At $7.50, the share price of Southcross
Energy Partners (SXE) offers a 21.3% dividend yield. Income investors who have
stopped to sniff around this midstream master limited partnership, however, might
want to pick up their piggy banks and keep walking.
The
majority of its revenue is derived from fixed-fee contracts, which have limited
direct exposure to commodity price levels. Nonetheless, the continued slowdown
in producer drilling activity is crippling income, as most sales are based on volumes
of natural gas (gathered, processed, treated, compressed and transported). In
the most recent quarter ended June 30, sales fell 14.3% to $167.2 million.
Southcross
Energy is highly leveraged, carrying total debt more than ten times trailing
twelve-month EBITDA of $48 million. A continued deterioration in financial performance
suggests the mouth-watering $1.60 dividend (per share) is likely to be
materially slashed – if not eliminated in its entirety.
Management
hinted as such in the recent second-quarter 10Q filing: “our forecast indicates
a shortfall in the amount of consolidated EBITDA (as amended in May 2015)
necessary to remain in compliance with the consolidated total leverage ratio of
our Financial Covenants.”
The
company will need to raise at least $35 million to cure this deficiency.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
