Crestwood Equity Partners (NYSE: CEQP) has been one of the best-performing MLPs of 2018. Overall, it has risen more than 45% through the end of August versus a sub-1% gain for the Alerian MLP ETF. Fueling Crestwood's surge has been the notable turnaround in the company's quarterly results, which have started rebounding after a challenging past few years.
Crestwood's rally this year might have some investors wondering if it's worth buying at today's price. While it's certainly not as cheap as it once was, the MLP still trades at a compelling valuation considering its growth prospects. Add that upside to its high-yielding distribution, and Crestwood looks like it could continue generating market-beating returns from here.
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Just hitting the turning point
While Crestwood's earnings have notably improved this year, it's just about to hit its stride. The company currently believes that it "will begin to materially grow adjusted EBITDA and distributable cash flow in the second half of 2018 and full-year 2019," according to CEO Robert Phillips. That puts the company on a trajectory to grow cash flow per unit at a more than 15% annual pace over the next three years.
Fueling Crestwood's forecast is its current slate of high-return growth projects. The company recently completed construction of the Orla gas processing plant in the Permian Basin, which it integrated into its two gathering systems in the region. On top of that, it expects to finish some debottlenecking projects on its Arrow system in the Bakken this quarter, which will boost cash flow later this year. Meanwhile, the company's joint venture with Williams Companies (NYSE: WMB) recently secured several projects in the Powder River Basin. Williams and Crestwood expect to finish those expansions by the end of 2019, which should boost the cash flow of both companies. It's also worth noting that Crestwood estimates that it can fully fund these projects with a combination of retained cash flow, incremental borrowings on its credit facility, and noncore asset sales. As such, there's less risk that something will derail its outlook.
High growth for a cheap price
Even though Crestwood has been one of the top-performing midstream companies this year, it remains significantly undervalued when factoring in its current growth forecast. Looking ahead to next year, the company's peer group trades at an average of 12.2 times their projected enterprise value to EBITDA, which is a common valuation metric for MLPs. Crestwood, on the other hand, only trades at about 10 times its estimated EV/EBITDA for 2019, which is the second-lowest valuation in its peer group.
This discounted price suggests that Crestwood has more than 20% upside as it works its way back up to the peer group average. Further, given that it expects to grow at a 15% annual pace -- which is a faster rate than most peers -- the company should trade at a premium valuation, especially since it has a strong balance sheet and conservative financial metrics. In other words, there's ample upside from here.
Still a solid buy for the long haul
Some investors might see Crestwood's big rally this year and figure they missed the upside. However, that doesn't seem to be the case, since the MLP remains at least 20% undervalued given the growth it has up ahead. Add that upside to its current 6.4%-yielding distribution, and Crestwood appears as if it has the fuel to generate market-beating returns over the next few years, which makes it an excellent option to consider buying.
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