This 8.7%-Yielding Dividend Stock Continues to Thrive

Crestwood Equity Partners (CEQP) got 2022 off to a good start. The energy master limited partnership (MLP) closed its acquisition of Oasis Midstream Partners, which along with higher commodity prices, helped fuel better than expected results despite some weather and other impacts. With market conditions still strong, the company expects to continue growing in the coming quarters.

Drilling down into Crestwood Equity Partners' first-quarter results

Data source: Crestwood Equity Partners.

Crestwood Equity Partners delivered solid earnings and cash flow growth during the period. That enabled it to maintain a conservative distribution coverage ratio for its 8.7%-yielding payout even though it increased the payment by 5% and issued equity to finance a string of strategic transactions over the past year.

The MLP benefited from strong results from its gathering and processing (G&P) assets, more than offsetting the impact of a tough comparable quarter in its storage and logistics business:

Data source: Crestwood Equity Partners. Chart by the author.

Earnings from Crestwood's northern G&P business surged 29% year over year. This segment benefited from two months of contribution from Oasis Midstream and the impact of higher commodity prices at its legacy Arrow assets. That helped offset the effects of extreme winter weather during the first quarter, which affected well completions. Given the current strength in commodity pricing, the company expects producers to accelerate their drilling activities for the remainder of the year.

Earnings from the G&P South assets rocketed 72% from last year's first quarter. This business benefited from higher volumes driven by higher commodity prices and the acquisition of Oasis Midstream's operations in the Delaware Basin.

Finally, earnings from the S&L segment tumbled 50%. That's due entirely to a challenging comparable period. Crestwood's year-ago earnings were $10 million higher because of the positive impact of Winter Storm Uri on its gas storage business. In addition, the company received $14 million of earnings from Stagecoach Gas Services, which it sold last July. After adjusting for those items, the S&L business exceeded Crestwood's internal expectations despite continued commodity price volatility.

"Overall," stated CEO Robert Phillips in the earnings press release, "I think the first quarter was a good start to another strong year of improving financial and operating performance as we look for opportunities to strategically grow Crestwood's competitive position in the basins in which we operate."

Image source: Getty Images.

A look at what's ahead for Crestwood Equity Partners

Crestwood Equity Partners' solid start to the year has it on track to deliver on its full-year forecast. That would see the MLP generate between $780 million and $840 million of adjusted EBITDA and $500 million to $560 million of distributable cash flow. After factoring in its recent 5% distribution increase, the company should cover its payout by 2.0 to 2.2 times. That would provide it with enough cash to fund its $160 million to $180 million of growth-related capital spending with $75 million to $135 million to spare. That combination of earnings growth and free cash flow should keep its leverage ratio within a comfortable range of 3.25 to 3.75 times debt-to-EBITDA. 

That's giving the pipeline and processing company the financial flexibility to hunt for additional growth opportunities. It wants to be a consolidator in the G&P space. It's targeting deals that increase its scale, improve its relevance in its core basins, bolster its credit profile, and grow long-term value for investors. The MLP is also open to investing in additional high-return expansion projects and simplifying or consolidating its current joint ventures. These future investments will help grow its cash flow to support continued distribution increases.

Meanwhile, the company sees continued volume growth ahead for its legacy assets as producers drill more wells in response to higher commodity prices. That should support cash flow growth in the second half of this year and throughout 2023, further supporting its high-yielding distribution.

A powerful passive income producer

Crestwood Equity Partners delivered another solid quarter, fueled by higher commodity prices and its acquisition of Oasis Midstream. Those catalysts should continue driving growth in the coming quarters, providing additional support for its 8.7%-yielding distribution. Meanwhile, it has upside potential as it pursues further sector consolidation and captures new expansion opportunities. These factors make the MLP an excellent option for those seeking an attractive passive income stream.