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Why DCP Midstream’s Current Capital Expenditure Is Low

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DCP Midstream’s distributable cash flows

DCP Midstream Partners’ (DPM) distributable cash flow for 2Q16 was $128 million compared to $141 million during the second quarter of 2015, a YoY decline of 9.2%. The decrease in distributable cash flows drove DPM’s coverage ratio lower. DPM’s 2Q16 coverage ratio stood at 1.1x. The partnership’s distribution coverage might remain volatile due to the volatility in commodity prices.

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DCP Midstream’s distributions

DPM declared a flat distribution of $0.78 per unit for 2Q16. Based on the recent distribution, the partnership is currently trading at a high distribution yield of 9.1%, which might not be sustainable for the long term. DPM peers EnLink Midstream Partners (ENLK) and Summit Midstream Partners (SMLP) are also trading at a high yield of 9.2% and 10.0%, respectively.

DCP Midstream’s capital expenditure

DCP Midstream’s capital expenditure for the second quarter of 2016 was $7 million. According to the 2Q16 earnings call, the partnership has “substantially executed” its 2016 capital program. The decline in DPM’s maintenance capital in 2Q16 is mainly due to idled capacity in the Eagle Ford system and the sale of its North Louisiana pipeline. While few midstream MLPs are still aggressive on their growth projects, DCP Midstream seems to be looking for a stabilized commodity price environment despite its relatively low leverage.

On addition of new capacity through organic projects, Wouter van Kempen, DPM’s CEO, said, “where we’re sitting here today with these commodity prices, overall, the oil and gas business is not sustainable. So we continue to look and talk with producers and say you need to have prices that are probably on the crude lines, somewhere in the mid to high $50s or low $60s per barrel high, depending on where you are to really have a sustainable long-term kind of approach from producers where they’re willing to commit to new capacity. And that holds true for us as well.”

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