CEQP - Crestwood Equity: Dealmaking Has Transformed The Company

Summary

• Acquisitions and divestitures have re-positioned CEQP's assets.
• Improved in-basin scale will allow for more high-return projects or bolt-on acquisitions.
• Stock is one of the cheapest in the midstream sector.

Gathering and processing operator Crestwood Equity Partners ( CEQP ) has had a busy couple of years strategically re-positioning its portfolio through various acquisitions and divestitures. The deals have left the company with two very strong gathering and processing platforms located in two of the strongest oil basins in North America. Despite this, CEQP stock trades at one of the cheapest valuations on the midstream space.

What I would call phase 2 of CEQP’s transformation began in July of 2021 when it and Consolidated Edison ( ED ) sold their Stagecoach JV to Kinder Morgan ( KMI ) for nearly $1.2 billion, giving CEQP $600 million in proceeds for its half. Notably, CEQP sold half of this same natural gas storage facility to ED for $975 million in 2016 (a $1.9B valuation), but tough NY state regulations made it difficult for CEQP and ED to grow the asset. The original asset sale was the beginning of phase 1 of its transformation.

CEQP then turned around and acquired Oasis Midstream for $1.8 billion, consisting of 33.8 million units and $160 million in cash. The deal made the company the 3rd largest natural gas processor in the Bakken. The acquisition closed in February of 2022.

Continuing its dealmaking, CEQP purchased Sendero Midstream for $600 million as well as First Reserve’s 50% equity interest in Crestwood Permian Basin Holdings for $320 million to bolster its position in the Delaware Basin. The company projected the acquisitions were made at a 7x next twelve-month EBITDA multiple.

At the same time, the G&P sold its Barnett Shale systems to EnLink ( ENLC ) for $275 million in cash. For its part, ENLC said the deal was made at a 4x EBITDA multiple. All three deals closed in July of 2022.

Most recently, the company sold its Marcellus gathering and processing system to Antero Midstream ( AM ) for $205 million in cash. CEQP said the deal was done at an over 7x multiple to 2023 EBITDA. Since 2017, the production on this system has been in natural decline as producer Antero Resources ( AR ) has favored drilling the western side of its Marcellus acreage, where AM has the dedication.

Discussing the company’s strategic moves on its Q2 conference call, CEQP CEO Bob Philips said:

“I just want to highlight that we've transformed Crestwood from a company that was generating adjusted EBITDA of about $527 million in 2019 with a relatively scattered asset base and limited competitive advantage in these high-growth basins, and we are now at generating north of $820 million a year of adjusted EBITDA. That's an increase of over 55%, and we're generating that with an asset base that is solid and competitive in the regions where we operate with enhanced competitive positioning, much larger scale, operational synergies and a strong customer base in our core areas of the Williston, the Delaware and the Powder River.

“So just a quick update on our strategy. We think we're in a really good position right now to generate some real strong growth in these areas. Our acquisitions have been timely. They offer significant operational and commercial synergies, and they're easily integrated into our core positions in each of these basins. Most importantly, they allow Crestwood to continue to grow while avoiding significant future capital expenditures due to the excess processing and compression capacity that we acquired in each of these acquisitions.”

Assets

Following all the deals, CEQP now primarily operates in 3 basins, while also having a Storage & Logistics operation.

Williston Basin (~65% of EBITDA)

The Williston (or Bakken) is CEQP’s largest basin where it has over 535,000 dedicated acres in North Dakota and eastern Montana. The company’s assets include over 1,200 miles of gathering pipelines with 400 MMcf/d of natural gas gathering capacity, 225 MBbls/d of crude oil gathering capacity, and 383 MBbls/d of produced water gathering capacity. It also has 430 MMcf/d of natural gas processing capacity at its Bear Den and Wild Basin processing complexes and 149,250 horsepower of gas compression.

Its systems connects to various outlets including DAPL, Hiland, Tesoro, the Bakken-Link pipeline, as well as CEQP’s transloading facility COLT Hub.

Key customers include Chord Energy (CHRD), Devon ( DVN ), Enerplus (ERF), and XTO, which is a subsidiary of Exxon ( XOM ).

Delaware Permian (22% of EBITDA)

In the Delaware Basin, meanwhile, CEQP has over 534,000 dedicated acres in New Mexico and western Texas. The company’s assets include over 660 miles of gathering pipelines with 650 MMcf/d of natural gas gathering capacity, 95 MBbls/d of crude oil gathering capacity, and 165 MBbls/d of produced water and disposal gathering capacity. It also has 550 MMcf/d of natural gas processing capacity and 191,415 horsepower of gas compression.

Key customers include ConocoPhillips ( COP ), Mewbourne Oil, Percussion, and Novo Oil & Gas.

Powder River Basin (7% of EBITDA)

In the PRB, CEQP is the largest well-head service provider in the basin. It has over 400,000 dedicated acres in Wyoming. The company’s assets include over 360 miles of gathering pipelines with 241 MMcf/d of natural gas gathering capacity and 345 MMcf/d of natural gas processing capacity at its Bucking Horse Processing Plant. It has 85,688 horsepower of gas compression.

It primarily serves Continental Resources ( CLR ) in the basin.

Storage and Logistics (7% of EBITDA)

Through various storage and transportation assets, CEQP is a leading NGL marketer primarily for Marcellus and Utica producers. The company has 13 liquefied petroleum gas ((LPG)) terminals with 10 MMBbls of contracted storage and pipeline capacity, as well as 13 trucking and rail terminals.

CEQP’s COLT Hub transloading platform and crude oil storage facility in the Bakken and the Tres Palacios gas storage facility on the Texas coast are also part of this segment.

Valuation

Turning to valuation, CEQP trades at 8.4x the 2023 EBITDA consensus of $865.3 million. For 2024, its trades at 7.9x the 2024 EBITDA consensus of $919.7 million.

It trades at about 5.3x my estimated DCF of $531 million, and has a 2023 FCF yield of about 12%.

The stock currently yields 9.9% with a solid 1.9x coverage ratio last quarter.

Opportunities

CEQP has already done a really nice job of transforming itself through its aforementioned acquisitions and dispositions. In doing so, it’s become a prominent midstream operator in two of the largest oil basins in the U.S. (Permian and Bakken) that have attractive oil-price breakevens, and it has a solid foothold in a third basin, the Powder River Basin.

Prior to the acquisition, Oasis Midstream was projecting solid mid-teens growth from increased producer activity, while CEQP should continue see some solid synergies as well. The Sendero acquisition, meanwhile, now gives the company the scale needed to be a bigger player in the Permian.

Despite high-grading its portfolio and turning itself into an oil-centric midstream provider in a strong oil environment, the stock remains one of the cheapest midstream operators out there. Its improved in-basin scale also likely allows for more high-return projects or bolt-on acquisitions.

CEQP also should see solid growth opportunities to serve its largest customer in Chord Energy. With the Oasis-Whiting merger, CHRD is solely focused on the Bakken and is in a strong financial position with net cash on the balance sheet following the sale of its CEQP units.

CEQP’s balance sheet is also in strong shape, and I think the company could buy back shares or raise the distribution from here. I also wouldn’t be surprised if the company eventually sells its Logistics and Storage segment, or even its PRB midstream assets to CLR.

Risks

While high-grading its portfolio, CEQP has also become more concentrated in both the Bakken and Permian, presenting basin risk, as well as becoming solely tied to oil production. Thus, oil prices are a risk, as would a transition away from crude to other fuels.

Demand destruction from a recession could hurt oil prices, although I do think global crude underinvestment, the Russia-Ukraine war, and a reinvigorated OPEC+ bode well for crude prices. I also think producers learned a valuable lesson last decade and aren’t going to make the same mistake of chasing theoretical IRRs, which led to heavy debt loads, overproduction, and price destruction.

Weather in the Bakken (and to a lesser extent the PRB) caused the company to lower Q4 guidance earlier this year. Harsh winter weather and below freezing temperature can be a fairly common issue during the winter in this region, and thus remains a risk.

There is still some overhang with First Reserve and CHRD owning shares, but the company has done a good job of reducing the amount owned by these two holders.

Conclusion

After some early mistakes, CEQP management has done a masterful job of transforming the company over the past 7 years. They’ve taken a disparate set of midstream assets scattered across the country and now turned them into two very strong gathering and processing platforms located in two of the strongest oil basins in North America. While losing some diversity, this ultimately creates a lot of in-basin scale, which is extremely valuable.

At the same time, they’ve led the way on IDR eliminations, ESG initiatives, and repaired the company’s balance sheet. Despite this, CEQP remains one of the cheapest midstream stocks out there. I think eventually it should start to re-rate, as investors catch on to the company’s story. I also think there is the possibility that it becomes acquired itself.

As noted above, CEQP already lowered its Q4 guidance due to severe weather impacting the Bakken and PRB, so I wouldn't expect too many surprises when it officially announce earnings. This was a weather-related issue and not a company or customer issue, and E&Ps have 15 rigs running on its acreage dedications. Analysts estimates, meanwhile, have come down for 2023, so I think the company will issue in-range guidance for EBITDA around the $865.3 million consensus, and then use its typical playbook of raising its forecast throughout the year.

I think the stock could trade into the low to mid $30s.

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