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Why DCP Midstream Partners Fell after Simplification Announcement

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Jan. 9 2017, Updated 9:08 a.m. ET

DCP Midstream’s market performance

DCP Midstream Partners’s (DPM) simplification received a negative reaction from investors. DPM fell 4.3% in two trading sessions following the announcement. This could be mostly attributed to Moody’s announcement that it would downgrade DPM after the corporate restructuring. DPM was downgraded from Ba1 to Ba2.

The rationale behind DPM’s downgrade is its increased leverage following the reorganization. According to Moody’s, “DPM’s debt to EBITDA ratio was 5.9x as of 30 September 2016, pro forma for the reorganization, and 6.3x, if the DCP GP Holdco debt is included.”

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Moody’s added, “The rating is tempered by higher commodity price risk, MLP model risks with high payouts (although the three year IDR give back is a positive) and the reliance on debt and equity markets to fund growth.” We’ll discuss the IDR (incentive distribution right) givebacks in a later article.

DCP Midstream Partners, which mostly provides natural gas gathering and processing and NGLs (natural gas liquids) transportation and storage services, has gained 72.4% during the past year. In comparison, DPM’s peers—Crestwood Equity Partners (CEQP), Western Gas Partners (WES), and Enable Midstream Partners (ENBL)—have gained 49.8%, 46.4%, and 118.8%, respectively. However, DPM and most of its peers are still trading below the levels before the rout in energy prices.

A look at DPM’s moving averages

Currently, DPM is trading 5.4% above its 50-day moving average and 9.2% above its 200-day moving average. Plus, the 50-day moving average surpassed the 200-day moving average earlier during 2016, indicating a bullish trend in DPM stock.

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