3 Double-Digit Energy Dividends That Could Be in Big Trouble

Image source: Noble Corp Investor Presentation.

One thing that needs to be considered when looking at the offshore market is that many U.S. shale producers can now generate positive returns at lower prices than offshore oil, and we may not fully grasp how shale's ability to rapidly ramp up production could impact oil prices long term. On top of that, many of Noble's competitors will be bringing new rigs online over this time frame, which will make for very stiff competition when bidding for new contracts.

Another thing to consider is that Noble doesn't have a track record as a company that consistently pays a dividend. In the past 25 years the company has instated and suspended dividend policies three times. While dividend suspensions are very discouraging for the investor, they are normally necessary to get through tough situations like the one that we could be facing in the next 12 to 18 months in the offshore market.

While there are some reasons that Noble might be able to pull it off without cutting its dividend -- it does have one of the stronger balance sheets in the offshore market and very few capital obligations going forward -- there is a very real chance that we haven't seen the worst of the offshore market. If that is the case, then the chances of Noble being able to fork over about $375 million a year to its shareholders will get slimmer by the day.

Adam Galas : One oil producer whose sky-high yield is, in my opinion, unsustainable and threatened with a payout cut is Breitburn Energy Partners . While that may sound grim to investors of this embattled MLP that's already slashed its distribution twice -- 76% from its December 2014 payout -- there are two main reasons I think another payout cut is possible over the next few quarters.

First, Breitburn has a mountain of long-term debt on its balance sheet: $3.1 billion, to be precise. The earliest debt maturity is the $1.3 billion it's borrowed under its current $1.8 billion credit facility, on Nov. 19, 2019. While that may sound like Breitburn has plenty of time for oil prices to recover, the problem is that this credit facility is up for redetermination on April 1, 2016.

According to Breitburn's latest 10-Q, on this date its lenders can adjust down its credit facility -- which is already 72% drawn -- at "their sole discretion based on their valuation of our proved reserves and their internal criteria." The last time creditors readjusted its borrowing limit was on April 8, 2015, when, in order to secure a $1 billion cash infusion from EIG Global Energy Partners , Breitburn's borrowing capacity was slashed 28%.

Since that time, WTI crude is down another 13%, which means the value of Breitburn's reserves continue to decline and, barring a sharp recovery in oil prices by April 1, the MLP's credit facility is likely to get cut again, threatening the sustainability of its current distribution.

Another major problem is that Breitburn's strong hedge portfolio -- 75% and 65% of liquids production in 2015 and 2016 at $93.46 and $89.01 per barrel, respectively -- could roll off before oil prices recover. For example the EIA is currently forecasting WTI will average $54 per barrel in 2016, and in 2017, 61% of Breitburn's crude production won't be hedged, meaning distributable cash flow could take a serious beating.

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The article 3 Double-Digit Energy Dividends That Could Be in Big Trouble originally appeared on

Adam Galas has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. The Motley Fool recommends BreitBurn Energy 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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