Energy Transfer's (ET 0.12%) buying binge continues. The midstream behemoth is acquiring fellow master limited partnership (MLP) Crestwood Equity Partners (CEQP) in an all-equity deal valued at $7.1 billion. That's its second acquisition this year. Its latest transaction will enhance Energy Transfer's operations and cash flow, giving it more fuel to support its strategy of growing its 9.9%-yielding distribution by 3% to 5% per year.
Here's a closer look at the deal and how it will benefit the pipeline company.
Drilling down into Energy Transfer's latest acquisition
Energy Transfer will acquire Crestwood Equity Partners for $7.1 billion, which includes the assumption of $3.3 billion in debt. It will exchange 2.07 of its units for each unit of Crestwood Equity Partners. The companies expect the transaction to close in the fourth quarter.
The deal is Energy Transfer's second acquisition this year. It recently closed its nearly $1.5 billion purchase of Lotus Midstream. That followed a couple of smaller bolt-on purchases last year and its $7 billion acquisition of Enable Midstream that closed in late 2021.
The Crestwood Equity deal follows the basic blueprint of those acquisitions. It will enhance its existing operations, extend its footprint in key regions (Williston and Delaware), and expand its business to a new area (Powder River Basin). Meanwhile, it will be immediately accretive to the company's distributable cash flow on a per-unit basis and leverage neutral to its balance sheet. That will enhance its ability to pay distributions while preserving its financial flexibility.
The transaction will also benefit Crestwood Equity Partners' investors. They'll exchange their ownership of an MLP focused on gathering and processing with a much more diversified business model. In addition, they will see enhanced distribution growth because Energy Transfer expects to increase its payout by 3% to 5% per year (while Crestwood's distribution would likely remain flat while it continues its deleveraging strategy). Investors can also benefit from enhanced capital appreciation potential as Energy Transfer grows its business and distribution.
Fits like a glove
Crestwood Equity Partners is a great strategic fit for Energy Transfer because it adds a high-quality portfolio of complementary assets. Crestwood's gathering and processing operations focus on three core regions (Williston, Delaware, and Power River). It has about 2 billion cubic feet per day of natural gas gathering capacity, 1.4 billion cubic feet of natural gas processing capacity, and 340,000 barrels per day of crude oil gathering capacity.
Image source: Energy Transfer.
These assets would complement Energy Transfer's downstream operations by providing additional volumes to feed into its Mont Belvieu fractionation assets, which convert raw natural gas liquids (NGL) into other products like propane, and its export terminals. In addition, Crestwood's operations would boost Energy Transfer's NGL, refined products, and crude oil businesses by providing it with 10 million barrels of additional storage capacity.
Most of Crestwood's assets generate steady fee-based cash flows supported by long-term contracts. They will provide an immediate boost to its cash flow. In addition, Energy Transfer estimates it will capture at least $40 million in annual cost savings. It also sees more upside potential from the merger by leveraging its enhanced scale to capture additional commercial opportunities and the possibility of locking in lower interest rates when it eventually refinances Crestwood's debt.
Enhancing its ability to pay distributions
Energy Transfer is acquiring another MLP as it continues its strategy of consolidating the midstream sector. Its deal for Crestwood Equity Partners will enhance and grow its midstream footprint and cash flow without negatively impacting its balance sheet. That will improve the MLP's ability to achieve its plan of increasing its high-yielding distribution by 3% to 5% per year. It makes Energy Transfer an even more attractive option for investors seeking a big-time passive income stream.
