Crestwood Equity Partners (CEQP) has been one of the top-performing energy stocks this year, delivering a total return of more than 40%. Fueling that surge has been the noticeable improvement in the company's financial results as volumes ramp up across its systems, which was evident again in the third quarter. With several recently completed expansion projects just starting up, and more coming down the pipeline, this high-yielding master limited partnership (MLP) should have plenty of fuel with which to continue producing high-octane returns in the coming years.
Drilling down into the results
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Adjusted EBITDA |
$101.4 million |
$96.3 million |
5.3% |
|
Distributable cash flow |
$51.7 million |
$50.3 million |
2.8% |
|
Distribution coverage ratio |
1.2 times |
1.2 times |
N/A |
Data source: Crestwood Equity Partners. YOY = year over year.
While earnings and cash flow only rose by a mid-single-digit rate versus the year-ago period, that was due to the impact of asset sales in its marketing, supply, and logistics business, which masked the company's underlying strength.
Data source: Crestwood Equity Partners. Chart by the author.
Earnings in Crestwood's gathering and processing segment surged 12% versus last year's third quarter thanks to a 27% increase in gas processing volumes and a 31% jump in produced water volumes. Fueling the uptick in those volumes were expansion projects the company completed over the past year as well as an improvement in drilling activities in its core regions thanks to higher oil prices. That ramp-up in activity is driving increased utilization for the company's assets, which is opening the door for new investment opportunities.
Profitability in the company's storage and transportation segment also increased 12% year over year. Natural gas storage and transportation volumes surged 20% thanks to higher volumes on its Stagecoach Gas Services joint venture with Consolidated Edison (ED 0.64%) and increased storage utilization at Tres Palacios, which is a natural gas storage facility in Texas. The company also benefited from a step up in distributions from its joint venture with Consolidated Edison so that Crestwood is now receiving 40% of the income. Finally, crude oil loading volumes at the company's COLT Hub in North Dakota rocketed 119% due to higher oil prices and tightening pipeline capacity.
The lone laggard was the company's marketing, supply, and logistics segment, where earnings declined from $13.9 million to $7.4 million due to the sale of two non-core businesses. However, after adjusting for those sales, profit in the segment jumped 26% due to increased NGL supplies as production volumes in the industry expanded while pipeline projects faced delays.
Image source: Getty Images.
A look at what's ahead
According to CEO Robert Phillips:
During the third quarter, Crestwood delivered strong financial results, continued solid execution on our capital investment program, and benefited from robust market fundamentals that continue to support development activity and commercial growth opportunities across our franchise positions in the Bakken, Powder River, and Delaware Basins.
As a result, the CEO noted that the company is:
... right on track to achieve all of our 2018 guidance targets and maintains strong confidence in our ability to drive a 3-year 15% annual growth rate in EBITDA and DCF per unit by executing on our backlog of existing and new organic expansion opportunities which fit our disciplined investment and financing criteria focused on generating long-term accretive value for our unitholders.
The company currently has several expansions under way that should fuel growth in the next year. In the Powder River Basin, for example, Crestwood and its partner Williams Companies (WMB 1.21%) are expanding their Jackalope joint venture to support the growth of Chesapeake Energy (CHKA.Q). The partners currently expect to finish expanding their Bucking Horse gas processing plant in the region by year end while adding a second one by the end of 2019. In addition to that, Williams and Crestwood are building new gathering pipelines so that Chesapeake Energy can accelerate its development activities in that region, with it expecting its volumes to double in the next year.
In addition to those expansions, Crestwood continues to build out its gathering and processing footprint in both the Delaware Basin and Bakken region. The company has several expansion projects under way in each area, which, when combined with the continued ramp-up in drilling activities, should boost its volumes and earnings in the next year.
Pushing down on the accelerator
Assets sales masked the fact that earnings from the company's underlying operations are starting to accelerate thanks to recently completed expansion projects as well as a ramp in drilling activities across its core areas. That accelerating growth rate should become even more visible in the coming quarters as the impact from asset sales fades, and the volume ramp continues. As that happens, it could give Crestwood even more fuel with which to continue delivering high-octane total returns for its investors.
