Crestwood Equity Partners (CEQP +0.00%) continued making progress on its turnaround efforts during the second quarter by posting better-than-expected results. That sets it up for an even sharper upward turn in the second half of this year and heading into 2019 as it brings more of its expansion projects online. That expected upturn will put the company's high-yield payout on an increasingly firmer footing, which enhances its appeal for income investors.
Drilling down into the results
|
Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$102.9 million |
$97.3 million |
5.8% |
|
Distributable cash flow |
$54.2 million |
$61.3 million |
-11.6% |
|
Distribution coverage ratio |
1.3 times |
1.5 times |
-13.3% |
Data source: Crestwood Equity Partners.
Crestwood's earnings rose nearly 6% during the quarter even though it recently sold its US Salt business, which impacted results. It's also worth noting that while distributable cash flow declined, that's because the company issued preferred shares last year to help fund some of its expansion projects. After adjusting for this impact, cash flow would have increased 12.9% versus last year's second quarter. Meanwhile, even though the distribution coverage ratio declined, it's still at a very healthy level and well above average for an MLP.
Driving Crestwood's growth was the strong result from its gathering and processing (G&P) segment:
Data source: Crestwood Equity Partners. Chart by author.
Overall, earnings in the G&P segment jumped 16% year over year due to strong volume growth on its Bakken, Delaware Basin, and Powder River Basin systems, with the first two also benefiting from recently completed expansion projects. Natural gas processing volumes were noticeably higher -- up 28% versus last year's second quarter -- while the amount of produced water it gathered also increased sharply, up 21% year over year.
While earnings in the storage and transportation segment dipped, Crestwood noted several positives during the quarter. One of them was that gas storage injections increased at its Stagecoach Gas Services joint venture (JV) with Consolidated Edison (ED +1.33%). Meanwhile, Crestwood pointed out that earnings from that JV will be on the rise. The company noted that as of July 1, it's receiving 40% of the distribution from this 50/50 JV with Consolidated Edison due to a step-up in their agreement and that it will receive the final step up to a 50-50 split next July.
Finally, earnings in Crestwood's marketing, supply, and logistics segment also declined year over year. However, that's due entirely to the sale of US Salt. Without that impact, earnings would have rocketed 46% thanks to the strength of its natural gas liquids (NGLs) business.
In commenting on the quarter, CEO Robert Phillips stated: "Crestwood continued to build strong momentum during the second quarter, with better-than-consensus quarterly performance, timely completed capital projects and contracts, newly announced growth projects and non-core asset sales, while maintaining a strong balance sheet and self-funding model through 2018 and 2019 based on current plans."
Image source: Getty Images.
A look at what's ahead
That better-than-expected performance when combined with higher-than-anticipated oil prices enabled the company to boost the bottom end of its guidance range. Crestwood now anticipates adjusted EBITDA of $400 million to $420 million, which is a slight improvement from its initial forecast of $390 million to $420 million. That increase is even more impressive considering that the company announced the sale of its West Coast NGL assets during the quarter, which will give it some more cash to fund expansion projects.
The company can put that money to work right away since it recently secured two new expansion opportunities. First, Crestwood acquired ownership of the EPIC NGL Pipeline's Orla-to-Benedum segment to create an integrated midstream business in the Delaware Basin. In addition, Crestwood and Williams Partners (NYSE: WPZ) approved some growth projects in their Jackalope JV in the Powder River Basin. Crestwood and Williams will jointly fund the expansion of their Bucking Horse gas processing plant as well as their natural gas-gathering infrastructure in the region.
These new expansions, when combined with those already under way, position Crestwood to grow earnings and cash flow at a 15% annual rate through 2020. Such a rapidly rising cash flow stream would provide further support for the company's high-yielding distribution while also giving it more money to invest in additional expansion projects in the future.
A stronger income stock with each passing quarter
Crestwood has done a remarkable job executing its turnaround program. Because of that, it's on pace to grow at a high rate over the next few years while maintaining its high-yielding payout. That makes it an excellent option for income seekers to consider.
