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Genesis Energy Announced a Distribution Cut

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Genesis Energy slashed its distribution 31%

Genesis Energy (GEL), the Texas-based midstream MLP, shocked its investors with a distribution cut announcement on October 12, 2017. Genesis Energy, which continued to grow its distribution for 48 consecutive quarters, declared a distribution of $0.5 per unit for 3Q17. It’s a 31% cut compared to the distribution of $0.7225 per unit in the previous quarter. Genesis Energy joined the minority list of midstream companies that have announced a distribution cut since the rout in energy prices. The list includes Kinder Morgan (KMI), Plains All American Pipeline (PAA), and Williams Partners (WPZ).

The partnership expects to grow its distribution by at least $0.01 per unit starting in 4Q17 with a distribution coverage between 1.4x and 1.6x. If we assume the minimum distribution growth of $0.01 per unit, it would take 5.5 years to reach the current level of distribution.

Genesis Energy expects to use the cash savings to lower its debt. It’s targeting a leverage ratio of 4.75x, 4.25x, and 3.75x for 2018, 2019, and 2020, respectively. It doesn’t expect to access the equity capital market in the near future. It plans to evaluate a buyback program.

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Market Reaction

The news didn’t go well with investors and Genesi Energy shares fell 4.7% following the announcement. It could be attributed to an expected fall in investor returns following the cut. Genesis Energy has lost 31.3% since the beginning of the year. At the same time, the Alerian MLP ETF (AMLP), which is comprised of 25 energy MLPs, has lost 10.9%. Genesis Energy is underperforming AMLP by 2,600 basis points.

In the next part, we’ll look at the reasons behind the distribution cut. In Part 3, we’ll discuss analysts’ recommendations.

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