Last year was a rough one for master limited partnerships (MLPs). That's evident by taking a look at the Alerian MLP ETF, an exchange-traded fund that holds 38 MLPs, which delivered a negative total return of 12.7% in 2018 even after factoring in their high-yielding dividends. Only a handful on MLPs managed to produce positive returns last year, led on the midstream side by Crestwood Equity Partners (CEQP), which delivered an impressive total return of 17%.
That strong showing last year could be just the beginning of good things to come from Crestwood given that the company expects earnings growth to accelerate in 2019 as more expansion projects come online. Add that growth to its still-cheap valuation and other catalysts on the horizon, and this MLP could continue enriching investors in 2019 and beyond.
Check out the latest Crestwood Equity Partners earnings call transcript.
What went right in 2019?
After several down years, Crestwood Equity Partners returned to growth in 2018. Through the third quarter, the company's adjusted EBITDA had risen 7.6% versus the same period in 2017, while distributable cash flow would have been up 8.5% if it weren't for the impact of an increase in distributions paid to preferred investors. Driving that growth was a rise in volumes across much of the company's footprint due to improving oil market conditions and the positive impact from recently completed expansion projects.
In addition to growing earnings, Crestwood also took several steps to further bolster its financial profile. Not only did the company sell its non-core West Coast natural gas liquids (NGL) operations, but it proactively amended and extended its credit facility, which firmed up its liquidity while reducing interest expenses.
Meanwhile, Crestwood made excellent progress on its expansion plan by completing several projects last year. In the Bakken, the company expanded and debottlenecked its Arrow gathering system and started up its first Bear Den processing plant. Then, in the Delaware Basin, it expanded its Nautilus gathering system and finished the Orla Express pipeline, as well as the first Orla processing plant. In addition to that, the company enhanced its growth prospects by acquiring a pipeline segment in the Delaware Basin to improve its competitive position in the region while moving forward with an expansion of its joint venture with Williams Companies (WMB 0.30%) in the Powder River Basin. The project with Williams includes expanding their Jackalope gas gathering system, expanding their Bucking Horse gas processing plant, and building a second facility at Bucking Horse.
Why 2019 could be an even better year for Crestwood
Many of Crestwood's expansion projects didn't enter service until late 2018, so the company won't enjoy their full benefit until this year. On top of that boost, the company has several expansions nearing completion that should provide a further lift to 2019's results, such as those in the Powder River with Williams, as well as Bear Den 2 and the continued growth of Arrow and Nautilus. In the company's view, those projects position it to grow earnings by more than 15% this year and likely another 15% in 2020.
Crestwood has several options for the gusher of cash flow it expects to haul in this year. One of them is that it could start increasing its distribution once again, which is already an attractive payout at an 8% yield. In addition to that, the company could also invest in more expansion projects or start repurchasing units.
That latter option might not be a bad idea even after last year's rally. That's because Crestwood still trades at a relatively low valuation when factoring in 2019's growth. At the current unit price, Crestwood sells for an enterprise value-to-EBITDA ratio of less than nine times expected earnings in 2019, which is the third cheapest in its peer group and well below the roughly 11 times average of its rivals.
Everything's in place for another banner year
While 2018 was an excellent one for Crestwood's investors, the company appears poised to continue delivering strong total returns in 2019. For starters, the MLP pays a well-supported 8%-yielding dividend that provides a solid foundation. On top of that, the company has lots of growth coming down the pipeline in both 2019 and 2020, which should boost its value. Add in the potential for Crestwood's valuation to move closer to its peer group average, and this midstream stock has enough fuel to deliver another double-digit total return in 2019.