What happened
Units of midstream energy player NGL Energy Partners (NYSE: NGL) nose-dived 15% by 2:30 p.m. EDT on Oct. 27. The units started the day off in the red and then continued to trickle lower and lower as investors digested the master limited partnership's business update. It wasn't good.
So what
The big news from NGL Energy's update can be summed up pretty quickly: another distribution cut. After trimming the payment from $0.39 per unit per quarter to $0.20 in April, the partnership has now cut the payment to just $0.10 per unit per quarter. All in, that's a roughly 75% haircut for income-oriented investors. It's not surprising that NGL Energy's units sold off.
Image source: Getty Images.
But that's not all the news the company provided. While management stressed that the business was performing as expected, it also noted that it was working with its banks to extend the maturity of its credit facility. In addition, the partnership continues to look at assets that it might sell to further reduce debt. Basically, leverage is a problem here, and it's not likely to be an easy fix, noting that financial debt to EBITDA was over 10 times at the end of the second quarter. While management tried to put a positive spin on things, highlighting that the dividend reduction will help on the leverage side of the equation, the debt update was really no better a piece of news than the dividend cut.
Now what
It would be an understatement to say that the energy sector is facing headwinds today. Things are pretty bad, and it could be some time before there's a sustained recovery. And much depends on the path of the global pandemic. While dealing with that, NGL Energy also has to contend with a heavily leveraged balance sheet. At this point, most investors should probably sit on the sidelines here.
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