Units of Crestwood Equity Partners (CEQP -0.86%) cratered 28% in February, according to data provided by S&P Global Market Intelligence. While the midstream company reported strong fourth-quarter results, investors don't believe it can deliver on its 2020 forecast given the weakness in the oil and gas market.
Crestwood Equity Partners' expansion program has started paying dividends in recent quarters. Cash flow for the master limited partnership (MLP) soared nearly 40% during the fourth quarter, providing enough cash to cover its high-yielding distribution by an ultra-comfortable 2.0 times. Because of that, the company boosted its payout by 4.2% earlier this year.
Meanwhile, Crestwood expects even more growth in 2020, projecting that it will generate $350 million to $380 million in cash, an increase of 20% from last year at the midpoint of that range. That's enough money to cover its higher dividend payment by 1.9 to 2.1 times as well as fully finance its planned $150 million to $200 million expansion program. That will enable the company to reduce its leverage level from 4.1 times at the end of last year to around its 3.5 times target by the end of 2020.
But the market is growing concerned that Crestwood might not deliver on those growth expectations due to the impact lower oil and gas prices are having on its customers. Most notably is the financially challenged Chesapeake Energy (CHKA.Q), which is a key customer on Crestwood's Jackalope gas-gathering and processing system in Wyoming's Powder River Basin. Chesapeake has already reduced its well completion plans in that region and could cut them again, given the plunge in crude prices as a result of the COVID-19 outbreak. Crestwood is working to reduce this impact, and recently signed oil giant Occidental Petroleum (OXY -0.37%) as a customer on the Jackalope system.
Investors are worried that financially challenged companies like Chesapeake Energy will need to declare bankruptcy as a result of the recent plunge in oil prices. If that happens, it could hurt Crestwood's growth.
But given Crestwood's strong coverage ratio and improving balance sheet, it should be able to weather this storm. That should allow it to maintain its distribution yield, which has risen to an eye-popping 15% due to the Chesapeake-fueled fears.