Get in on the Ground Floor With the 'Warren Buffett of MLPs'

The Motley Fool emphasizes the importance of quality leadership. Since we invest in companies and not stocks, the management team is of the utmost importance to growing our investments and achieving long-term success. This article is about a special opportunity in the realm of midstream MLPs. One of the most qualified and successful CEOs in the industry with a proven track record of building a diversified-midstream empire is now at a much smaller partnership but playing by the same rule book. In this partnership, long-term investors get a chance to get in on the ground floor as this 'Warren Buffett of MLPs' builds another empire.

Crestwood Midstream Partners (NYSE: CMLP  ) is headed by CEO Robert Phillips (a 37-year veteran of the midstream industry), formerly of Enterprise Products Partners (NYSE: EPD  ) . The partnership was created in 2010 when Crestwood Management, in partnership with private equity firm First Reserve, bought the general-partner interest and 60% of the LP units of Quicksilver Gas Services. Since that time Phillips has steadily acquired gas assets around the country and today Crestwood services all of the major shale gas areas. 

The recent $1.61 billion acquisition of Inergy LP helped further diversify the partnership. Prior to the merger, Crestwood got 95% of its EBTIDA from natural gas transportation and processing. Inergy had greater access to oil and natural gas liquids (51% gas, 43% oil and natural gas liquids). 

Speaking about his reasoning behind the merger, Phillips stated he was a fan of Enterprise's diversified portfolio: "We're striving to replicate that business model. That's the primary strategic rationale behind the Crestwood-Inergy merger." 

In an interview with the Houston Business Journal the CEO explained that Inergy's downstream access to customers made it an appealing purchase. The combined company has an enterprise value of $8 billion and better access to cheap capital, which is the lifeblood of the industry. If Crestwood can grow to $500 million in annual free cash flow, it will achieve investment grade status by credit rating agencies, greatly lowering its borrowing costs.

The key to this goal is further expansion. In an Oct 7, 2013 interview with Bloomberg, the CEO stated that Crestwood was interested in further acquisitions (between $100 million and $1 billion in size). Just three days later Crestwood announced the $750 million acquisitions of Arrow Midstream Holdings LLC. The acquisition nets the partnership additional oil, gas, and water gathering assets in the prolific Bakken shale region of North Dakota. 

This kind of aggressive growth, along with transportation, processing, and storage facilities in the most prolific shale areas of the country (Marcellus, Utica, Eagle Ford, Permian Basin, Woodford, Bakken and Niobrara shales), ensures that Crestwood will be able to sustain its 7.2% yield and grow it over time. Since the partnership's IPO in 2012 Crestwood has grown the distribution at a 6% CAGR and raised the distribution every quarter. This recreates one of Enterprise Products Partners most beloved traditions, which is 39 consecutive quarters of distribution increases. 

Speaking of Enterprise, just why is this midstream MLP held in such esteem? And given that Phillips is building Crestwood into a miniature version of this partnership, what can Crestwood investors look forward to?

The distribution growth at Enterprise has been very consistent (5.72% CAGR over the last five years). This occurred even during the financial panic of 2008-2009, when competitor Atlas Pipeline Partners was near bankruptcy and slashing its distribution by 84% (resulting in a 95.5% unit price decline). 

Today Enterprise is the largest midstream MLP by market cap and one of the most diversified in America. Its assets store, process, and transport oil and gas from every major shale region in the country (as well as service Canadian tar sands and oil exports in the Gulf of Mexico). The legendary success of the partnership has resulted in the price being bid up and the yield is only 3.9%. Similarly, the size of the MLP has resulted in slower growth (though distribution growth in the last year has been 6%). However, a good argument can still be made for investing in Enterprise -- an argument based on two catalysts.

First, growth will continue -- slower, but just as steady. Management has $5 billion in investments coming online in 2014 and the areas the partnership services have 35 to 100 years of projected gas production.

Second, the distribution, though low by industry standards (average midstream yield is 5.1%), is as safe as a Volvo (distribution coverage ratio 1.55). The combination of consistent growth and bomb-proof distribution coverage will ensure consistent distribution growth going forward. 

Foolish takeaway
Crestwood Midstream Partners is run by one of the greatest CEOs in MLP history. It represents a chance for long-term investors to capture the same kind of legendary growth experienced by Enterprise's limited partners, but from the ground floor. 


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