Crestwood Equity Partners: One of the Best MLPs on the Market

Crestwood Equity Partners (CEQP) has been one of the best-performing midstream master limited partnerships this year. That success comes on the heels of its efforts to reduce debt and bring in partners so that it could return to growth, which is finally starting to show up in its financial results. In this Industry Focus: Energy clip, host Nick Sciple and Fool.com contributor Matt DiLallo discuss what makes Crestwood Equity Partners stand out, Crestwood's expansion projects, and what else lies ahead for Crestwood.

A full transcript follows the video.

This video was recorded on Nov. 15, 2018.

Nick Sciple: Let's pivot into your main discussion today, which is pipeline companies. The first company we want to talk about is Crestwood Equity Partners. Their an MLP pipeline business. They yield a little over 7%. Up about 28% year to date. They have a fairly well-covered distribution, about a 1.2 distribution coverage ratio. When you look at Crestwood Equity, what really stands out to you about that business?

Matt Dilallo: They've done a lot over the past couple years to turn around. I've been watching them for a little while. I actually bought some units earlier this year. I saw the turn in their financials, their leverage ratio, which is the amount of debt they have to earnings. That's gone from over 5 to around 4. And then, their coverage ratio, as you mentioned, is up to 1.2. They were paying out more than they were bringing in for quite a while. They sold assets, they cut their distribution a few years ago, they partnered with a bunch of companies to bring in cash, but also to help fund grow. They've done a lot to turn around, and it's finally starting to show up in their financials. Their earnings were up about 8%, which is good for a company that's been steadily declining. It was nice to see that turn. And that turn's going to accelerate going forward. They've had success.

What they do is, their main business is gathering and processing. That's taking natural gas from the wellhead. They'll take that and separate out the natural gas liquids. It's a business that's very dependent on volume. As oil and gas companies are drilling, the volumes go up. That's been one of the things that has driven them lately, this uptick and drilling, especially in places like the Bakken, where they have a good position. They're also in the Delaware Basin, which is part of the Permian, and the Powder River Basin, which is out in the Rockies. They've got these three growth engines. They're starting to finish up some projects. As those projects are coming online, it's allowing companies to drill more wells, complete more wells. That's really starting to accelerate their growth, and they're starting to take off.

Sciple: Let's talk about some of those new pipeline investments that are coming online. You mentioned partnering with some other businesses in the Delaware base. They're working on their Orla natural gas processing plant and pipeline. They've announced a joint venture for the Nautilus Orla pipeline, with Shell Midstream Partners for what Shell's doing. Similarly, in the Powder River basin, they're partnering with Williams Companies to help support the growth of Chesapeake Energy. Latching on to these producers they're servicing, what advantages does that give them? Does that give them some steadier cash flow opportunities because they're partnered with these producers? Give us some color on what that means for the business.

Dilallo: We'll start in the Powder River Basin, where they're working with Williams Companies to support Chesapeake Energy. Chesapeake's one of the bigger drillers out there. Chesapeake really sees a lot of growth potential out in that area there. Production is up, like, 100% in the past year off a low base. They're putting more rigs out there. That gives Williams and Crestwood visibility. They can tell, "OK, Chesapeake's production is going to grow by X%. To support that, we need to build these gathering pipelines," which will take the raw production from the well to these processing plants, which separate the natural gas from the natural gas liquids. They get paid fees as they do this. So as the volumes go up, the fees go up. It's a really good visibility business. It is tied to, we call it the supply side versus the demand side. It's really driven by drilling. With oil prices recently going up this has been really driving that.

By working with both Chesapeake and Williams, they have a very good idea of what's going on, as far as planning how many wells. And then Williams, they help fund half of it. For a company that's paying out with a 1.2 coverage ratio, that's probably over 70% of their cash flow, they don't have a lot of retained cash to reinvest. So that's helping them with that.

The same thing in the Delaware basin working with Shell. Obviously, a massive company. They have their own MLP and they're working with them to follow along with what Shell's doing so they can time these gathering pipelines coming online. You mentioned the Orla plant. That's the first one. They'll probably build a second one there. It's really being able to time these plants so they're not building a natural gas processing plant on speculation, but they know that the volume is coming, so they can make that return very quickly.

Sciple: Right. As a result of these investments, Crestwood is projecting a cumulative annual growth rate in their cash flow per unit at 15% through 2020. They're really thinking that there are some significant growth opportunities. We've discussed the Bakken and the Permian in the past, and the real opportunities, once we get this infrastructure online, for that growth lever to really get pulled.

Looking forward for Crestwood over the next few years, if an investor wants to start a position or wants to start following the stock to think about maybe starting position in the future, what are the things that investors should watch going forward or pay attention to with this business?

Dilallo: One of the things I like about Crestwood is that they're focusing on growing earnings per unit, focus on the individual growth as opposed to absolute. That's what will create value, more so than "We're going to double business," but if they're issuing a whole lot of new shares to do that, it really doesn't help the investor. I like that focus on the per unit. That'll make sure that they're able to grow the distribution. This is an income-focused stock. As they're able to grow that distribution, they probably won't grow it at 15% per year, but they might grow it 5%-7% a year, which would be more sustainable. That will give them more free cash flow later on to reinvest into new projects. I like that it'll be a steady grower. You're not going to see another 30%, I doubt it, in the next year. But a good, steady grower with the distribution.