Crestwood Stock: Busy Afternoon (NYSE:CEQP)

Monday Announcements:

After the close today (Monday Sept 12th), Crestwood (NYSE:NYSE:CEQP) made a series of announcements that I believe both finish rationalizing the portfolio of assets and remove a large overhang on the units.

• The sale of its Marcellus Assets to Antero Midstream (AM)
• The sale of 11.4 million of its units by the largest shareholder Chord Energy (CHRD), formerly Oasis Petroleum
• The purchase of $125 million of those units from CHRD at the secondary offering price

I’ll take these one at a time. The sale of the Marcellus assets was pretty heavily telegraphed and was something I speculated on in previous write-ups on the company. The Marcellus was the smallest footprint and growth there was largely capped as the company was primarily servicing acreage owned by Antero Resources (AR), which abutted acreage serviced by Antero Midstream (AM). AR has definitely prioritized AM-serviced acreage at the expense of CEQP in the past, and there was no real prospect to scale in this geography.

Unfortunately, this dynamic made AM the only real buyer of the assets. Consequently, the company only got $205 million or about 7x 2023 EBITDA for the sale, which looks cash flow neutral to slightly dilutive. However, the sale focuses management and the proceeds helped out in the unit transactions the company also announced today.

Chord Energy, f.k.a. Oasis Petroleum, announced the sale of its 11.4 million units of CEQP it acquired as part of the Oasis Midstream acquisition. CHRD was the largest unitholder and clearly was going to sell at some point. Therefore this sale removes an overhang on the shares. Moreover, thanks to the Marcellus sales, the company has the wherewithal to buy $125 million of these units from CHRD at the same secondary price CHRD receives for the units that CEQP is not buying. CEQP’s price was around $27.50 after hours. At that price, CEQP can buy about 4.5 million of the 11.4 million units, which should be cash flow accretive and still give the company $80 million of cash to pay down debt. The company also reiterated its confidence in achieving its 2023 leverage target of below 3.5x.

Valuation:

I’m reducing the unit count by 4.5 million, reducing net debt by $100mm and reducing EBITDA by $30 million to reflect all of the changes. I’m also using $27.50, where the units were indicated after the deal announcement. It raises the valuation slightly from my last write-up after Q2, but the unit price is also 5% higher.

Market Cap (Using 100.5 million units at $27.5/unit)	$2.764 billion
Preferred Units	$612 million
Minority Interest	$430 million
Net Debt	$3.1 billion
Enterprise Value	~$6.90 billion
EV/EBITDA (Using $800 million EBITDA midpoint)	8.6x

Click to enlarge

Conclusion:

The Marcellus transaction should close in Q4 barring any antitrust problems, which I don’t expect. I like exiting the Marcellus. I wish we could have gotten a better price but again it was a buyer pool of one. I like removing the CHRD overhang on the units and I like buying back shares at what I consider an excellent free cash flow yield. The company’s distribution coverage should go back to about 2x in short order. At 9.15% distribution yield and now ~18% free cash flow yield for a business that has scale and organic growth in highly productive geographies with a balance that sports investment grade metrics, I continue to not understand why this company remains below its pre-COVID valuation and units a no brainer that pay you to wait.