Crestwood Equity Partners (CEQP 0.80%) has been the top-performing midstream company this year, delivering a total return of more than 30% through mid-November. Those gains were fueled by notable improvements in the company's financial results, including in the third quarter.
However, as good as this year has been, the company's management team sees even better days ahead. That was evident from comments made during the third-quarter conference call. Here are the three key messages executives had for investors.
1. We're exceeding our expectations
CEO Bob Phillips led off the call by discussing the company's financial results:
Looking at the third quarter and for the first nine months of 2018, we've certainly exceeded our internal expectations for both adjusted EBITDA, as well as distributable cash flow, and I think would largely beat consensus estimates along the way. So, we're very pleased with that. That does position us to have a really strong finish to 2018 and we're clearly on track to achieve our financial guidance targets, which at the midpoint, you might remember, would imply year-over-year adjusted EBITDA growth of about 10% from 2017, and recall that we adjusted our guidance up midyear as we gained more confidence in the volumes across our systems and the services that we're providing to customers.
As Phillips noted, the company's results this year have trended ahead of its expectations. Two factors have fueled those stronger-than-expected results. First, the company is completing its expansion projects on time, which has enabled it to start cashing in on those investments. It has also benefited from the improvement in commodity prices this year. Those higher prices have given drillers the money to complete more wells, which drove higher volumes into Crestwood's systems. On top of that, the company has been able to take advantage of the improving market conditions to move larger quantities of oil and natural gas liquids (NGLs) by truck and rail to higher-priced markets.
2. We expect growth to accelerate in the coming years
However, as good as 2018 has been, Crestwood expects even better results in the coming years. Phillips noted on the call that the company's success this year positions it to "deliver adjusted EBITDA and DCF [distributable cash flow] growth of about 15% per year over the next few years starting in 2019." Among the things underpinning that view are the expansion projects the company has underway.
Phillips noted that Crestwood is in the process of expanding three of its gathering systems: Arrow in the Bakken, Nautilus in the Delaware Basin, and Jackalope in the Powder River Basin. Crestwood and its joint venture partner Williams Companies (WMB 0.21%) recently sanctioned a major expansion of Jackalope to support the growth of Chesapeake Energy (CHKA.Q) and other customers in that area. They expect to finish one small project this year and a larger one by the end of 2019. However, with Chesapeake Energy ramping up its drilling activities in the area, Crestwood and Williams anticipate that the expanded system will quickly fill up, which leads them to believe that they might need to sanction another project in the next year. Because of this increased visibility on future expansion projects, Crestwood's "confidence level ... is high," according to Phillips.
3. We're looking at resuming distribution growth in 2019
With cash flow on pace to grow at a fast clip in the coming years, Crestwood should soon be generating more than enough money to support its current distribution to investors as well as finance a sizable portion of its expansion projects. Because of that, the company is considering the options for its growing cash flow. When asked by an analyst on the call what the company might do with that cash, CFO Robert Halpin said, "I think we would probably lean toward some appropriate and modest amount of distribution [increase]."
Halpin noted that with the company's financial metrics already at its target levels, and on pace to improve with cash flow, its priority is to fund high-return expansion projects. However, with "the very clear line of sight we have to the expansion in growth in 2019," management is evaluating an incremental return of capital to investors starting next year.
Entering a period of sustained success
After enduring several challenging years, Crestwood Equity Partners has started turning around this year. That rebound should accelerate in 2019 and beyond, fueled by the growth projects it has underway, as well as those it's increasingly confident it will develop in the future. Those expansions should provide the company with an increasing supply of cash flow, which should enable it to resume distribution growth next year. That growing income stream should give the company the fuel to continue delivering strong total returns, which makes it a great stock to buy for the long haul.