Crestwood Equity Partners (NYSE:CEQP) reached a milestone this week as it started commercial operations at its Bucking Horse II processing plant in Wyoming's Powder River Basin. As a result, it can now process 345 million cubic feet of natural gas per day. That expanded capacity in the region is one of the main fuels driving its 2020 growth outlook.

The primary reason it built that plant was to support the growth of Chesapeake Energy (NYSE:CHK). However, with Chesapeake tapping the brakes on its drilling program due to its weakening financial profile, Crestwood has had to find ways to fill in the gap so it can maintain its growth trajectory. It made more progress on that goal by recently signing a contract to connect oil giant Occidental Petroleum (NYSE:OXY) to its system. This deal increases the likelihood that Crestwood can deliver on its 2020 growth forecast. 

Two people shaking hands with pipelines in the background

Image source: Getty Images.

A big bet on the Powder River Basin to support Chesapeake's growth

Crestwood Equity Partners purchased its initial position in the Powder River Basin in 2013, when it acquired a 50% stake in Jackalope Gas Gathering Services for $108 million. It has since invested about $1 billion into the region to build out additional gathering and processing infrastructure and buy out its joint venture partner Williams Companies.

Those investments have enabled it to support the growth of Chesapeake Energy, which now has about 315 wells connected to the system. It initially expected that Chesapeake would complete another 30 to 40 wells this year, which led it to build Bucking Horse II to support the anticipated increase in production. However, Chesapeake has since tapped the brakes on its drilling program and now only plans to complete 25 to 30 wells this year. As a result, Chesapeake will use less capacity than initially expected.

Backfilling the capacity by bringing on new customers

Crestwood has been working hard to offset the impact of Chesapeake Energy's drilling slowdown by adding new customers to its system. It previously signed a deal with Panther Energy -- which controls land adjacent to Chesapeake's position -- to process its gas at Bucking Horse. Its latest addition is Occidental Petroleum, which inherited Anadarko Petroleum's acreage when it acquired that company last year. 

Occidental controls about 400,000 acres in the region, which cuts right through Chesapeake's land. Crestwood will provide it with gas-gathering and processing services on wells it drills as part of its testing program. Crestwood won't need to invest much money to connect these wells to Jackalope given the proximity to its existing system.

Between Chesapeake, Panther, and Occidental, Crestwood expects to connect 45 to 50 wells to Jackalope this year. That should grow the volume of gas it gathers by 10% and its processing volume by 15%. That aligns with the company's original 2020 outlook, putting it in position to deliver on its guidance expectations.

Meanwhile, Crestwood is actively negotiating with additional third-party producers that control land near its assets to potentially connect their wells to Jackalope. It's also in discussions with other midstream companies about processing some of their volumes at Bucking Horse. If these talks result in signed contracts, Crestwood could quickly increase the utilization of Bucking Horse, which would enable it to grow its earnings at an even faster pace.

Offsetting the issue weighing on its valuation

Units of Crestwood Equity Partners have been under pressure over the past few months due to concerns that Chesapeake Energy's weakening financial profile will affect the utilization of its Powder River Basin assets. Crestwood, however, is working to offset that potential impact by adding more customers such as Occidental Petroleum to its system. Because of that, the company continues to believe its cash flow will jump another 20% this year, providing it with enough money to fully fund its 12%-yielding distribution as well as its expansion-related investments. That forecast makes this dividend stock look like a compelling buy right now.