Crestwood Equity Partners: Another Safe 50+% Yield – Crestwood Equity Partners LP (NYSE:CEQP)


I have written two articles since the beginning of the market crash due to the outbreak of coronavirus on two high yield midstream O&G companies that had well covered 50%+ dividend yields. Those articles were based on Enable Midstream Partners (ENBL) and EnLink Midstream (ENLC).

The purpose of those articles was to show that the companies had high fixed-fee components to their revenue structure, low leverage, but most importantly, were focused on distributing cash to shareholders and paying down debt as a means to create value for shareholders versus allocating DCF towards CAPEX plans that may not realize immediate shareholder value due to the uncertain outlook. The reason for this strategy may also be due to the substantial drop in the share prices making issuing equity an unattractive option for raising capital. Financing growth CAPEX would make more sense to use a combination of “cheap debt” due to Fed drops in the base rate albeit with some borrowing constraints (limits on revolvers) and retained earnings.

ChartData by YCharts

Another company that fits this mold is Crestwood Equity Partners LP (CEQP). I bought this stock back in 2016 for ~$20/share after the oil collapse in 2014 and after a distribution cut was realized. After the distribution was slashed in half, I still enjoyed a yield in excess of 15%, plus the share price took off and climbed for the next couple years as I was able to sell near the high of $40/share. This is a prime example of the market overreacting to an imminent problem of low commodity prices and a dividend cut, and seems to be the case now.

My reason for selling was not because of unfavourable fundamentals but because of a less favourable valuation.

ChartData by YCharts

Once again the stock trades at close to its 2016 valuation in terms of EV/EBITDA, with an even higher dividend yield due to the increasing quarterly dividend from $0.60/share to $0.625/share in that time.

The fundamentals are even better than they were in 2016 as well. This is another midstream that appears priced for bankruptcy at ~4x EV/EBITDA and ~1.0x P/DCF. But the situation could not be further from the truth.

Source: March 2020 Investor Presentation

Background and Investment Thesis

CEQP has three different operating segments:

  • Gathering and processing (26% of 2019 revenue)
  • Storage and transportation (1% of 2019 revenue)
  • Marketing supply and logistics (73% of 2019 revenue)

CEQP has a fairly diversified asset base. The G&P operations and investments are located in North Dakota, Wyoming, West Virginia, Texas, New Mexico and Arkansas and provide gathering, compression, treating and processing services to producers in multiple unconventional resource plays, some of which are the largest shale plays in the United States.

The S&T operations consist of crude oil terminals in the Bakken and Powder River Basin and natural gas storage and transportation assets in the Northeast and Texas Gulf Coast.

The MS&L segment consists of NGL, crude oil and natural gas marketing and logistics operations, including rail-to-truck terminals located in Florida, New Jersey, New York, Rhode Island, North Carolina and Connecticut. CEQP utilizes its trucking and rail fleet, processing and storage facilities, and contracted storage and pipeline capacity on a portfolio basis to provide integrated supply and logistics solutions to producers, refiners and other customers in over 30 states from New Mexico to Maine.

Source: March 2020 Investor Presentation

These are all very high-quality assets as they are on the lower end of the breakeven cost curve, which is important in this low oil price environment as E&P companies are less likely to make major production cuts at these wells.

What is even more attractive about CEQP is that 83% of its EBITDA for 2020 is expected to come from fixed-fee contracts and all from investment grade reputable customers.

Source: March 2020 Investor Presentation

CEQP has a ~10-year average contract length and Crestwood purchases 100% of oil and gas volumes at the wellhead in the Bakken region with major producers such as WPX Energy, Inc. (WPX), XTO Energy Inc. (XTO), and Enerplus Corp. (ERF).

CEQP has invested ~$600MM at sub-5x build-multiples over the last three years to expand its Bakken footprint to fully support strong producer development.

During 2019, CEQP placed in service a 120 MMcf/d cryogenic plant in the Bakken that will fulfill 100% of the processing requirements for producers on the Arrow system. This expansion increases the gas processing capacity to 150 MMcf/d in that region.

Source: March 2020 Investor Presentation

The expansion of gas processing capacity on the Arrow system will ignite greater development activity around the Arrow system, provide greater flow assurance to producer customers and reduce flaring of natural gas, and reduce the downstream constraints currently experienced by producers on the Fort Berthold Indian Reservation.

Source: March 2020 Investor Presentation

In April 2019, CEQP acquired Williams’ 50% equity interest in Jackalope for approximately $484.6 million. The acquisition of the remaining 50% equity interest in Jackalope was financed through a combination of borrowings under the revolver and the issuance of $235 million in new Series A-3 preferred units to Jackalope Holdings.

In the Powder River Basin, CEQP has expanded Jackalope gathering system and Bucking Horse processing plant to increase processing capacity to 345 MMcf/d as of February 2019. The Phase 2 Jackalope expansion also includes gathering, compression and a second processing plant which will add an additional 200 MMcf/d of processing capacity to the Jackalope system which allows CEQP to process 100% of the gas gathered by Jackalope.

In the Delaware Permian, CEQP has identified gathering and processing and transportation opportunities in and around existing assets, including the Crestwood Permian joint venture. In the Delaware Permian, it is expanding systems to include a produced water gathering and saltwater disposal system. CEQP has entered into a produced water gathering and disposal agreement with a large integrated producer in the Delaware Permian in Culberson and Reeves Counties, Texas, for initial system capacity of 60 MBbls/d with long-term plans to expand system capacity up to 120 MBbls/d based on producer activity.

The storage and transportation segment includes a 50% equity interest in Stagecoach Gas Services LLC (Stagecoach Gas), which is accounted for under the equity method of accounting. The wholly-owned subsidiary, Crestwood Pipeline and Storage Northeast LLC (Crestwood Northeast), and Con Edison Gas Pipeline and Storage Northeast, LLC (CEGP), a wholly-owned subsidiary of Consolidated Edison, Inc. (Consolidated Edison) (NYSE:ED), formed Stagecoach Gas to own and further develop the company’s natural gas storage and transportation business located in the Northeast. The JV’s operations are held under long-term management agreements.

Marcellus is one of the most prolific US dry gas basin as Stagecoach expects to generate an additional ~$125MM in adjusted EBITDA in 2020. The basin has a 20-year, fixed-fee gathering and compression services contract with Antero Resources (NYSE:AR).

Liquidity and Financial Flexibility

CEQP could not have picked a better time to complete its major 2017-2019 expansion projects completed in Bakken, Powder River Basin and Delaware Basin, as most projects are either up and running or set to be up and running in 2020, which is important in this uncertain environment as it will be able to maintain its modest growth CAPEX planning for 2020 at only $150MM-200M, nearly half the level in 2019.

Source: March 2020 Investor Presentation

This is all the more important as well because in November 2019, Chesapeake (CHK), a major customer in the Powder River Basin, announced that continued low commodity prices could negatively impact its cash flows and financial condition, and raised substantial doubt about its ability to continue as a going concern given the financial covenants contained in its debt agreements. Subsequent to that announcement, CHK announced that it had refinanced certain amounts of its debt and amended its debt covenants to alleviate its liquidity concerns. CEQP continues to gather and process natural gas volumes under contracts with CHK, and is current on its payments.

What this could mean in the event of a bankruptcy, however, is that the fixed-fee contracts get renegotiated to reduce the guaranteed revenues CEQP will receive from CHK over the 5-7 year period.

Assuming DCF just remains constant YoY at the 2019 level of $305MM, with $200M in growth CAPEX and $192M in common share distributions, CEQP would still be able to self-fund 78% of these planned expenditures as the company had $661.3MM in available capacity under the revolving credit facility as of December 31, 2019, with no upcoming debt maturities until 2023 as that is the expiry of the revolver.

Source: March 2020 Investor Presentation

The most restrictive covenant on the revolver is the net debt to consolidated EBITDA ratio of not more than 5.50:1.0. With net debt at about $2,600MM and 2019 YE adj. EBITDA at $527M (not including unconsolidated affiliates), CEQP could stomach a ~10% drop in EBITDA before CAPEX or dividends would need to be cut to pay down debt.

Although this seems somewhat precarious, the Stagecoach storage facility is expected to bring in an additional $125M in adj. EBITDA through long-term (10-20 year) fixed-fee contracts which can offset the likely drop in revenue in 2020 on percentage of product or service contracts.


Similar to ENBL, CEQP’s balance sheet and asset base are well-positioned to face this period of economic uncertainty and we can be confident in the company maintaining its dividend for the foreseeable future. It has confirmed moderate growth CAPEX plans for the immediate future, giving it ample flexibility for distributions and/or share buybacks, which is a more favourable quality to have in this environment rather than having a greater percentage of the asset base in infrastructure financed via debt to obtain future shareholder value that may not materialize for a few years.

Disclosure: I am/we are long CEQP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.