Energy Transfer's (NYSE: ET) distribution is the latest victim of this year's downturn in the energy market. The master limited partnership (MLP) cut its quarterly payout in half (from $0.305 per unit to $0.1525 per unit) in response to the turbulence and uncertain market conditions. The distribution reduction will free up cash flow that the company can allocate toward other initiatives, including repaying debt.
While Energy Transfer had repeatedly said that it didn't need to reduce its distribution, the market had priced one in given its recent yield of nearly 20%. That's because its leverage ratio remains well above its targeted level, causing some concern about its financial profile and ability to maintain an investment-grade credit rating. While the company had hoped to reduce debt over time by completing expansion projects and generating free cash flow, this year's downturn in the oil market threw a wrench in those plans. Its earnings have come in below expectations due to lower volumes and commodity prices.
By cutting its payout, Energy Transfer is following the blueprint laid out by several other MLPs, many of which also opted for 50% reductions to free up cash flow for debt reduction. Those moves have paid off for EnLink Midstream (NYSE: ENLC) and DCP Midstream (NYSE: DCP), which have delivered meaningful debt reductions this year.
Energy Transfer's sizable distribution cut will accelerate its deleveraging program, which was on track to get a big boost starting next year due to an expected reduction in capital spending resulting from the upcoming completion of several expansion projects. Once Energy Transfer gets its financial situation back on a firmer foundation, it can return more cash to investors via either a higher distribution or a unit repurchase program.
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Matthew DiLallo owns shares of Energy Transfer LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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