Crestwood Equity Partners (NYSE:CEQP) is in the midst of a multi-year strategy to improve its financial profile even as it restarts its growth engine. That plan has already paid dividends for investors as the company generated high-end results in 2018, which enabled it to delivermarket-crushing total returns.
The midstream company believes there's plenty more upside ahead. That's evident from the comments of CEO Bob Phillips on the company's fourth-quarter conference call, where he laid out three reasons he believes Crestwood has a bright future.
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1. We're growing at a peer-leading rate
Phillips wrapped up Crestwood's call by making three summary points that outlined what investors should expect from the company in the future. He began by saying that "No. 1, we've reaffirmed our 15% annual growth rate in EBITDA and DCF [distributable cash flow] per unit through 2020." What's noteworthy about those comments is that they suggest Crestwood's earnings and cash flow growth rates are going to accelerate. That's because EBITDA was up only about 6% last year while DCF was down slightly since its expansion projects didn't start ramping up until the second half. That puts the company on track to grow at a much faster rate in 2019 -- with earnings on pace to increase 13% while cash flow should rise 15% at the midpoint of its guidance range -- before kicking into an even higher gear in 2020.
That fast-pace growth sets Crestwood apart from most peers. It's currently on track to deliver the third highest EBITDA growth rate over the next two years while leading the way in DCF per unit growth. That high-octane growth should enable Crestwood to continue delivering strong total returns, especially since it currently trades at the second lowest valuation in its peer group.
2. We're closing in on our targeted financial profile
Phillips continued by saying:
No. 2, we're entering the final year of a three-year capital program, spending $850 million in the basins that we operate in, Bakken, Powder, Delaware, generating incremental EBITDA of $160 million for an investment multiple of about 5.5 times. ... [W]e think that is exactly where the company ought to be right now. That results in us achieving our targeted leverage ratio of 3.5 to 4 times in early 2020.
The reason Crestwood is growing at such a fast pace is that it's investing in high-return expansion projects. Phillips noted that the company's $850 million of investments should generate $160 million of incremental EBITDA, which is significant, considering it produced less than $400 million of earnings in 2017. That earnings growth, when combined with some non-core asset sales, has the company on track to achieve its leverage target by early next year.
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3. We plan on rewarding our patient investors as soon as it's practical
The CEO concluded by saying:
And when we get there [to our leverage target], or get to line of sight on that run rate, then we're going to reevaluate distribution growth going forward. That's the plan. We're sticking to it. We know we sound like a broken record, but the model is working and our team continues to execute well. So we're going to stay with it and hope that the investors like what we're doing.
Crestwood had talked about potentially increasing its distribution this year but decided to hold it flat for 2019. That will allow it to retain more cash to finance some additional expansion projects so that it doesn't negatively affect its financial profile. One of those projects is a $60 million investment to expand its Arrow water gathering system in the Bakken to support the growth of Enerplus (NYSE:ERF). Crestwood couldn't pass up this opportunity since the long-term agreement with Enerplus implies an investment multiple of 4, which is higher than its average project.
Next year, however, not only is capital spending on track to moderate, but Crestwood should also achieve its targeted leverage metrics. As a result, the company should be in a position to start returning more money to investors, either through increasing its already attractive 7.6%-yielding payout or repurchasing some of its dirt cheap units.
Well positioned to enrich investors
Crestwood has already been one of the best-performing midstream companies over the past year. However, it still appears to have ample upside since its growth engine is starting to accelerate, while it's on track to achieve its leverage target so that it can begin returning more cash to investors. That combination of growth, yield, value, and improving financial profile make Crestwood look like a great income stock to buy and hold for the long term.
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