credit facility to fund the dividend. Remember, the NRGM IPO provided them with funds which they used to pay down higher cost debt, but it also resulted in transferring some $80mm of debt to NRGM. The earnings report will likely include several charges for extinguishment of debt, which while a negative to earnings, should improve their cashflow going forward. Now that NRGM has risen to around $19 per share (up from the offering price), they could also sell some more of their stake if they had to, although that would be a last resort.
Finally, the distribution announcement is due next week. Some investors may be bailing out to limit their risk. In my opinion, a cut is not coming because they have reduced a significant amount of debt with the proceeds of the midstream IPO, that their ratios should have improved.
I am losing patience with the stock and looking for a bounce, hopefully after the distribution is maintained. A distribution cut would be a killer.
I think NKA is the most likely MLP to cut their distribution, and even then I think it may be next quarter rather than this one. Their 2012 dcf shortfall is likely to by much worse than NRGY's.
As for NRGY, I think they will be reluctant to cut the distribution unless the situation is really dire. If coverage is in the 90% range, I'd think they would rather keep the distribution at the same level and wait for things to improve. Despite what one other poster said, when MLPs cut the distribution it is perceived negatively by the market and the unit price takes a haircut. Some other MLPs have gone with coverage less than 1 for a while (CPNO, for example).
While I agree with much of what you said, particluarly with respect to NRGM, I disagree with your assertion that a distribution cut would be a killer. The funders would view it positively, analysts would view it positively, and it would put the company on a more sustainable path, albeit with a somewhat lower yield. And, of course, the size of the reduction would determine the market's reaction as well. The larger the cut, the more pronounced the reaction would be. But I believe it would be a temporary reaction and an opportunity for smart money to accumulate the stock. Given that the stock is already evidently discounting that possibility to a near certainty, it may already be time to accumulate additional units.
You may be right. But, I doubt it. If NRGY does not cut the distribution, then nothing has changed. The stock is going down for two reasons. First, there is a fear that the distribution will be cut. Second, there is a fear that it will not. There are two points of view. I assure you the bankers and analysts want the disbribution to be reduced. Management of the company and its retail unitholders do not. Most retail investors in this stock are there for the income. Clearly, the health of the company depends on getting its distribution in line with its DCF. The current gap cannot continue indefinitely. With the company saying, by one report, that DCF will not support the current distribution during 2012, the handwriting is on the wall. I do not believe that NRGY can continue another year in its current condition.
I don't understand why a bunch of substanial insider buys would be made like is the case with NRGY knowing a dividend cut is coming. Can someone please explain what rational would be behind such a purchase
Nov 14, 2011 ELBERT PHILLIP
Officer 396,749 Indirect Acquisition (Non Open Market) at $0 per share. N/A
Nov 14, 2011 HUGHES CARL A
Officer 434,242 Indirect Acquisition (Non Open Market) at $0 per share. N/A
Nov 14, 2011 GAUTREAUX WILLIAM C
Officer 451,222 Indirect Acquisition (Non Open Market) at $0 per share. N/A
Nov 14, 2011 SHERMAN JOHN J
Officer 4,169,083 Indirect Acquisition (Non Open Market) at $0 per share. N/A
Nov 14, 2011 SHERMAN R BROOKS
Officer 151,992 Indirect Acquisition (Non Open Market) at $0 per share
i for one never said a cut was coming this quarter, but the fact remains clear that nrgy is short funding with respect to DCF and will be for at least 12 months or more. the weather here in the northeast is very mild and has been for some time, this will further
impact their ability to cover DCF going forward. the projects coming on line will not cover the short fall. nrgy may not meet the street expectations on earning and I don't see how they can given the various
negative factors - there may be further down side pressure to at least the 20 area. i was sucked into the stock by the insider buys at 23 and change. should have done the work before diving in. looking at the chart it looked like a bottom. now we are headed to 20 it seems. Tres Palacios TX dome is under performing. the spin off of nrgy best asset class- mid stream- will help but that was a prime asset class that nrgy now has only a 75% stake in. as that spin off grows nrgy collective "assets" will be enhanced. the question is should we own an under performing pipe when others like OKE - great mid stream pipe are raising their distros and will double by 2014. i still have some shares but this will take time to turn it self around.