CEQP - Crestwood Equity Partners: Organic Growth Plus Greater Than 10% Distribution Yield

Summary

• Another solid operational quarter from Crestwood Equity Partners.
• Sale of another non-core asset at healthy valuation largely completes asset realignment around core geographies.
• 15% more wells connected expected for this year.
• Balance sheet and cash flows still among the best in the industry.
• Guidance implies 8% growth.

The Quarter:

Crestwood Equity Partners ( CEQP ) reported a typically firm quarter this morning (February 21st). EBITDA came in at $200.3mm for the quarter, pretty much right on top of consensus estimates. Comparisons versus last year's Q4 of $149.1mm are obfuscated by the large number of acquisitions and divestitures the company completed during the year.

Overall, no surprises jumped out at me from any of the geographies. Gathering and Processing was 70% of the company's EBITDA. The Williston Basin remains the largest EBITDA generator. That will be where the company expects to spend about 50% of its growth capital expenditures of $135-155mm. The bulk of the rest will be spent in the Delaware basin, where Sendero's assets were centered. This expenditure will go to helping service 260 new wells in 2023, a 15% increase. The PRB will add 10-20 new wells largely from Continental Resources.

For anyone who has followed the company for several years, this cap ex budget is tiny compared to previous years.

Asset Sale

The company announced the sale of Tres Palacios Gas Storage Assets in South Texas (between Galveston and Corpus Christi). The company will receive about $168 million for its 50% stake in the storage assets and use all of it to pay down its revolving credit facility, whose balance stood at $525 million pro forma for the $600 million bond issue the company completed in January. Tres Palacios should be the last major non-core asset the company has left and its sale will complete a fairly major asset repositioning the company has conducted over the past two years, including exiting the Marcellus and Haynesville and bulking up in the Williston and Delaware Basins.

Guidance

The company issued the following guidance for 2023, taking into account the sale of Tres Palacios:

• EBITDA $780-860 million.
• Growth Capital Expenditure of $135-155 million
• Maintenance Capital Expenditure of $25-30 million
• DCF available to common unit holders of $430-510 million
• Free cash flow after distributions of $10-90 million
• Year-end leverage ratio of 3.7x to 4.1x
• Full year coverage of unchanged $2.62 common distribution of 1.6x to 1.8x

I think some people will be disappointed that the company does not expect to increase the distribution this year. Frankly, I don't see why. At >10% distribution yield, the company is not getting rewarded for its current distribution. Why would a higher one matter more?

Free cash flow after all cap ex and distributions (midpoint of $50 million) will be used to reduce leverage, most likely via the revolver. The company continues to have a leverage target around 3.5x. It should finish the year close to that as the company almost always guides to where it can meet or beat the high end.

Risks

Given that the company's major counterparties have vastly improved balance sheets (as does Crestwood) and there is healthy drilling activity, most of the risk in this name is market volatility. Cash flows have been pretty predictable outside of last year's weather impacted Q2, which had a small impact for the year. Unless that repeats, I'd expect the company to meet or exceed its guidance. The units will do what they do but the distributions give you over 10% of cover.

Conclusion

At a 10.22% well-covered distribution yield and less than 9x the midpoint of EBITDA guidance, I continue to see CEQP as a really easy place to invest capital. MLPs like CEQP, Enterprise Products ( EPD ) and Energy Transfer ( ET ) have held up well as energy prices have come off, but they didn't rally hard with energy prices either. Perhaps the investor base finally sees them as places to get yield and some growth regardless of economic or commodity conditions.

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