The oil companies that could be in big dividend trouble

Could dividend trouble for energy companies be spreading?

On Tuesday, energy giant Kinder Morgan announced a plan to slash its quarterly dividend to 12.5 cents from 51 cents. And if the commodities crush continues, one analyst says a slew of other companies may find themselves in a similarly tight position.

Christopher Sighinolfi of Jefferies said Kinder Morgan is representative of energy companies that have taken a fall from crumbling oil prices, but struggle to maintain high dividends to attract investors. Higher yields are also in part a product of falling stock prices, as the existing dividend becomes a larger percentage of a lower share price.

Other beleaguered names in the space with high dividend yields include EnLink Midstream, Oneok, Plains GP Holdings and Spectra Energy. The most imminently similar company to Kinder Morgan is Targa Resources, Sighinolfi said, which has a dividend yield of 12 percent and is down about 70 percent year to date.

However, he said Kinder Morgan has suffered from a unique intersection of problems, such as highly leveraged debt, the threat of being downgraded to junk status and a pressing need for capital in 2016.

"These companies exist on a spectrum, and Kinder's issues were more acute," Sighinolfi said Wednesday on CNBC's "Trading Nation." "The rest of the universe that we cover, broadly speaking, doesn't have those pressures immediately."

Should markets normalize, others in the space may not need to follow in Kinder Morgan's footsteps, Sighinolfi said.

But "if current conditions persist, it will be contemplated at other companies. It is obviously having an effect on midstream equity valuations that have also largely been valued for years on their dividend yields and their dividend growth stories," Sighinolfi said.

On Monday, Sighinolfi published a report calling for Kinder Morgan to reduce its quarterly dividend all the way down to 1 penny. Before the cut, Kinder Morgan had one of the highest-yielding dividends in the S&P 500 at 13 percent.

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High-yield dividends can look attractive to investors, promising payouts on relatively cheaper stock holdings. But the current energy environment has some investors skeptical of using dividend yields to value stocks, Sighinolfi said. Not only might companies like Kinder Morgan be unable to sustain dividends, but high dividends may also indicate imprudent use of cash flow.

For Kinder Morgan, cutting the dividend will allow the company to allot more cash to capital expenditures and deleveraging debt without issuing new equity, Sighinolfi said, an ability the company previously lacked.

"We had made the call that if they were going to cut at all and alienate the investor who had been there solely for the dividend, that they might as well cut all the way down to a penny," Sighinolfi said. "If they could cut down to a penny, they could definitively restore their balance sheet."

Kinder Morgan shares soared after the dividend cut announcement, closing up almost 7 percent Wednesday and continuing the gains into Thursday trading.

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"I think it's being rewarded today by investors, because they see it as a much more prudent strategy to fund external growth with internally generated cash given the price of the equity itself," Sighinolfi said Wednesday.

However, like many others in the industry, Kinder Morgan's stock is down substantially for the year at about 60 percent.

EnLink, Oneok, Plains GP, Spectra Energy and Targa did not respond to requests for comment at the time of publication. Kinder Morgan did not provide additional comment beyond the company's press release and company call Wednesday.

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Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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