Crestwood Equity Partners' (CEQP) first-quarter results once again showed that it's heading in the right direction. As a result, the company is on pace to create significant value for investors over the next couple of years. That was the key message CEO Bob Phillips wanted to get across on the accompanying conference call, where he laid out four reasons why he thinks the company is an extremely compelling investment opportunity right now.
We're in excellent financial shape
Phillips started off the call by stating that Crestwood is off to "a great start in 2018" after its first-quarter results came in ahead of its expectations, setting it up to deliver on its full-year target. Furthermore, the CEO stated that the company is in "in very solid financial shape." He pointed out that "our leverage ratio was 3.9 times and our coverage ratio was 1.25 times, well within our targets going forward." In fact, those numbers are a bit more conservative than many peers, which are comfortable with leverage above 4.0 times and coverage closer to 1.0 times. Crestwood, on the other hand, is "100% committed to maintaining our strong financial health," according to Phillips.
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Our outlook is excellent
Not only is the company's financial foundation solid, but the CEO stated that "business fundamentals are strong and driving demand across our entire asset base." He added, "When combined with the new projects that we have coming online in 2018, we expect Crestwood will reach an inflection point near midyear 2018 to begin to see meaningful cash flow growth as we exit the year and move into 2019." The company's current slate of projects should add an incremental $120 million in annual EBITDA through 2021, which is significant considering that it's on pace to generate $390 million in EBITDA this year.
We have lots of skin in the game
Crestwood's management team takes its financial stewardship very seriously. That's why they've aligned themselves with investors by "collectively own[ing] about one-third of the common units outstanding," according to Phillips. Due to that, the CEO stated, "Our business decisions are purely driven to enhance the total return for our unitholders."
We're trading at a compelling valuation
Even though Crestwood has a solid financial foundation and visible growth coming down the pipeline, Phillips noted that "we're operating in a macro environment that is creating some noise." As a result, Phillips "believe[s] the unit price is undervalued from several different perspectives." He laid out his case by making four points:
- "We are not getting credit for all the fees that we're charging on the production that we're moving and the growth ramp-up that we've experienced and will experience" in the Bakken.
- In the Delaware Basin, the company has "a great set of brand-new assets right in the middle of the core of the most active basin in North America today, and I don't believe we're getting credit for all the growth potential out of that."
- While the company has a strong position in the Powder River Basin and "a high level of confidence that the volumes are going to grow dramatically," the CEO doesn't "think we're getting credit for the high-return wells that Chesapeake Energy is drilling and the growth potential there for both gas and oil."
- Finally, in the Marcellus, the company's Stagecoach joint venture with Consolidated Edison is "strategically located for long-term infrastructure expansion." That's increasingly likely because "companies like Cabot Oil & Gas and Chesapeake Energy continue to drill at very, very good returns." Given Crestwood and Consolidated Edison's ability to operate competitively, "We're not going to miss an opportunity to grow up there."
He finished by saying that "all of these projects will begin to have a material impact over the next year and a half to two years," and that they're already fully financed. Due to that, he believes there's a "case for unrecognized value in the Crestwood unit price today."
It all adds up to one compelling opportunity
Phillips laid out a convincing investment case on the call, pointing out that not only is Crestwood built on a solid financial foundation, but it's undervalued given the growth coming down the pipeline. Income-seeking investors can lock in a rock-solid 8.1% yield as well as experience the upside as the market begins realizing the value that Phillips and his team are creating at Crestwood. That income with upside has the potential to generate market-beating returns for investors in the coming years.
