Crestwood Equity Partners (CEQP) stands out in today's low-yield environment. The master limited partnership (MLP) currently offers an 8.8% yield, multiples above the S&P 500's 1.4% dividend yield.
While a dividend yield that high might seem to be at a high risk of a reduction, that's not the case with Crestwood's payout. Instead of heading lower, the MLP plans to increase its distribution after closing its most recent acquisition. Meanwhile, with a strong financial profile, it has the flexibility to continue expanding, which could fuel continued distribution growth.
Plenty of fuel to support its big-time dividend
Crestwood Equity Partners recently reported its fourth-quarter and full-year results. The MLP generated $91.1 million of distributable cash flow in the fourth quarter, pushing its full-year total to $371.1 million. That was enough money to cover its distribution by 2.3 times in the fourth quarter and 2.4 times for the full year.
That left Crestwood with plenty of excess cash. It reinvested $50.7 million of that money on growth projects. As a result, it generated $154 million in free cash flow in 2021. It used some of that money on its unit repurchase program, with the rest helping strengthen its balance sheet. The MLP ended the year with a debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 3.5 times. That's within its long-term target range of 3.0 to 3.5 times.
Those conservative financial metrics put Crestwood's high-yielding distribution on rock-solid ground.
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The fuel to head higher in 2022
Thanks to its strong financial profile, Crestwood had the flexibility to acquire fellow MLP Oasis Midstream. It closed the deal earlier this month. Along with improving conditions in the oil market, that transaction has the company on track to grow its distributable cash flow to a range of $500 million to $560 million this year.
The company expects to allocate some of that excess cash toward expansion projects. It plans to spend between $160 million and $180 million to support several high-return investments. These included:
- Building multi-product gathering systems for Oasis Midstream's former parent Oasis Petroleum in North Dakota's Williston Basin.
- Constructing the Continental Express natural gas transportation line for Continental Resources in Wyoming's Powder River Basin.
- A natural gas gathering and compression system for Novo Oil & Gas in New Mexico.
- The expansion of crude oil and water gathering systems for Percussion Petroleum in Texas.
These growth-focused investments should give Crestwood's cash flow a boost in the future once it finishes these projects.
Even with this increased growth-focused spending, Crestwood has the cash flow to return more money to investors this year. It plans to expand its distribution by 5%. After factoring in that increase, the company anticipates covering its payout by 2.0 to 2.2 times this year. Meanwhile, it sees free cash flow after growth-related spending and the higher distribution coming in between $75 million to $135 million. That will give the MLP additional financial flexibility to strengthen its balance sheet and opportunistically repurchase equity. As a result, the company expects to maintain a solid leverage ratio between 3.25 times and 3.75 times debt-to-EBITDA this year.
That stable financial profile also gives Crestwood the flexibility to continue executing its consolidation strategy. It remains on the lookout for opportunities to participate in strategic M&A opportunities in the areas it operates as they emerge. In addition, it intends to pursue new organic growth opportunities as they arise. Its ability to capture additional M&A or organic expansion opportunities would give Crestwood even more fuel to support higher distributions to investors in the future.
A great option for yield-thirsty investors
Crestwood Equity Partners' consolidation strategy is paying dividends. The MLP recently closed its deal to acquire Oasis Midstream, giving it the fuel to boost its already sizable payout by another 5%. That deal will also enable it to generate more cash to invest in organic expansion projects while maintaining its flexibility to continue growing. These factors make Crestwood an attractive option for investors seeking a juicy passive income stream.
