Crestwood Equity Partners (CEQP) is getting a lot bigger. The master limited partnership (MLP) is acquiring rival Oasis Midstream Partners (OMP) in a $1.8 billion deal. The combination will create a $7 billion midstream company while significantly increasing its cash flow. That will give it the fuel to grow its already sizable dividend payment

Here's a closer look at the deal and what it means for the high-yield dividend stock.

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Drilling down into the deal

Crestwood Equity Partners is acquiring Oasis Midstream Partners in a cash-and-stock transaction. Overall, it's paying $160 million in cash, issuing 33.8 million of its common units, and assuming $660 million of debt to acquire Oasis Midstream Partners. All the cash is going to oil and gas producer Oasis Petroleum (CHRD -0.69%), along with 21 million units, in exchange for its 33.8 million unit stake in Oasis Midstream and its ownership of the MLPs general partner. Meanwhile, Crestwood is issuing the balance of the common units to public shareholders in exchange for their 14.8 million units.

The combination will significantly enhance Crestwood's position in its core Williston and Delaware Basins. It will create a top-three midstream operator in the Williston Basin, increasing its processing capacity 3 times. It will also expand its oil and produced water gathering system in the Delaware Basin.

The deal will also significantly increase Crestwood's earnings and cash flow. It will boost its 2021 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 37%, its distributable cash flow by 51%, and its free cash flow by 38%.

A needle-moving deal for the dividend

The higher cash flow will put Crestwood's already rock-solid high-yield dividend on an even firmer foundation. The company estimates that it will generate enough cash to cover its payout by more than 2 times next year. Furthermore, it expects its leverage ratio to be below 3.5 times debt-to-EBITDA next year. Those are conservative levels for a midstream company.

That's why Crestwood plans to accelerate its capital return strategy. It expects to increase its distribution by 5% when it closes the transaction, which should occur early next year. In addition, the deal should enable the company to return even more capital to investors through its $175 million repurchase program.

Meanwhile, the merger provides longer-term growth potential. Crestwood believes it can capture about $45 million of commercial and cost reduction savings in the coming years. It has identified $25 million in cost savings it should capture next year, driven by operations and maintenance reductions from the overlapping footprints and eliminating duplicate general and administrative expenses. The MLP also expects to capture $20 million of annual cash flow by integrating the two Williston Basin systems by physically connecting them.

A new growth strategy comes into focus

Crestwood is coming off a multi-year expansion program that saw it invest $1 billion to expand its footprints in the Delaware, Williston, and Powder River Basins. However, with oil and gas producers like Oasis running into financial trouble in recent years because of the volatility in the oil market, the industry isn't growing its production these days. Crestwood has therefore significantly reduced its growth capital spending. That's left some questions about its future growth prospects.

With this deal, it's becoming clear that Crestwood aims to be a consolidator in the midstream sector. It believes that midstream consolidation is necessary to optimize capacities, capture cost savings, and drive long-term returns for investors. By merging with Oasis Midstream, it has even greater scale and financial flexibility to pursue additional merger opportunities.

M&A in the midstream sector has started to heat up. APA-backed Altus Midstream (KNTK) recently combined with privately held EagleClaw to create a leading integrated midstream company in the Permian Basin. Meanwhile, Brookfield Infrastructure Partners (BIP -2.34%) (BIPC -1.79%) won a bidding war for Inter Pipeline. Other energy companies currently control several midstream MLPs, and many more are in private hands, making them excellent merger candidates for Crestwood and other suitors. Future deals could give acquirers more fuel to grow their dividends. 

An ideal combination

Oasis Midstream checks all the boxes for Crestwood Equity Partners. It enhances its position in two core basins while significantly growing its earnings and cash flow. Furthermore, the company will maintain a strong financial profile, giving it the fuel to increase its high-yielding dividend. The deal also sets it up for future growth, giving it the scale to be a consolidator in the sector.