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A 13.3% Yielder Burning at Both Ends

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When we talk about dividend payers, sometimes we have to be wary of yields that are too juicy…

And that may be the case with the master limited partnership (MLP) we’re looking at today – USA Compression Partners (NYSE: USAC).

Its 13.3% distribution yield (MLPs pay distributions, not dividends) definitely piques interest, but checking under the hood reveals some issues…

USA Compression Partners provides equipment and services to the oil and gas industry. Its compression machines keep pressure high in pipelines to move natural gas.

The energy sector has had an unsteady year… Oil prices are rising, which might seem like a positive at first. But a mismatch between supply and demand due to a production crunch shows that this cyclical industry is still in recovery mode.

Not only does USA Compression Partners find itself smack-dab in the middle of a turbulent energy market… but its services are also very niche.

Still, despite issues brewing, USA Compression Partners makes rewarding shareholders a top priority…

While others in this industry cut their distributions during the pandemic to tackle dangerous debt, USA Compression Partners kept up its distribution without any cuts, as it has since 2013.

The danger here is whether the partnership is putting too much emphasis on its distributions.

Over the past few years, the company had been growing its distributable cash flow (or the cash available to give out to shareholders). Distributable cash flow came in around $118 million in 2017, $177.8 million in 2018 and $220.8 million in 2019, and it increased (if only slightly) to $221.9 million in 2020. That’s not the case this year, however, as its distributable cash flow is predicted to decrease to $213 million.

That’s still enough to cover its distributions – landing at a payout ratio of 96.67%. That’s less than 100%, so it’s safe for now, but just barely.

(As a reminder, Chief Income Strategist Marc Lichtenfeld generally likes to see payout ratios of 75% or less with usual stocks, but Marc is comfortable with an MLP paying out as much as 100%.)

At the same time, USA Compression Partners has seen its debt increase, and it has made no significant improvements to its balance sheet…

While others improved their businesses in 2021, the partnership seems to be going in the wrong direction. For the third quarter of 2020, it reported $161.67 million in revenue. For the third quarter of 2021, meanwhile, it reported $158.63 million in revenue. Previously, it had been growing its revenue year over year.

USA Compression Partners is clearly committed to compensating its shareholders – but at what cost?

In order to sustain its distribution in the long term, the partnership needs to invest in its business and make improvements to operations.

Right now, management states that the plan is to save money by making use of idled equipment, which doesn’t give a whole lot of guidance for 2022.

But we can cut USA Compression Partners some slack… The pandemic put unprecedented strain on the company, and it chose to prioritize shareholders. Plus, it’s putting in the work to better its margins.

If distributable cash flow continues to slide, the safety of this distribution could be in jeopardy. But because USA Compression Partners is set on keeping up its distribution payments, I think it will do everything in its power to continue paying its distribution. That means we can count it safe… for now.

Dividend Safety Rating: C

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