Crestwood Equity Partners LP (CEQP) isn't a household name, but that doesn't mean it isn't worth getting to know a little better. In fact, the midstream partnership is working with a few companies you may have heard of before, like New York utility Consolidated Edison, Inc. (ED 0.64%). And while leverage is an issue to watch, partnering up with companies like Con Ed should allow Crestwood to keep growing while keeping leverage to a minimum. Here are some of the details you'll want to know if Crestwood's 7.5% distribution yield interests you.
A little Crestwood background
Crestwood breaks its business down into three divisions: gathering and processing, storage and transportation, and marketing, supply, and logistics. It has assets spread across the continental United States, and roughly 85% of its EBITDA comes from fee-based contracts. Its counterparties include some of the largest names in the energy industry, including ExxonMobil, Royal Dutch Shell, and Con Ed.
Image source: Getty Images.
That said, the oil price downturn in mid-2014 took a toll on the partnership's business, particularly its gathering assets. Essentially, when drillers pulled back because of low prices it meant less oil flowing through Crestwood's pipes. To give you an idea of how bad it got, Crestwood's distribution coverage was a very tight 1 times in 2015, with that metric dipping to just 0.8 times in the fourth quarter of that year. The downturn forced the partnership to take material writedowns, totaling around $3.5 billion, and then it chose to cut its distribution by 56% in 2016 to free up cash.
Since that point, Crestwood has been working to get back on track, with 2017 proving that it's headed in the right direction. Some of the key turnaround initiatives included buying Crestwood Midstream Partners, LP (Crestwood is the general partner), pushing out debt maturities and lowering interest expenses, and selling non-core assets (including the late 2017 sale of US Salt). It also inked some key partnerships (more on this below). As a result of these efforts, Crestwood's distribution coverage was a healthy 1.25 times in the first quarter of 2018. Although the distribution is lower on an absolute basis today, it's on much stronger ground.
Where to from here?
There's an interesting dichotomy here, however. Crestwood was looking to stay financially disciplined, but it also needed to invest to grow. Doing both at the same time is difficult, which is why it partnered up with Con Ed in the Marcellus region, Shell Midstream Partners LP (SHLX) and First Reserve in the Delaware Basin, and Williams Partners (NYSE: WPZ) in the Powder River basin. These agreements allow Crestwood to keep expanding its business without having to foot the entire bill for the investments.
The Delaware Basin is a telling example. Crestwood, Shell Midstream, and First Reserve are partnering on two pipelines and a processing plant. Crestwood and First Reserve are 50/50 partners on the Willow Lake gathering system and the Orla plant. They each hold a 25% stake in the Nautilus gathering system, with Shell Midstream controlling the rest. Nautilus is backed by oil giant Royal Dutch Shell's expansion plans in the region, while Willow Lake counts Concho Resources as a key customer. Both gathering systems should be connected to the processing plant in the first half of 2018, offering near-term growth potential.
An overview of Crestwood's 2018 spending plans. Image source: Crestwood Equity Partners LP IMAGE: https://s2.q4cdn.com/398504439/files/doc_presentations/2018/03/Crestwood-Investor-Deck_March-2018.pdf page 21
Crestwood's 50/50 joint venture with Williams in the Powder River basin, meanwhile, is expected to hit capacity in the second half of 2018 or early 2019. That, in turn, could lead to further opportunity for demand-driven expansion. And the partnership's 50/50 joint venture with Con Ed in the Marcellus region is intended to help satisfy the increasing demand for natural gas in the Northeast. Crestwood's take from this business will increase five percentage points to 40% in mid-2018, and then to 50% in mid-2019.
The best part of all of this is that the combination of Crestwood's asset sales and the partnership structure on these assets means it shouldn't need to tap the equity markets to fund these projects in 2018. They also allowed the limited partnership the flexibility to make headway on its leverage issues. And as they start to contribute to the top- and bottom-lines, Crestwood's financial results and balance sheet should continue to improve.
Worth a deeper dive for high-yield lovers
While you may not have heard of Crestwood, you should really take some time to get to know the partnership. It survived a rough patch, and looks like it's gotten itself back onto the right path today -- a path backed by partnerships with names you have likely heard of. Meanwhile, you'll collect a fat 7.5% yield while you wait for its partnership investments to play out.
