Looking at Southcross Energy's 21% Yield? Don't

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.

Weak market fundamentals augur a dividend cut will be high on any list of necessary executed actions. 

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.