Williams Companies (NYSE:WMB) and Crestwood Equity Partners (NYSE:CEQP) are both working toward similar goals. The midstream companies want to improve their financial and growth profiles. That way they can continue expanding while maintaining their high-yielding payouts. They took a notable step toward that aim this week by teaming up on a win-win transaction.
The deal saw Williams sell its 50% interest in Jackalope Gas Gathering Services to its partner Crestwood Equity for $484.6 million in cash. The transaction will reduce Williams' debt and capital expenses while accelerating Crestwood's growth rate.
What the sale means for Williams Companies
Williams Companies has been seeking buyers for its 50% interest in Jackalope since last November. It wanted to sell the business to pay down some debt and reinvest in its most promising growth areas. The company initially hoped to fetch more than $500 million for the stake, which drew interest from other midstream companies and private-equity funds. In the end, however, it sold the business to its joint-venture partner.
Williams plans to use the cash it receives to pay down debt. That will enable it to continue whittling down leverage, which entered the year at an elevated debt-to-EBITDA ratio of 4.8. This sale, combined with another joint-venture transaction last month, will bring in nearly $1.1 billion in cash for debt reduction. In addition to the cash proceeds, Williams Companies will also save about $90 million that it would have invested in expanding Jackalope this year. The company can redirect that money toward additional debt reduction or other high-return expansions. That will improve the long-term sustainability of Williams' dividend, which currently yields 5.3%.
What the acquisition means for Crestwood Equity Partners
While Jackalope wasn't a core growth driver for Williams, it is an essential piece for Crestwood, which now becomes the leading gathering and processing company in the fast-growing Powder River Basin. That enhances the appeal of what's a needle-moving deal for Crestwood Equity.
Overall, Crestwood anticipates that its cash flow per unit will expand at more than 20% annually through 2020, an acceleration from its prior outlook. Driving that view is the expectation that these assets will supply it with $100 million in cash flow this year, which should expand to $150 million by 2021. Supporting that growth are long-term contracts with Chesapeake Energy (OTC:CHKA.Q), which is using the Powder River Basin as the "growth engine of the company."
Crestwood sees ample opportunity to expand Jackalope beyond supporting Chesapeake's fast-growing output in the region. That's because it now has full control to pursue additional opportunities, such as adding more third-party customers to its system. The company recently agreed to gather gas produced by Panther Energy, and is evaluating the possibility of providing services to others with acreage surrounding its existing footprint. Adding more third-party customers would enhance its long-term growth prospects in the region.
Another benefit of this transaction is that Crestwood can grow at an accelerated rate while maintaining solid financial metrics. Not only did it pay a reasonable price for an expanded stake in Jackalope, but it was also able to issue preferred stock to help fund the deal. That allowed it to avoid diluting existing investors while also keeping leverage within its target range. The company now estimates that it can cover its 6.7%-yielding distribution by a very comfortable 1.5 to 1.7 times. That's up from its earlier view that distribution coverage would be between 1.4 and 1.6 times this year.
A good deal for both parties
Williams Companies is taking another step to firm up its financial profile by selling its stake in a noncore asset. That will give it the cash to pay down debt, and save it from having to spend money on Jackalope's expansion projects. Crestwood, on the other hand, grabs full control over an asset that's core to its growth for a reasonable price. That will give it the fuel to expand cash flow at an accelerated rate over the next two years.
Another benefit of this win-win deal is that it enhances the long-term sustainability of both companies' high-yield payouts, making them even more attractive options for income-seeking investors.