This High-Yield Dividend Stock Just Keeps Getting Better

Crestwood Equity Partners (CEQP +0.00%) is in the midst of a three-year program to expand its various midstream systems to support the projected growth of its producing customers. Those investments are already starting to pay dividends, which was evident in the company's second-quarter results.

Meanwhile, with the master limited partnership (MLP) expected to finish up its current expansion phase early next year, it's on track to generate significantly more free cash flow. That could enable it to return even more cash to investors above its 6.6%-yielding dividend.

Drilling down into the results

Data source: Crestwood Equity Partners.

During the second quarter, Crestwood Equity Partners delivered solid results across the board:

Data source: Crestwood Equity Partners. Chart by author.

Earnings in the company's gathering and processing segment jumped 12% year over year, as it benefited from a significant uptick in volumes in the Bakken shale and Powder River Basin. The company's gas processing volumes surged 65% in the Bakken, while the amount of produced water it gathered rose 47%, driven by recent system expansion projects. Meanwhile, its processing and gathering volumes in the Powder River jumped 56% due in part to its acquisition of Williams Companies' (WMB +0.47%) 50% interest in their former joint venture (JV). The strong growth in those areas helped offset weaker results in the Delaware Basin, where producers shut in wells due to low gas prices in the region.

Crestwood's storage and transportation segment, meanwhile, saw its earnings dip 3.5% year over year. That's mainly because volumes on its Stagecoach JV with Consolidated Edison (ED +1.51%) declined by about 5%. Crestwood was able to partially offset that weakness with the strong results at its COLT Hub, where crude-by-rail volumes jumped 38%.

Finally, earnings in the company's marketing, supply, and logistics' segment surged 33% from last year's second quarter. Crestwood benefited from favorable conditions in the natural gas liquids (NGLs) market, because the industry doesn't currently have enough infrastructure to support record production.

Image source: Getty Images.

A look at what's ahead

"We are entering an exciting time at Crestwood as we begin to capture the robust returns from the Bakken and Powder River Basin expansion projects," stated CEO Robert Phillips in a press release. He continued:

The Bear Den II plant is on-track to be completed in early September, which will sequence nicely with current record oil, gas, and water volumes on the Arrow system plus over 60 well connects planned for the second half of 2019. In the Powder River Basin, we have fully integrated operations from Williams and continue to expand the Jackalope gathering system to support Chesapeake [Energy]'s development plans. The Bucking Horse II processing plant is on-budget and on-schedule for an early first quarter 2020 completion date. In both basins, we have clear visibility to the processing plant expansions delivering immediate returns as the initial plants are running full, we are currently offloading to third parties and our producers continue to actively drill. The expected high utilization rates for Bear Den II and Bucking Horse II, after their in-service dates, should result in a meaningful step-change in cash flow in the second half of 2019 and heading into 2020.

Crestwood also started receiving 50% of the cash distributions from its Stagecoach JV with Consolidated Edison in July, up from 40% over the past year. Because of these factors, the company continues to expect that its distributable cash flow (DCF) per unit will grow at a 20% compound annual rate through next year. This growth, when combined with the anticipated completion of its current expansion phase, leads Crestwood to believe it will generate significant free cash flow next year. That will significantly improve the company's financial flexibility, which could allow it to boost the distribution, repurchase units, or invest in new expansion-related initiatives.

While the company didn't approve any new expansion projects during the quarter, it remains well-positioned to keep growing beyond 2020. Among its many opportunities are to add new customers to its Powder River Basin system, expand its Stagecoach JV with Consolidated Edison, and expand its Delaware Basin systems once new infrastructure comes online later this year.

An increasingly excellent option for income-seekers

Crestwood's second-quarter results show that the company's expansion plan is paying dividends. With the MLP's cash flow rising, its high-yielding distribution is becoming increasingly more sustainable. Because of that, the company should be in the position to return even more money to investors next year.