Crestwood Equity Partners (CEQP) is coming off a big year. The master limited partnership (MLP) grew its earnings by 25% last year, while its cash flow rocketed 36%, enabling it to cover its 9.4% yielding distribution by a comfy 1.8 times. It was able to finally give its investors a raise.
The MLP expects even more growth in 2020, despite some headwinds that have emerged over the past couple of months, which was a key takeaway on its fourth-quarter conference call. Its big-time yield is on an increasingly sustainable foundation.
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More high-octane growth ahead in 2020
Crestwood's CFO Robert Halpin outlined the company's outlook on the call: "As we look forward into 2020, we are guiding to an adjusted EBITDA range of $590 million to $620 million, an increase of 15% year over year at the midpoint, and distributable cash flow of $350 million to $380 million, an increase of approximately 20% year over year at the midpoint. This growth is driven by our G&P segment as recently completed capital projects, new commercial contracts, and producer drilling plans drive volume growth across our core basins."
This forecast would see the company cover its recently increased distribution by an ultra-comfortable 1.9 to 2.0 times for the full year. As a result, the MLP would retain virtually all the cash it needs to finance its growth spending, which should be in a range of $150 million to $200 million, down about 58% year over year at the midpoint. Because of that spending decline, and its forecasted earnings growth, Crestwood anticipates that its leverage ratio will be between 3.5 to 4.0 times EBITDA this year, down from 4.1 at the end of 2019.
That's an excellent financial profile for an MLP. As such, the company has ample financial flexibility, which could allow it to return even more cash to investors in the future, as well as capture additional expansion-related opportunities.
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Addressing the elephant in the room
Crestwood's growth outlook remains unchanged from its prior view despite some growing headwinds in the oil and gas sector. One issue that has unnerved investors, and weighed on Crestwood's unit price, is a concern about the financial condition of Chesapeake Energy (CHKA.Q), the main customer on its Jackalope system in Wyoming's Powder River Basin.
CEO Bob Phillips discussed this situation on the call: "It's clearly been a potential overhang on our stock since the third quarter. [...] No doubt following Chesapeake's credit rating downgrade in the fourth quarter, things started to change." However, he also noted:
We have a long-term gathering and processing contract that was renegotiated to a fair market deal back in 2017. [... W]e've got a really good contract that's favorable to Crestwood in the event of any type of financial contingencies going forward. We are a critical service provider to Chesapeake. We can't imagine a situation where 316 wells would be shut in on their best oil and gas producing property, and it's their only access to get their natural gas to market in eastern Wyoming, which is a no-flare state.
The company is therefore confident that those volumes and the fees they generate aren't going anywhere. Furthermore, the company continues to believe that Chesapeake will maintain its current two-rig program this year and connect another 30 to 40 wells to its system. On top of that, it expects third-party customers to add 15 or so wells to its network this year.
"At this level of activity," stated Phillips, "we expect gathering system volumes on the Jackalope to grow by about 10%, processing volumes to grow by about 15% in 2020 with a lot of upside, depending upon third-party developments and the potential for maybe consolidating some third-party processors in the Powder River Basin as well."
In other words, Crestwood doesn't expect any negative impact from Chesapeake. Instead, it sees upside as it works to add more third-party volumes to the system. Because of the perceived upside and the potential to capture opportunities elsewhere throughout its asset base, Crestwood firmly believes it can deliver on its 2020 growth projections.
No reason to worry
Concerns about the impact of Chesapeake's deteriorating financial situation have weighed on Crestwood over the past few months. However, the company doesn't believe those issues will have any effect on its growth forecast this year. The company appears poised to deliver another year of outsize growth, which will put its recently increased dividend on an even firmer long-term foundation, making it a solid option for yield-seeking investors.
