Examining Midstream C-Corp Dividends as Yields Rival Historical MLP Yields

04/22/20 | Bryce Bingham

Given their greater income, we have typically prioritized MLPs in our research covering yields and distributions (read more). However, the recent sell-off and consequential increase in the yields of the broader midstream space has prompted many income-oriented investors to consider both energy infrastructure MLPs and their historically lower-yielding C-Corp counterparts. The Alerian Midstream Energy Select Index (AMEI), which has a 75% weighting to US and Canadian midstream corporations and 25% weighting to midstream MLPs, has yielded 5.3% on average since inception in April 2013. For context, this compares to an average yield of 7.3% for the Alerian MLP Infrastructure Index (AMZI) over the same time period. With the steep sell-off in the space, the AMEI’s yield reached an all-time high of 15.2% on March 18 and sits at 9.6% as of April 21 even with announced dividend cuts included. This is well above the historical average yield for MLP-only indexes.

Similar to their MLP peers, several C-Corps have revised their dividend policies in the wake of lower oil prices. Through April 21, 13 out of the 51 total dividend-paying North American midstream companies have announced reduced payouts for 1Q20, including four C-Corps. The table below shows the four C-Corps that have announced dividend cuts as well as the four corporations maintaining dividends sequentially based on formal announcements. Every company that has reduced its payout so far has had higher than average leverage with the exception of Equitrans Midstream (ETRN), which announced a cut alongside its simplification transaction in late February. Retained cash flow from Targa Resources' (TRGP) 89% dividend cut and 32% 2020 capex budget reduction will help strengthen the company’s balance sheet. Inter Pipeline (IPL) stated that the $525 million of cash savings from its 72% dividend cut will be used to fund the Heartland Petrochemical Complex without the need for external equity financing. Macquarie Infrastructure's (MIC) dividend action is also worth highlighting given its unique storage business. The company suspended its dividend after reporting a 4Q19 payout ratio of over 140% and noted the ongoing impact of COVID-19 on its aircraft fueling and Hawaii utility businesses.

While the cuts may garner more attention, there have been several midstream C-Corps that have announced flat dividends for the first quarter. C-Corps with a combined weighting in the AMEI Index of 14.7% are maintaining their 1Q20 payouts compared to a weight of 12.6% for C-Corps cutting dividends. When including MLPs, 31.8% of AMEI constituents by weighting are maintaining their dividends compared to 19.3% that have announced cuts. Many MLPs and corporations have not yet declared their dividends, and the numbers cited only account for announcements – not guidance. Those choosing to hold dividends flat typically have lower leverage or a more diversified customer base than the companies that reduced payouts as shown in the table above. Larger, integrated midstream companies were also able to maintain their dividends, including multiple MLPs listed below. Interestingly, a number of gathering and processing (G&P) focused C-Corps are holding their payouts steady, while cuts for MLPs were heavily concentrated in the G&P segment (read more). G&P C-Corps Antero Midstream (AM) and ONEOK (OKE) both maintained their dividends despite yields reaching highs of 72.8% and 30.8% in March, respectively. Canadian companies Pembina (PBA/PPL CN) and Keyera (KEY) held their most recent monthly payouts flat. Given the defensive characteristics of Canadian midstream (read more), IPL’s dividend cut may be the exception to the rule rather than the norm for the Canadian names, which are the largest portion of the North American energy infrastructure universe by market cap as of the end of March (read more). Initial dividend cuts have been painful, and more could be on the horizon. However, many midstream corporations, along with MLPs, remain well positioned to provide investors with attractive income going forward given the strength of their financial positioning, diversified asset base, and fee-based business model.

MLPs growing/maintaining distributions sequentially based on distributions declared to date:
Blueknight Energy Partners (BKEP), Crestwood Equity Partners (CEQP), Delek Logistics Partners (DKL) Energy Transfer (ET), Enterprise Products Partners (EPD), Phillips 66 Partners (PSXP), Shell Midstream Partners (SHLX), TC PipeLines (TCP)

Links to company materials:
Equitrans Midstream (ETRN)
Inter Pipeline (IPL)
Macquarie Infrastructure (MIC)
Targa Resources (TRGP)
Antero Midstream (AM)
Keyera (KEY)
Pembina Pipeline (PBA/PPLCN)