Crestwood Equity Partners (CEQP) was the top-performing master limited partnership (MLP) of 2018 by a landslide. The midstream company generated a total return of 17% last year, which was well ahead of the negative-12.7% total return of the average MLP as measured by the Alerian MLP ETF. That outperformance has continued in 2019, as Crestwood has generated a more than 23% total return through the first month and a half, which has outpaced the 18% total return of its peers in the Alerian MLP ETF.
That significant outperformance probably has investors wondering if Crestwood is still worth buying today. While it's not the steal it once was, it remains a compelling buy for the long term. Here are three reasons why.
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The valuation still looks attractive
While Crestwood Equity Partners' unit price has rebounded more than 30% since the start of 2018, that doesn't mean this MLP lacks further upside. For starters, with units recently selling for around $33.75 apiece, Crestwood trades at about 10.8 times 2018's cash flow. Meanwhile, the company expects its cash flow per unit to increase by 16% at the midpoint of its guidance range in 2019, which implies that units sell for only around 9.3 times forward cash flow. With most midstream companies trading for more than 10 times cash flow, Crestwood has some upside as it works its way up closer to the peer group average.
Its high-yield payout is getting stronger by the quarter
Another factor that makes Crestwood Equity Partners look like an attractive option for investors is its increasingly sustainable high-yield distribution. The payout, which currently yields 7.1%, has become much more of a sure thing for income investors in recent years. Crestwood has done that by firming up its financial foundation through selling assets and investing in expansion projects that are growing its cash flow.
Crestwood's distribution coverage ratio, for example, has improved from around 1.2 at the start of last year to an even more comfortable 1.4 to 1.6 in 2019. Meanwhile, the company sees coverage rising to about 1.75 next year as it benefits from the incremental cash flow of expansion projects it has coming online. Leverage, on the other hand, has fallen from 4.8 in 2015 to 4.3 at the end of last year and is on track to head below 4.0 next year. Those forecast metrics for 2020 would give Crestwood the second best numbers in its peer group next year.
Lots of growth coming down the pipeline
Crestwood invested $332 million on expansion projects last year and anticipates spending another $275 million to $325 million in 2019 and between $100 million and $150 million next year. Those projects position the company to grow earnings and cash flow per unit at more than a 15% compound annual rate from 2017's base through next year. That growth rate is right near the top of its peer group.
Crestwood, however, could grow at an even faster pace next year if it secures more expansion projects and spends closer to 2019's level. The company is currently working on several opportunities. For example, Crestwood and its joint-venture partner, Williams Companies (WMB -0.30%), are evaluating the potential to add more third-party producers to their Jackalope system in the Powder River Basin, which currently supports Chesapeake Energy. Crestwood and Williams are also looking at expanding their service offerings in the region to include crude oil services. Meanwhile, Crestwood has several future expansion opportunities in the Delaware Basin, including building a second natural gas processing plant in Orla and expanding into crude oil as well as water services. Finally, the company sees opportunities in the Marcellus to expand its Stagecoach joint venture with Consolidated Edison (ED -0.41%). Among the projects Crestwood and Consolidated Edison are evaluating are those that would increase the amount of natural gas they transport out of the area.
If the company can secure the projects it currently has under development, Crestwood would not only be able to grow at a faster pace in 2020 but should also be able to maintain its current high-octane growth rate further out into the future. Meanwhile, another potential future growth driver is the consolidation some of its joint ventures -- such buying out Williams Companies' interest in Jackalope, which it's reportedly looking to sell -- as well as acquiring third-party assets to bolster its footprint in its core regions.
Check out the latest Crestwood Equity Partners earnings call transcript.
It all adds up to a compelling buy
While Crestwood's unit price might not be as low as it was at this time last year, the company's valuation remains cheap because of how fast earnings and cash flow are growing. Add in a rock-solid high-yielding distribution and lots of growth ahead from projects under construction, as well as additional upside from those in development, and Crestwood Equity Partners looks like it has the fuel to continue delivering market-beating total returns over the next few years, making it a solid buy these days.
