Crestwood Equity Partners (CEQP) offers passive-income investors an enticing yield. The payout of the master limited partnership (MLP) currently clocks in at 8.7%, more than double the energy sector's average and over four times the S&P 500.
While high-yielding payouts are usually higher risk, Crestwood Equity Partners is different. The midstream energy company has taken several steps this year to enhance the long-term sustainability of its big-time distribution. Because of that, passive-income seekers will want to take a closer look at Crestwood's payout.
On a firm foundation
Crestwood Equity Partners recently showcased its ability to sustain its payout when it reported its third-quarter results. The MLP generated $131 million of distributable cash flow during the period, a 53% increase from the prior year. That provided it with enough money to cover its distribution (it paid $68.5 million in the period) by a comfortable 1.9 times, even after factoring in a 5% increase earlier this year. It used that retained cash to fully fund its expansion projects ($59.1 million during the quarter). That left Crestwood with $3.4 million of free cash flow during the period.
The MLP produced enough cash through the third quarter to cover its distribution and its growth capital expenditures with about $33 million to spare. That's given it the additional financial flexibility to repay debt and repurchase units. The company ended the quarter with a 4.2 times leverage ratio. While that's an increase from last quarter due to the company's recent moves, it sees leverage heading back toward its long-term target of 3.5 times.
Making moves to enhance its operations
Crestwood Equity Partners has made several strategic moves in recent months to enhance its portfolio and financial profile. These have included:
- Closing its acquisition of Oasis Midstream Partners in February. Crestwood paid $1.8 billion, including 33.8 million newly issued common units, $160 million of cash, and the assumption of Oasis Midstream's debt.
- Acquiring Sendero Midstream in July for $600 million in cash.
- Purchasing its partner's 50% interest in their Permian Basin joint venture for 11.3 million common units.
- Selling its Barnett Shale assets for $275 million in cash.
- Selling its Marcellus Shale assets for $205 million in cash.
- Agreeing to repurchase and retire 4.6 million common units from Chord Energy (CHRD 1.51%), the prior parent of Oasis Midstream. It paid $123.7 million in cash and will save $12 million of annual distribution payments.
This series of moves enabled Crestwood to enhance its operations in its three core basins, while maintaining a solid balance sheet.
Getting even better next year
The company is still waiting to see the full benefit of those moves. In the meantime, it expects to produce $485 million to $505 million of distributable cash flow in 2022. That will give it the money to cover its high-yielding distribution by 1.8 to 2 times. Crestwood would also be able to retain all the money needed to fund its $200 million to $220 million of planned capital projects with about $5 million to $25 million left over. The company expects to end the year with leverage between 3.9 to 4.1 times.
Crestwood anticipates those numbers will improve significantly next year. It sees growth spending coming down as it completes its current slate of expansion projects while realizing the full-year benefit of its recent acquisitions. Because of that, the MLP expects its "asset base to generate meaningful, and growing, free cash flow in 2023 and beyond," CEO Robert Phillips said in the company's third-quarter earnings release. That should drive next year's leverage ratio toward its long-term target.
Once it reaches that target, Crestwood will have even more financial flexibility. It could use its growing free cash flow to repurchase more units, make additional investments to expand and enhance its portfolio, and continue increasing its distribution.
An increasingly attractive option for passive income
Crestwood Equity Partners has made tremendous strides to enhance its long-term sustainability this year. The MLP has upgraded its portfolio, putting it on track to generate significant free cash flow starting next year. That should enable it to achieve its leverage target, giving it even more financial flexibility.
Because of that, its big-time payout is on an increasingly firm foundation. That makes it look attractive for those seeking a sizable passive income stream.