Last year was one of the most challenging years the energy industry has ever faced. Demand fell off a cliff as the COVID-19 outbreak nearly ground the global economy to a halt. That forced oil and gas producers to shut in wells and shut down their drilling programs, which impacted the volumes flowing into midstream systems, like those operated by master limited partnership Crestwood Equity Partners (CEQP +0.00%).
However, the company navigated those headwinds and ended the year on a high note, enabling it to deliver record earnings and allowing it to take a step forward in a year when most of the energy industry headed in reverse. As a result, it's well positioned to continue its forward progression in 2021, putting its big-time payout on an even firmer foundation.
Drilling down into Crestwood Equity Partners' fourth-quarter results
|
Metric |
Q4 2020 |
Q4 2019 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$165.1 million |
$149.0 million |
10.8% |
|
Distributable cash flow (DCF) |
$106.3 million |
$89.6 million |
18.6% |
|
Distribution coverage ratio |
2.3 |
2.0 |
15% |
Data source: Crestwood Equity Partners.
Crestwood ended 2020 with a bang, producing double-digit earnings and cash flow growth. That helped push its full-year Adjusted EBITDA total up to $580.3 million, a 10% increase over 2019's level. That was above the upper end of its revised guidance range and a record result for the MLP. Meanwhile, it produced $361.2 million of DCF for the full year, up 18.5% year over year. That was twice the amount of cash needed to cover its 11.5%-yielding distribution, which it increased by 4.2% last year.
Fueling the strong finish to the year was its gathering and processing business and marketing, supply, and logistics segment:
Data source: Crestwood Equity Partners. Chart by author.
Earnings from gathering and processing jumped 13% during the quarter. The company benefited from volume growth on its Arrow system in the Bakken as producers accelerated well connections as oil prices improved while achieving strong initial production rates. Arrow processed 38% more natural gas during the quarter while gathering 45% more gas, 21% more water, and 5% more oil in the period.
Earnings from the company's storage and transportation assets declined slightly. Volumes rose from 2 billion cubic feet per day (Bcf/d) in 2019 to 2.2 Bcf/d last year, thanks to record transportation volumes on its Stagecoach joint venture with Consolidated Edison (ED +0.14%) on strong natural gas production activities in the Northeast. However, earnings declined because of a new arrangement with Chesapeake Energy (NASDAQ: CHK) as part of its bankruptcy process.
Finally, marketing, supply, and logistics earnings surged 42.5% during the fourth quarter. The company benefited from acquiring some assets from Plains All American Pipeline (PAA 0.32%) and consistent demand for its services.
Image source: Getty Images.
A look at what's ahead for Crestwood Equity Partners
Crestwood Equity Partners is "increasingly optimistic that the recent improvements in commodity prices are reflective of constructive market fundamentals underpinned by increasing hydrocarbon demand as the vaccination rollout continues and economies begin to fully reopen," according to comments by CEO Robert Phillips. The company expects to generate between $550 million to $610 million of adjusted EBITDA this year. While that would be flat with last year's level at the midpoint, Crestwood expects that the "upper end of that guidance range becomes increasingly likely as producers continue to increase activity in a prolonged $55- to $60-per-barrel crude oil price environment," according to Phillips. With crude currently above $60 a barrel, it's easy to see why he's bullish that Crestwood could deliver a high-end result, potentially growing its earnings by more than 5%.
That should enable Crestwood to generate between $320 million and $380 million of cash flow, which is enough to cover its 11.5%-yielding dividend 1.7 to 2.0 times over. As a result, it should generate between $90 million to $160 million of free cash flow. That's more than enough money to cover the company's projected capital spending plan of $35 million to $45 million, which is a more than $100 million decline from last year's investment level.
The company plans to use the excess cash to repay debt. As a result, it expects to end 2021 with a leverage ratio of 3.75 to 4.25 times debt-to-EBITDA. That puts it on track to deliver on its long-term leverage target range of 3.5 to 4.0.
An enticing option for yield-seeking investors
Crestwood Equity Partners navigated last year's oil market turbulence with relative ease. The company was able to overcome several headwinds to produce record earnings, so its big-time dividend looks rock solid since continued improvements in the oil market should enable the MLP to generate more cash it can use to further strengthen its already solid balance sheet. That makes Crestwood look like an even more attractive option for income investors.
