Crestwood Equity Partners (NYSE:CEQP) pays an eye-popping dividend that currently yields 9.3%. Usually, a dividend yield that high is a sign of trouble. However, that's not the case with Crestwood's payout, as the master limited partnership (MLP) backs it with solid financial metrics.
It's on an even more sustainable foundation following a string of transactions the company recently completed with a former strategic investor. Add that to the better-than-expected market conditions the company has experienced so far this year, and Crestwood's big-time dividend looks like an even more attractive option for income-seeking investors.
A significant enhancement
Crestwood Equity Partners recently unveiled a series of strategic moves. The company agreed to acquire 11.5 million of its common units held by private equity fund First Reserve and its general partner interest for $268 million. First Reserve also plans to sell its remaining 6 million units in a private placement to other investors for $132 million. These sales will enable First Reserve to exit its position in Crestwood Equity Partners. Crestwood will also repay the Term Loan B held by First Reserve.
These transactions will accomplish the following objectives for Crestwood:
- Enhance its corporate governance: With First Reserve exiting its ownership position, Crestwood will implement a traditional public company governance structure with a publicly elected board of directors.
- Increase its cash flow per share: The repurchase of 11.5 million units from First Reserve will reduce Crestwood's total outstanding units by 15%. This transaction will save the company $29 million in distributions per year.
- Increase and diversify its investor base: The private placement by First Reserve for its remaining units will increase Crestwood's public trading float by 12% and diversify the investor base.
- Enhance its credit profile: The term loan payoff will improve the company's capital structure.
Crestwood also plans to repurchase up to $175 million of its common and preferred units through the end of next year. These incremental repurchases will save it money on future distributions and increase its cash flow on a per-unit basis.
An even better outlook
Crestwood also revised its full-year guidance following stronger-than-expected results so far in the first quarter and a favorable outlook for the balance of the year. The company now estimates that it will produce between $575 million and $625 million of adjusted EBITDA this year, up from its prior range of $550 million to $610 million. That implies a 3.4% year-over-year increase from 2020's level of $580.3 million, an improvement from its previous expectation of delivering flat year-over-year results following a stronger than expected 10% year-over-year increase in 2020.
Crestwood also sees a slight improvement in distributable cash flow to $335 million to $385 million, up from a range of $320 million-$380 million. As a result, it should generate more free cash flow after covering its distribution. It now expects to produce $130 million to $180 million in excess cash, an improvement from $90 million to $160 million. That should enable it to cover its 9.3%-yielding distribution by a comfortable 2.0 times after factoring in the lower unit count from the First Reserve unit repurchases.
The company intends on using that excess cash to repay debt and fund the additional common and preferred unit repurchases. It's aiming to get leverage down from an expected level of 4.25 times debt-to-EBITDA this year following the First Reserve transactions to its long-term target range of 3.5 to 4.0. While it will prioritize debt repayment until leverage is in that target range, the company will use some of its excess cash on repurchases to maximize shareholder value.
Getting even stronger
Crestwood Equity Partners is helping facilitate First Reserve's exit of its ownership position by buying out a large portion of its stake. It's getting a great deal given its cheap valuation, enabling the MLP to retire a needle-moving amount of common units. Add that to the continued improvement in the energy market, and its big-time dividend is on an even firmer foundation. That makes it a compelling option for income investors these days.