Crestwood Equity Partners' (NYSE:CEQP) strategy of investing in high-return expansion projects is starting to pay off. The company's financial results -- which started turning around late last year -- accelerated as expected during the first quarter of 2019.

That trend should continue for at least the next two years, especially after it recently took full control over one of its growth engines. That provides further support for the company's 6.6%-yielding payout while increasing the potential for future dividend growth once Crestwood gets through its current investment phase. 

Drilling down into the results

Metric

Q1 2019

Q1 2018

Growth (YOY)

Adjusted EBITDA

$115.3 million

$101.7 million

13.4%

Distributable cash flow

$68.3 million

$53.4 million

27.9%

Distribution coverage ratio

1.6 times

1.25 times

28%

Data source: Crestwood Equity Partners.

Crestwood Equity Partners generated strong earnings and cash flow during the first quarter. The company benefited from an uptick in volumes thanks to recently completed expansion projects, as well as its ability to capture opportunities in the energy market brought on by higher oil prices during the quarter.

A chart showing Crestwood Equity Partners first quarter results by segment in 2019 and 2018.

Data source: Crestwood Equity Partners. 

Earnings from Crestwood's gathering and processing (G&P) segment slipped 6% year over year mainly due to $4 million in noncash losses from the sale and retirement of assets in the Granite Wash and Delaware Basin, as well as declining volumes in some of its legacy gas-focused gathering systems. Those issues clouded the positives in the G&P segment, which benefited from 30%-plus growth in the volume of gas processed and produced water gathered in the Bakken, as well as gas gathered in the Delaware Basin. The company anticipates even stronger volumes and earnings growth during the second half of the year as the Bear Den II plant comes on line and it expands its Jackalope gathering system in the Powder River Basin.

Storage and transportation earnings zoomed nearly 46% versus the year-ago period even though volumes transported declined from 2.2 billion cubic feet per day (BCF/d) to 1.9 billion BCF/d. Two factors offset that issue. First, Crestwood began receiving 40% of the cash from its Stagecoach joint venture with Consolidated Edison last July. Meanwhile, the company's COLT crude-by-rail hub loaded 63% more volumes in the quarter thanks to improved oil prices and higher oil production out of the Bakken. Crestwood anticipates continued growth in this segment, driven by another increase in the cash distributions from its partnership with Consolidated Edison to 50% this July.

Earnings in Crestwood's marketing, supply, and logistics segment rocketed more than 70% year over year even though the company sold its West Coast business late last year. The company more than offset that lost income by utilizing its excess storage capacity at COLT and capturing opportunities to earn a profit by moving oil and natural gas liquids (NGLs) to higher valued markets.

Pipelines heading to a refinery with the sun shining in the background.

Image source: Getty Images.

A look at what's ahead

Crestwood has several expansion projects underway that should drive growth over the next couple of years. In the Bakken, the company is building the Bear Den II natural gas processing plant and expanding its Arrow system to gather more natural gas and produced water. These projects should provide a meaningful boost to the company's cash flow from the region starting in the fourth quarter, which should continue during 2020.

The other major near-term growth driver is the company's Jackalope system in the Powder River Basin. Crestwood bought out Williams Companies' 50% interest in that joint venture earlier this month for $485 million. As a result of that deal, Crestwood will now collect 100% of the income from this system as well as take over responsibility for Williams' half of the expansion-related funding. The company is currently building the Bucking Horse II plant as well as additional natural gas gathering infrastructure to support the growth of Chesapeake Energy. Those projects should come on line by the first quarter of next year, enabling Chesapeake to double its volumes in the region.

The acquisition of Williams' stake in Jackalope will provide a meaningful boost to Crestwood's full-year results:

Metric

Updated Guidance

Midpoint growth versus 2018

Prior Guidance

Midpoint growth versus 2018

Adjusted EBITDA

$500 million to $530 million

23%

$460 million to $490 million

13%

Distributable cash flow

$275 million to $305 million

30%

$245 million to $275 million

15%

Data source: Crestwood Equity Partners.

The acceleration has begun

Crestwood Equity Partners' growth engine started accelerating during the first quarter as anticipated. That should continue throughout the next year as the company benefits from its acquisition of Williams' stake in Jackalope and completes its current slate of expansion projects. That growth will enhance the long-term sustainability of its high-yielding payout, which could start increasing again in the next year.