Crestwood Equity Partners (CEQP) had been one of the better-performing master limited partnerships (MLPs) until it hit some turbulence last fall. It's now about 50% off its high.
The plunge in the company's market value has caused its dividend yield to rise north of 12%. That enticing payout likely has income-investors salivating and wondering if now's a good time to buy Crestwood. Here's a closer look at what has weighed on the MLP in recent months and whether it's an issue or opportunity for investors.
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The catalyst causing the recent collapse
Crestwood's value started heading south last fall, when Chesapeake Energy (CHKA.Q), the main customer on its Powder River Basin system in Wyoming, warned that it might not be able to stay in compliance with its financial covenants. Those concerns have grown since then because of slumping oil and gas prices.
Crestwood CEO Bob Phillips discussed the Chesapeake Energy situation on its fourth-quarter conference 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 made it clear that Chesapeake has continued to pay its bills on time. Furthermore, he noted:
We'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.
In other words, even if Chesapeake were to file for bankruptcy protection, Crestwood would continue to collect fees as the gas from its wells flow through this system. Furthermore, the company continues to believe that Chesapeake will maintain its current drilling plans, which would see it connect 30 to 40 more wells to its Powder River Basin assets this year. However, Chesapeake did recently adjusted its 2020 outlook, which calls for it to complete 25 to 30 wells in that region. But with Chesapeake expecting to complete more wells this year, the company's financial troubles shouldn't have too much negative impact on Crestwood's 2020 growth forecast.
All the numbers are heading in the right direction
Crestwood's confidence that Chesapeake's issues won't affect its financial results is evident in its guidance for 2020. The MLP reaffirmed its forecast that earnings would rise 15% from 2019's level at the midpoint, while cash flow would jump 20%. That's a continuation of its success from 2019, when earnings surged 25% and cash flow leaped 36%.
The company's projected cash flow range of $350 million to $380 million would provide it with enough money to cover its recently increased distribution by 1.9 to 2.1 times, which is a very comfy level for an MLP. That means it's on track to retain almost all the cash it needs to cover its anticipated growth spending range of $150 million to $200 million. With its earnings rising and capital expenses covered with cash flow, Crestwood expects its leverage ratio to fall to a range of 3.5 to 4.0 this year, down from 4.1 at the end of last year. That has it on track to hit its long-term target of 3.5 by year's end. It has lots of financial flexibility, which could allow it to return more cash to investors as well as capture additional expansion opportunities.
With Crestwood's value sinking at the same time earnings are rising, the MLP has become much cheaper. At the midpoint of its 2020 forecast, the company trades at seven times earnings and a little more than five times cash flow. Those are insanely cheap levels for a midstream company where assets typically sell at a low-teens earnings multiple.
Verdict: Crestwood is an excellent buy right now
Investors seem overly worried about the impact that Chesapeake Energy's troubling financial situation will have on Crestwood. The company has strong contracts in place, which means it should continue collecting as the volumes from Chesapeake's growing number of wells flow through its system. The company has high confidence that its earnings and cash flow will continue growing at a fast pace this year. Add that growth to the company's high-yield and cheap valuation, and it's an excellent buy these days.
