These Oil Stocks Are a Ticking Time Bomb / Commodities / Crude Oil

I don’t blame you.

The yields on energy masterlimited partnerships (MLPs) are very tempting.

If you’re not sure what these are,energy MLPs are companies that own the pipelines that transport oil and naturalgas around the US.

And they often pay huge dividendyields. The top five oil MLPs have an average dividend yield of 5.3%. That’smore than twice the S&P 500 dividend yield of 1.9%.

I even found one oil MLP that ispaying a crazy 18.4% dividend.

But in The Weekly Profit, I’m on the lookout for safe income opportunities.

And while the MLP yields aregenerous, many of them are very unsafe.

Here’s why.

MLPsBorrow Money to Pay Dividends

Of those top five oil MLPs Imentioned, the average payout ratio is 104%.

The payout ratio is the percentageof net income a firm pays to its shareholders as dividends. So, if a companyhas earnings per share of $4 and pays $2 in dividends, it has a payout ratio of50%.

Bottom line: The lower the payoutratio, the more sustainable the dividend payment.

When the payout ratio is over 100%,the company is actually dipping into its cash reserves to fund thedividend.

Or worse, they’re using debt tofinance the dividend.

A company can’t borrow to pay itsdividend for very long. That’s even more true when oil pricesare tanking.

TheDays of Easy Yields Are Over

Oil prices have been in a tailspinsince October:



There are two reasons for thedecline.

The first is rising global supply.Saudi Arabia, Russia, and other producers have been wary of production cuts.This has left markets awash in oil.

When supply is rising and demandstays constant, prices tend to fall.

The second reason is fear of a global economicslowdown. WeakEuropean economic data and a struggling US stock market have roiled the energymarkets.

Now, MLP revenue is often directlylinked to the price of oil. When prices fall, MLPs make less money.

That leaves less money for investingin the business and—you guessed it—paying dividends.

And when a company cuts itsdividend, it’s bad news for the share price.

ThisIs How the MLP Sector Crashed in 2015

In December 2015, Kinder Morgan (KMI)was the largest oil pipeline operator in North America.

The company had raised its heftydividend for five straight years… by 30% each year!

But oil prices were doing theopposite. They fell from $105 per barrel in July 2014 to $43 in December 2015.

Then the unthinkable happened:Kinder Morgan slashed its dividend by 75%.

The news shocked investors. Many hadpiled into the nation’s largest pipeline operator because they thought the 8%dividend yield was safe.

When you catch the market off guard,you get punished.

Here’s a chart of Kinder Morgan’sshare price during this period:



Following the announcement, sharesgot chopped 28.6%. To this day, they have not recovered.

But they weren’t the only company tomeet this fate.

Major pipeline operators such as PlainsAll American Pipeline LP (PAA), NGL Energy Partners (NGL), and Enbridge EnergyPartners LP (EEP) would soon cut their dividends

This tanked the entire MLP sector.The Alerian MLP ETF (AMLP) crashed 47% between June 2015 and February 2016.

With cheap oil, the writing was onthe wall for many of these companies.

Low oil prices reduced the value ofthe commodity they were transporting. This lowered the company’s earnings andmade their dividends less safe.

Today, I see a similar pattern withthree other companies.

TheseMLPs Are Ticking Time Bombs

When looking for unstable dividends,I always look at the payout ratio.

A high payout ratio and falling orstagnating earnings is a death sentence for any company.

If the company is also burningthrough cash and has a weak balance sheet, a dividend cut will soon follow.

As we saw with Kinder Morgan, that’sbad news for shareholders.

The first is Sunoco LP (SUN).Investors are probably being lured by the company’s hefty 11.8% dividend.

But don’t take the bait. The companyhas a 670% payout ratio. That’s just insane. It means the company is paying outnearly seven times its annual earnings in dividends.

To add insult to injury, the companyhas drained its cash from $86 million to $15 million over the last year.

Next on the list is MartinMidstream Partners LP (MMLP). To the untrained eye, the company’s 18.4%payout looks enticing.

But it’s anything but safe. Thecompany has a 540% payout ratio.

For every dollar the company earns,it pays out over five times that amount in dividends. And witha mere $3 million in cash on its balance sheet, the company is standing on itslast leg.

Lastly, we have AndeavorLogistics LP (ANDX). This $9-billion company pays an eye-popping 11.4%dividend.

But it’s a trap. The company has a payoutratio of 204%. That means it pays out twice its annualearnings in dividends. Its cash position has sunk from $75 million to $30million in under a year, so the company has little left in the tank.

I understand the temptation to buyinto these companies. But don’t be fooled. These are not safedividends.

So, whatever you do, steer clear ofthese ticking time bombs.

BY ROBERT ROSS

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