This year's downturn in the energy market has taken a growing number of dividends down with it, including several notable payouts. However, a few monster energy-fueled dividends remain intact, including the nearly 17%-yielder from MLP Crestwood Equity Partners (NYSE:CEQP). While the double-digit yield suggests the market believes a cut is inevitable, Crestwood continues to think it can maintain its current distribution level.

The company backed that view by recently reporting reasonably solid third-quarter numbers and unveiling a fairly optimistic glimpse of what's ahead in 2021.

A look at Crestwood Equity Partners' third-quarter results

Metric

Q3 2020

Q3 2019

Year-Over-Year Change

Adjusted EBITDA

$136.0 million

$140.9 million

-3.5%

Distributable cash flow

$86.5 million

$82.5 million

4.8%

Distribution coverage ratio

1.9 times

1.9 times

0%

Data source: Crestwood Equity Partners. 

The MLP was able to produce those relatively solid results despite the market turbulence thanks to its diversified midstream operations:

Crestwood Equity Partners earnings in the third-quarter of 2020 and 2019.

Data source: Crestwood Equity Partners. Chart by the author.

Earnings in Crestwood's gathering and processing division jumped 9% year over year. Fueling that growth was the company's Bakken system, as gas processing volumes surged 107% year over year. Water and gas gathering volumes rose 31% and 25%, respectively, thanks to recently completed expansion projects and fewer shut-in production volumes than anticipated.

That helped partially offset some weakness in its storage and transportation and marketing, supply, and logistics segments. Weighing on those segments were weaker volumes due to lower commodity prices and demand.

Crestwood's overall solid results enabled it to generate enough cash to cover its current distribution and its capital expenditures with room to spare. That marked a key milestone for the company, as it was the first time the MLP produced free cash after covering its payout and capital expenditures. When added to the $23 million sale of its noncore Fayetteville assets, the MLP generated $50 million in excess cash during the period, which it used to repay its credit facility and opportunistically repurchase some of its 2023 senior notes. As a result, it ended the quarter with a comfortable leverage ratio of 4.1 times debt-to-EBITDA.

A burlap sack with the word dividends printed on it.

Image source: Getty Images.

What's ahead for Crestwood Equity Partners

Crestwood's solid showing in the third quarter and optimistic outlook for the balance of the year have the MLP on track to deliver full-year adjusted EBITDA above the midpoint of its revised guidance range of $520 million to $570 million. The company noted that volumes across most of its operating areas have returned to their pre-pandemic levels while the remaining region should return to normal during the fourth quarter. Because of that, the company expects to generate free cash flow after funding its distribution and capital expenses during the fourth quarter, which should enable it to pay off more debt.

The MLP also provided an early glimpse of what it sees ahead in 2021. Crestwood noted that with volumes improving and commodity prices stabilizing, it expects to produce around the same amount of adjusted EBITDA next year as its revised 2020 outlook. Meanwhile, it anticipates spending no more than $40 million on growth capital projects next year because it has now completed its major expansion phase.

Because of that, the company expects to generate meaningful free cash flow in 2021, which will enable it to further deleverage its balance sheet as it's on track to get its debt-to-EBITDA ratio below 4.0 times over the next 12-18 months. The company will look to accelerate that plan by selling additional noncore assets. Thus, it doesn't see the need to reduce its distribution since it's already producing free cash to pay down debt.

Safe as long as everything goes according to plan

Crestwood reached a key inflection point during the third quarter as it completed its expansion program, which enabled it to start producing excess cash. That number should grow meaningfully over the coming quarters -- assuming the oil market doesn't take another tumble -- as the company pays down more debt and reduces its interest expenses. As long as that plan plays out as expected, the MLP should be able to maintain its massive payout.

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