This year was supposed to be a monster one for Crestwood Equity Partners (CEQP). The midstream master limited partnership expected to put the finishing touches on a three-year, $1 billion expansion program, which it anticipated would fuel high-octane earnings growth.
It appeared the company was finally in the position to start increasing its distribution to investors. The COVID-19 pandemic, however, has upended those best-laid plans. It has devastated demand for oil and gas, putting immense pressure on pricing and the finances of Crestwood's core customers. That has investors worried these companies might not be able to pay Crestwood -- affecting its ability to maintain its lucrative dividend.
These factors have weighed on its value, sending its unit price down roughly 75% this year and pushing its yield up to an eye-popping 40%. The company, however, recently reassured investors that its payout is safe, at least for the time being.
Holding its ground for now
Crestwood recently provided investors an update on how the current conditions in the oil market have affected its operations. CEO Robert Phillips stated in the report that "based on our current financial position and expected first-quarter financial and operating results, Crestwood ... has elected to maintain the common and preferred distributions at their current levels for the quarter ended March 31, 2020." As a result, the company declared its next dividend, which it expects to pay out next month.
That's in contrast to many other midstream companies focused on gathering and processing oil and gas. Several have slashed their payouts in recent weeks, while many more appear likely to follow that path.
Crestwood, however, was in a better position to maintain its payout than these peers because it entered this turbulent period in a much stronger financial position. Phillips noted in the press release that because of "actions we have taken in the past several years, including building substantial distribution coverage and a strong balance sheet with no debt maturities until 2023, Crestwood is positioned to manage the partnership through this current down-cycle." It has also taken additional steps this year to further enhance its flexibility. Phillips noted that the company cut its capital expenditures by more than $40 million while also delivering a similar reduction in operating costs. He stated that "these cost reductions are intended to partially offset the near-term impact of record low crude oil prices and limited market access for our customers in the current market environment."
Not out of the woods just yet
While Crestwood has opted to maintain its current payout level, its primary goal is to preserve its liquidity and balance sheet flexibility during this downturn. Phillips warned that the company is evaluating many ways to further enhance and protect its optionality, which could include adjusting its distribution.
One reason it might need to go that route is the deteriorating financial situations of its customer base. Beleaguered oil and gas producer Chesapeake Energy (CHKA.Q) is the top producer on the company's Jackalope system in Wyoming's Powder River Basin. Chesapeake has reportedly hired advisors to help restructure its debt, which could result in bankruptcy. If that happens, it might impact Chesapeake's ability to pay the fees owed to Crestwood. Meanwhile, Crestwood recently added Occidental Petroleum (OXY 1.24%) to that system, which also has some financial issues.
Furthermore, many of its customers in other regions have slashed spending on drilling new wells this year, which will affect the volumes flowing through its systems in those areas. While Crestwood does have some take-or-pay contracts that protect it from commodity price volatility and volume declines, the current market conditions will affect its financial results this year. What's not yet clear is how much affect the downturn will have on its cash flow. Even though the company has a large cushion, it's still possible that Crestwood could reduce its distribution and use that cash to pay down debt or buy back some of its beaten-down equity.
Taking a wait-and-see approach
Energy market conditions have deteriorated significantly this year because of the COVID-19 outbreak. That has put intense pressure on Crestwood's customers, causing them some financial stress. While they've continued to pay Crestwood what they owe, it's unclear how much effect the downturn will ultimately have on their finances. So while Crestwood's payout appears safe for now, it might opt to reduce it in the future to further enhance its flexibility. That makes Crestwood too risky for income investors to buy right now.