When the world looks back at 2020, one of the biggest economic stories is going to be the impact the coronavirus pandemic had on the energy sector. There was widespread financial pain across the sector as oil prices plummeted to historic lows. However, midstream operator Crestwood Equity Partners (CEQP) actually managed to have a record year. And 2021 could be even better.
At one point in 2020, the prices for benchmark West Texas Intermediate crude fell below zero. Basically, that means that exploration and production companies were paying customers to take their oil. That was only true for a brief time, but it shows just how bad things got.
And yet, during Crestwood Equity Partners' fourth-quarter 2020 earnings conference call, CFO Robert Halpin crowed, "Our diversified asset base generated record full-year 2020 adjusted EBITDA of $580 million, that up 10% year over year; and distributable cash flow of $361 million, that up 18% year over year, both above the high end of our revised guidance range." Equally important, the master limited partnership managed to cover its distribution by roughly two times. Those numbers would be considered strong in any year, let alone one as difficult as 2020.
So, in important ways, Crestwood bucked the energy sector trends last year. This is impressive, given that a huge part of the company's business is tied to gathering oil and natural gas from wells and delivering them to larger pipelines and midstream processing systems.
For 2021, the partnership expects adjusted EBITDA to land in a range of roughly flat to up about 8%. Distributable cash flow could rise by around 6.5% at the high end of guidance. The distribution coverage ratio is expected to remain at around 2, which suggests that there's no need to worry that the company will need to dial back its payouts, which at current share prices yield a hefty 9.2%.
At this point, investors might already be thinking that Crestwood Equity Partners is an obvious buy, and there's even more to like here. Specifically, the partnership just announced plans to internalize its general partner. It's a complex deal, but the end result will be a partnership that is better aligned with its unitholders. In fact, the financial projections noted above were actually improved from previous guidance because of the proposed internalization deal.
Time to buy?
So is it time to buy this partnership? The answer isn't as simple as the positive points mentioned above would suggest.
Crestwood Equity Partners' financial-debt-to-EBITDA ratio is toward the high end of the range among midstream companies, which means that it might not be a suitable choice for conservative investors. And while 2020 actually turned out to be a pretty solid year, gathering assets are exposed to ups and downs in drilling activity, which makes them a riskier asset category than larger pipelines that help move energy across states. Crestwood's big yield is compelling, but it may not be a great fit for everyone.
However, for more aggressive investors, there's a lot to like. A large and well-supported yield is one thing. But so too is the fact that the partnership's unit price is still around 30% below its 2019 peak, despite the strong performance of the underlying business. Other major players in the midstream space, like Enterprise Products Partners (EPD 0.66%) and Kinder Morgan (KMI -0.29%), are down 25% or so from their 2019 peaks, and didn't have as good a year as Crestwood in 2020.
That said, over the past 12 months, which roughly trace back to the nadir of the 2020 bear market, Crestwood's units have risen by an incredible 600%! That's partly a function of how far the units fell during the crash, but also shows that there has been a lot of enthusiasm around Crestwood Equity Partners of late. Enterprise and Kinder Morgan didn't fall nearly as hard, and thus haven't had to travel as far back on their rebounds. At the end of the day, a lot of good news has already been priced into Crestwood's units. This company isn't the bargain it was just a few months ago (when it would have taken a lot more courage to invest).
Worth a look, but...
At the end of the day, Crestwood probably isn't a great fit for conservative investors given its business and leverage profile. However, more aggressive types looking to maximize the income they generate might want to give it a serious look. It appears that 2021 will be another solid year for the partnership and the units remain notably below their pre-pandemic levels, so there may be additional room for their prices to rebound. Just go in knowing that Crestwood already has a huge recovery in value behind it, and the future is therefore likely to be less exciting in terms of its unit price. The bigger story is likely to be its outsize yield, which is roughly 1.5 percentage points higher than what's on offer from industry bellwether Enterprise and around three percentage points higher than the yield of midstream giant Kinder Morgan.