Crestwood Equity Partners (CEQP) offers investors a monster yield that currently clocks in at over 10%. While a double-digit percentage yield is often a warning sign, Crestwood's payout is on an increasingly sustainable foundation.

The master limited partnership (MLP) has spent the past several quarters completing a strategic realignment of its business. It recently signed its latest deal to complete that transformation, which will leave it in an even stronger financial position. That deal makes its big-time distribution an attractive option for yield-seeking investors.

Repositioned and ready to grow

On Tuesday, Crestwood Equity Partners revealed that the company and its joint venture partner Brookfield Infrastructure (BIPC 1.54%) (BIP 2.24%) had agreed to sell Tres Palacios Gas Storage for $335 million. Crestwood will receive about $168 million for its 50% stake in the storage facility. It plans to use those proceeds to reduce borrowings on its credit facility. Meanwhile, the transaction is part of Brookfield's ongoing capital recycling strategy of selling mature assets to finance the purchase of new investments with the potential for higher returns.

Crestwood has taken a page out of Brookfield's capital-recycling playbook. The Tres Palacios sale represents the company's fourth non-core divestiture over the past two years. Last September, the MLP sold its Marcellus assets to Antero Midstream for $205 million in cash. Meanwhile, the midstream company sold its Barnett Shale assets to EnLink Midstream for $275 million in May. Finally, in 2021 Crestwood and its joint venture partner Consolidated Edison sold their Stagecoach Gas Services business to Kinder Morgan for $1.195 billion. In each case, Crestwood sold an asset that was non-core to its business but that would dovetail with the acquirer's core strategy.

Crestwood has used the deals' proceeds to buy assets that are core to its long-term strategy, enabling it to maintain a solid financial profile in the process. The company closed its acquisition of Oasis Midstream for $1.8 billion in cash, partnership units, and assumed debt early last year. It followed that by acquiring Sendero Midstream for $600 million in cash and its partner's 50% interest in their Permian joint venture for $320 million in its units.

All this wheeling and dealing strengthened Crestwood's operations by sharpening its focus on its three core regions: The Permian, Williston, and Powder River basins. Those highly profitable oil-rich areas enable producers to continue drilling more wells. That will allow Crestwood to generate growing cash flow from its assets in those regions.

More growth ahead

Crestwood's realignment strategy is already paying dividends. Adjusted EBITDA grew 27% last year to $762.1 million. Meanwhile, distributable cash flow leaped nearly 26% to $466.6 million. The company produced enough cash to cover its distribution (which it increased by 5% per unit) and growth capital expenses of $191.6 million with $9.2 million to spare. 

Management anticipates that growth will continue this year. It expects to generate between $780 million and $860 million of adjusted EBITDA, a nearly 8% increase at the midpoint. Meanwhile, it expects to produce between $430 million and $510 million of distributable cash flow. That's enough money to cover its distribution (which it plans to hold steady this year) and growth capital spending with about $50 million to spare at the midpoint of its guidance range.

The company will use its free cash flow to pay down debt. It ended 2022 with a debt-to-EBITDA ratio of 4.2, which will tick down to 4.1 when the Tres Palacios sale closes. Free cash flow will further chip away at its leverage. While it's already reasonably comfortable, Crestwood's long-term goal is to get its leverage ratio below 3.5. That would give it even more financial flexibility to weather an industry downturn and continue its consolidation strategy as opportunities arise. It would also allow the company to return more cash to investors through a higher distribution or a share repurchase program.

An attractive income option

Crestwood Equity and partner Brookfield Infrastructure are selling their stake in Tres Palacios as both companies pursue their capital recycling strategies. That plan enabled Crestwood to refocus its business on its core growth areas while maintaining a solid financial profile. Because of that, its big-time distribution is on a firm foundation. It should grow even stronger throughout the year as Crestwood uses excess cash to reduce debt. That makes it a compelling option for investors seeking a big-time passive income stream.