Crestwood Equity Partners (NYSE:CEQP) recently reported exceptional first-quarter results as earnings surged more than 13% while cash flow zoomed almost 28%. Because of that, the company's 6.6%-yielding dividend is on an even firmer foundation.
However, as good as those numbers were, they weren't the central theme running through the accompanying conference call. Instead, the company's management team spent lots of time discussing its acquisition of the other half of its Powder River Basin joint venture. CEO Bob Phillips provided a great deal of color on the transaction during the call, pointing out several reasons his company is so excited to have full control over that asset.
It checks all the boxes
Phillips led off his comments on the deal by saying that it "is another big strategic step for Crestwood." That's because it met the company's promised parameters to "only acquire additional assets if they fit our financially disciplined growth model." To do that, Phillips pointed out that acquisitions must:
- Be in the company's core basins.
- Deliver returns above its weighted average cost of capital.
- Be accretive to DCF (distributable cash flow) per unit, while being leverage-neutral or leverage-enhancing over time.
"This acquisition clearly fits all three guidelines for us," according to Phillips. That's because it's in the Powder River Basin -- which is one of its core areas -- it will exceed the company's 15% return hurdle, and it will immediately boost the company's cash flow per unit growth rate from 15% up to 20% annually through 2020. Further, leverage will fall over that time frame.
It has a significant upside potential
Crestwood's CEO then ran through what's ahead for the asset. He noted that when the company bought its initial 50% interest in the business in 2013, it was only generating about $12 million in cash flow. Since that time, drillers like Chesapeake Energy (OTC:CHKA.Q) uncovered a treasure trove of oil and gas in the region. As they've tested new areas, oil companies have
... determined that there's over a mile of economic stacked pay in the reservoir and the acreage that's dedicated to us. It's very similar to the Delaware Basin, and some of the other basins where we enjoy the benefit of the early development of the significant amount of stacked pays.
Because of that, there's lots of running room as companies like Chesapeake drill more wells that will drive additional expansion on the system. In Crestwood's estimation, as volumes from those new wells come online, it should grow the cash flow of this asset from $100 million this year to about $150 million by 2021.
In addition to the growth of Chesapeake, which is the main producer on this system, Crestwood believes it can attract other drillers now that it has full control over both the commercial and operational functions of the asset. "We think this is going to afford us a real competitive advantage in securing incremental organic expansion opportunities," stated Phillips. In the company's estimation, it should be able to grow cash flow from the asset at a 10% to 15% compound annual growth rate from 2021's level, and that's assuming it doesn't add any more major customers outside of Chesapeake.
A great deal
Crestwood Equity Partners was already on track to grow its cash flow at a 15% compound annual rate without this transaction. Because of that, it was well positioned to potentially increase its above-average dividend in the future. However, it couldn't resist the opportunity to make this deal, which not only checked all of its boxes but comes with significant upside potential. As such, it enhances the long-term sustainability of the company's high-yield payout while increasing the probability that it will head higher in the future.