Crestwood Equity Partners (CEQP) completed an ambitious three-year, $1 billion organic expansion program in 2019. Those investments enabled the MLP to keep up with the activity levels of its producing partners, reduce flaring and trucking emissions, and drive a significant increase in its cash flow. That growth was evident during the fourth quarter, as both its earnings and cash flow soared, giving it the fuel to finally start increasing its 8.8%-yielding distribution.
Fourth-quarter results
|
Metric |
Q4 2019 |
Q4 2018 |
Change |
|---|---|---|---|
|
Adjusted EBITDA |
$149.0 million |
$114.1 million |
30.6% |
|
Distributable cash flow |
$89.6 million |
$64.3 million |
39.3% |
|
Distribution coverage ratio |
2.0 times |
1.51 times |
32.5% |
Data source: Crestwood Equity Partners.
As the table shows, Crestwood's fourth-quarter earnings and cash flow both soared more than 30% versus the year-ago period. That pushed its full-year EBITDA to $526.5 million, which was a 25% increase from 2018's level and comfortably within its upwardly revised $520 million-to-$535 million guidance range. Distributable cash flow, meanwhile, came in at $304.9 million for the full year, up 36% year over year and near the top end of its $295 million-to-$310 million guidance range.
Fueling the company's strong performance during the fourth quarter was its gathering and processing segment:
Data source: Crestwood Equity Partners.
Earnings in the gathering and processing segment soared nearly 40% year over year during the fourth quarter, fueled by strong volume growth in the Bakken, Powder River Basin, and Delaware Basin. In the Bakken, natural gas and crude oil gathering volumes surged 50% and produced water volumes gathered jumped 49%, thanks to the continued expansion of the company's Arrow system. Meanwhile, the completion of the Bear Den II gas processing plant helped double its natural gas processing volumes.
Storage and transportation earnings, meanwhile, jumped 21% year over year. This business benefited from higher natural gas storage and transportation volumes as well as the final step up in cash distributions from its Stagecoach joint venture with Consolidated Edison (ED -0.18%) so that both partners each now receive a 50% share.
Earnings in Crestwood's marketing, supply, and logistics segment dipped 5% year over year. However, the business, which is more sensitive to commodity prices and market conditions, outperformed expectations for the full year as it generated record EBITDA of $84.3 million, which exceeded the high end of the company's guidance range by about $9 million. During the fourth quarter, the segment benefited from colder-than-average weather, extended crop drying, and its ability to optimize the storage inventories it built throughout the year.
Image source: Getty Images.
What's ahead for Crestwood
Crestwood Equity Partners expects to generate $590 million to $620 million of adjusted EBITDA this year. At the midpoint, that's a 15% year-over-year increase. Meanwhile, it sees distributable cash flow coming in the range of $350 million to $380 million. That would be about a 20% increase at the midpoint and enough cash to cover the company's recently raised distribution by an ultra-comfy 1.9 to 2.1 times.
The recent and upcoming completion of several expansion projects will be the main factors fueling Crestwood's growth. The company just finished the Bear Den II plant in the Bakken and plans to bring the Bucking Horse II plant in the Powder River Basin online in the coming weeks. Meanwhile, the company will also benefit from a resumption of producer activity on its Delaware Basin systems.
Crestwood expects to invest between $150 million and $200 million in additional system expansions this year, which is 58% less than it spent last year. With capital spending declining and cash flow surging, Crestwood expects to generate excess cash after funding both its distribution and capital projects. Because of that, it sees its leverage ratio improving from its current level of 4.1 times debt to EBITDA down to a range of 3.5 to 4.0 times. As leverage falls closer to its long-term target level of 3.5 times toward year-end, Crestwood will have the financial flexibility to invest in more high-return expansions or return additional cash to investors via either a higher distribution or unit repurchase program.
An increasingly low-risk, high-yield stock
Crestwood Equity Partners is beginning to shift its focus toward harvesting cash from its recent expansion projects. Initially, it will use the money to ensure its balance sheet is in tip-top shape, though longer term, it appears poised to continue sending more cash to investors. Given this outlook, the company's big-time yield looks increasingly sustainable, making Crestwood an excellent stock for dividend investors to consider buying.
