Crestwood Equity Partners (CEQP) initially thought 2020 would be a banner year. The master limited partnership (MLP) was putting the final touches on a multiyear expansion program, which it expected would pay dividends in 2020 and beyond. Unfortunately, oil prices crashed early in the year, which torpedoed its grand plan. Because of that downturn, the MLP's units have shed about 35% of their value this year. That has pushed the yield on its distribution up to an eye-popping 12.5%.
Here's a look at whether the energy company has the fuel to make a comeback in 2021.
Drilling down into Crestwood Equity Partners' numbers
Crestwood Equity Partners entered 2020 believing it could generate between $590 million to $620 million of adjusted EBITDA this year. That implied a 15% increase from 2019's level at the midpoint. Meanwhile, the company estimated that it could produce $350 million to $380 million in cash. That would have been roughly enough to cover its distribution, which the company increased 4.2% quarter-over-quarter at the start of the year, as well as most of its $150 million to $200 million of remaining capital spending.
Unfortunately, cratering oil prices put a wrench in that plan, forcing most of its customers to shut in some producing wells and stop drilling new ones. Meanwhile, one of its largest clients, Chesapeake Energy, filed for bankruptcy. Because of that, Crestwood only expects to produce $520 million to $570 million of adjusted EBITDA this year. While that's a meager 3.5% ahead of 2019's level at the midpoint, the company currently anticipates meeting or exceeding the upper end of that range. Further, after cutting capital spending to a range of $140 million to $160 million, the company expects to generate enough cash to cover its distribution and its investment plan with room to spare, giving it some funds to repay debt.
To put those numbers into a different perspective, Crestwood currently has an enterprise value of $4.4 billion after its units tumbled 35% this year. With the MLP on track to generate $545 million of EBITDA at the midpoint of its guidance range, it trades at around eight times its EBITDA. That's a dirt-cheap valuation for a company generating stable cash flow.
Drilling down into what's ahead for Crestwood Equity Partners
While it's still early, Crestwood recently put out its preliminary guidance for 2021. The company currently believes that it can generate around the same amount of EBITDA next year as it will in 2020, or between $520 million to $570 million. Meanwhile, it only expects to invest $40 million into growth capital projects. Because of that, it should produce significant excess cash in 2021 after funding its distribution and capital spending program. That will give it the flexibility to repay debt, make acquisitions, and repurchase some of its beaten-down equity. While keeping leverage low is a near-term priority, Crestwood expects to end 2020 with a debt-to-EBITDA ratio between 4.0 to 4.1 times, which is right around the high end of its long-term target range of 3.5 to 4.0 times.
Meanwhile, there's upside to that plan if oil prices bounce back sharply, which would give its customers the cash flow and confidence to ramp up their drilling activities. On top of that, the company could add more fuel if it makes an acquisition. On the other hand, it could boost its per-share results by using its free cash to repurchase a meaningful amount of its discounted equity.
Get paid well while waiting for the rebound
Crestwood's operations proved to be remarkably durable during this year's oil market downturn. Because of that, it was one of the few midstream companies that didn't cut its high-yielding payout this year. That stability seems achievable again in 2021, given what Crestwood sees ahead. Add together its yield, solid balance sheet, and discounted valuation, and Crestwood looks like a compelling buy these days for investors who have the patience to wait for the oil market to turn around.