CEQP - Crestwood Equity Partners: 10.2% Yield 1.7x DCF Coverage Low Valuation

2023-06-07 11:21:48 ET

Summary

• Crestwood Equity Partners is a well-run midstream firm with stable and predictable cash flows, focusing on natural gas and crude oil gathering capabilities.
• The company issued a strong guidance for FY 2023, with adjusted EBITDA growth of up to 13% and distributable cash flow growth of up to 9%.
• Crestwood Equity Partners offers an attractive risk profile and compelling valuation based on EBITDA.

Crestwood Equity Partners (CEQP) is a well-run midstream firm with extensive pipeline assets in the Williston, Powder River and Delaware Basins. The company is performing well and posted double-digit adjusted EBITDA growth in the first-quarter. Since energy prices have been on the decline in recent quarters, I have sold all my producer investments and I am now heavily focused on midstream companies which offer more stable and predictable cash flows. Since Crestwood Equity Partners has an attractive valuation and a well-supported distribution, I believe CEQP presents a compelling investment opportunity for dividend investors right now!

Concentrated asset footprint in high-potential energy markets

Crestwood Equity Partners is a midstream-focused energy company with significant natural gas and crude oil gathering capabilities in the U.S. The midstream firm is focused on the gathering, processing and transportation of natural gas, natural gas liquidity, crude oil and produced water and it key operating theaters are the Williston, Powder River and Delaware Basins in the U.S.

By providing pipeline and storage capacity, Crestwood Equity Partners contributes to making sure that energy products reach end consumers in a timely manner. The company's key customers include the largest producer companies in the U.S. including XTO Energy, Devon Energy, ExxonMobil, ConocoPhillips, Marathon Oil and Occidental Petroleum.

Crestwood Equity Partners achieves approximately 60% of its revenues from its gas assets while 30% of revenues comes from the firm's oil and water assets. The remaining 11% of revenues are sourced from the firm's natural gas liquid products.

As is typical for midstream firms, Crestwood Equity Partners generates the majority of its revenues from fixed fee or take-or-pay contracts which require a customer to pay the supplier of raw materials an agreed-upon amount in any case, or face a penalty. This fee arrangement translates to stable and highly predictable cash flows for midstream companies. As opposed to producer companies, midstream firms like Crestwood Equity Partners have very little market price risk. Because energy prices have been on the decline in recent quarters, I have sold my producer investments and invested heavily into the midstream sector. Investment that I made in addition to Crestwood Equity Partners included Enbridge ( ENB ), Kinder Morgan ( KMI ) and Enterprise Products Partners ( EPD ).

Strong guidance for FY 2023

Crestwood Equity Partners has guided for adjusted EBITDA of $780-860M as well as distributable cash flow of $430-510M, implying year over year growth rates of up to 13% (for EBITDA) and up to 9% (for DCF). The midstream firm is also delivering solid distribution coverage and expects to cover its FY 2023 distribution by a factor of 1.6-1.8X. This coverage range leaves enough cash for Crestwood Equity Partners to invest in additional pipeline/storage capacity while also sustaining a 10.2% distribution yield for unitholders.

Valuation of Crestwood Equity Partners

Crestwood Equity Partners is currently expected to generate 822M in EBITDA this year and $883M in EBITDA in FY 2024 which translates to a forward Enterprise-Value-to-EBITDA ratio of 7.8X. Other midstream companies like Kinder Morgan and Enterprise Products Partners trade at Enterprise-Value-to-EBITDA ratios around 9.0X .

I like both Kinder Morgan and Enterprise Products Partners, but believe CEQP's valuation based off of EBITDA makes the midstream firm especially attractive as a dividend investment. Crestwood Equity Partners' units are also trading slightly (3%) below the 1-year average EV-to-EBITDA ratio.

Crestwood Equity Partners raised its distribution 5% in FY 2022 compared to FY 2021 and the midstream firm currently pays $0.655 per-unit. I expect to see approximately 5% distribution growth in FY 2023 due to the company's strong EBITDA and DCF guidance.

Risks with Crestwood Equity Partners

Crestwood Equity Partners is a midstream-focused energy firm that depends on natural gas and petroleum products to generate revenues and cash flow. As such, Crestwood Equity Partners is at the mercy of the U.S. government and federal regulators which have shown a propensity to shut down fossil fuel expansion projects in order to further the transition of the U.S. energy system. As a result, incremental DCF upside may not be realized and the midstream firm may not be able to grow its distribution as quickly as it did in the past.

Final thoughts

I have sold all my producer investments in 2023, chiefly because prices for petroleum and natural gas have declined considerably and I believe that earnings for the producer sector likely peaked in the third quarter of FY 2022. Midstream firms like Crestwood Equity Partners, on the other hand, offer a much more attractive risk profile because their distributable cash flows are much less exposed to changes in market prices for energy products. Since Crestwood Equity Partners also has a compelling valuation based off of EBITDA, relative to other midstream companies, and solid distribution coverage (a range of 1.6-1.8X is projected for FY 2023), I believe CEQP is an attractive dividend investment for investors that are concerned about falling energy prices!

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