Crestwood Equity Partners (NYSE: CEQP) is quickly becoming the Rodney Dangerfield of MLPs. Despite a rapidly improving financial situation, the pipeline and processing company doesn't get the respect from investors that it deserves. Because of that, units sell for a crazy cheap valuation of less than eight times cash flow, which is one reason why it yields a jaw-dropping 10.2%.
In the third quarter, the company took additional steps to improve its financial profile: It sold a noncore asset and secured joint venture funding for another project. As a result, Crestwood has the cash it needs to finance its expansion plan, which positions it to start increasing its already lucrative payout in the near future.
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Digging into the numbers
At first glance, Crestwood Equity Partners' third-quarter financial results were a big step back from the year-ago quarter:
However, those results don't fully reflect the company's recent progress. Several strategic initiatives Crestwood completed over the past year to improve its balance sheet and growth prospects have had a negative impact at first. For instance, issuing preferred stock reduced distributable cash flow by $15 million in the quarter.
These initiatives have enabled the company to strengthen its financial position so that its leverage ratio was a solid 4.1 times while its distribution coverage ratio was a conservative 1.2 times. Both are excellent levels for an MLP. And because the company more than fully covered its distribution, it is generating excess cash to help finance growth projects.
Getting more funding to fuel growth
Crestwood also remained active on the strategic front during the quarter and secured additional money for its expansion program. In mid-October, the company closed the sale of a 50% stake in its Nautilus gas-gathering system joint venture in the Permian Basin to Shell Midstream Partners (NYSE: SHLX), which is an MLP formed by Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B). The system currently gathers the majority of the natural gas Shell produces in the Delaware Basin side of the Permian under a 20-year fee-based contract. That transaction will provide Crestwood with cash to invest in its growth projects and pay down debt. It will also cut Crestwood's growth capital requirements within the joint venture in half because Shell Midstream Partners will be responsible for funding 50% of the growth spending within this entity.
In addition to that deal, Crestwood announced that it agreed to sell its U.S. Salt business for $225 million. It's a noncore asset that a predecessor company to Crestwood acquired in 2008. The company expects that the proceeds from the sale of this salt mine will eliminate the need to issue equity to finance its growth plan through the end of next year, which will make it 3% to 5% accretive to distributable cash flow by 2019.
Getting ready to start growing again
With its financing all lined up, Crestwood has the money it needs to execute its growth plan. Current projects include phases one and two of the Bear Den Processing Plant in the Bakken Shale of North Dakota, as well as the Orla Processing Plant and pipeline in the Delaware Basin. These projects will take gas produced in the region and separate out natural gas liquids for a fee. The company expects that they will all enter service over the next year and should generate an incremental $30 million in cash flow in 2018 and $75 million by 2020.
That growing stream of cash flow positions Crestwood to start increasing its distribution in the second half of next year, when phase one of Bear Den and the Orla project will be in service. Meanwhile, it should be able to continue increasing the payout through at least 2019 while maintaining healthy distribution coverage and a sound balance sheet, given the expected incremental cash flow from its current slate of projects.
The market is looking at the wrong thing
One of the reasons Crestwood Equity's valuation is so cheap right now is that the market remains focused on the fact that its earnings and cash flow are in decline due to recent asset sales. However, investors who are paying attention will see that those transactions will start paying dividends next year as the growth projects financed by the reinvested proceeds begin generating cash flow. Right now, investors can buy an increasingly safe high yielder at a bargain-basement price, which will enable them to capture ample upside once the company's growth plan starts bearing fruit.
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