MLP Bottom Fishing 4: Crestwood Equity Partners

| About: Crestwood Equity (CEQP)

Summary

CEQP is an MLP engaged in gathering and processing natural gas, storage and transport of natural gas and oil and marketing of natural gas liquids.

CEQP closed Monday at $9.93, a steep decline for a stock which traded at split-adjusted prices of more than $100 a unit for most of 2014.

CEQP has trailing distributions of $5.50 per unit annually for a yield of 55.4%.

CEQP's 2015 distributable cash flow supports its distributions making CEQP one of the most discounted stocks in the sector.

While there are developments which could adversely affect cash flow, CEQP has been oversold and is a bargain at this price.

This series of articles discusses master limited partnerships (NYSEARCA:MLPS) which have become ridiculously cheap. The first article discussed the companies which provide compression services to pipelines and gathering systems. The second article discussed Azure Midstream (NYSE:AZUR) - a small gathering and processing MLP that is trading near 1 times trailing cash flow. The third article discussed Capital Products Partners (NASDAQ:CPLP) which operates tankers and container ships and is also trading at a deeply discounted level. This article will discuss Crestwood Equity Partners LP (NYSE:CEQP), a large MLP engaged in a variety of activities supporting the oil and gas industry. On Monday of this week, CEQP closed at a price of $9.93 per unit

CEQP is organized into three segments for operational purposes. Its gathering and processing business is active in a wide variety of geographical regions including the Marcellus Shale area. Its storage and transport business includes strategically vital natural gas storage facilities serving the important New York market and an important transportation hub serving the Bakken area. Its marketing, supply and logistics business provides vertically integrated propane service. Its size and geographical diversity provide it with some protection from declines in individual production areas. My general thesis is that overall natural gas production in the United States will slowly increase due to lower net imports (which will be due, in turn, to higher exports) and more consumption in the chemical industry and the electric utility sector. It should be noted that, in early 2016, LNG exports have commenced and a large methanol plant operated by Methanex (NASDAQ:MEOH) is ramping up operations. While CEQP does provide some services to the oil industry, it is predominantly engaged in activities serving the natural gas industry. Its operations are largely insulated from price changes in natural gas and petroleum and a very large percentage of its revenue is under fixed fee or take or pay contracts.

2015 Financial Results - In 2015, CEQP faced many of the challenges faced by other companies in the industry. However, its financial results were solid. Although an initial examination of its financial statement suggests that it lost money, in fact the accounting losses were due to "impairments" (non-cash write downs of assets). The more important facts about the results are that CEQP generated $527.4 million in adjusted EBITDA and $361.5 million in distributable cash flow. This performance supported distributions of $5.50 per unit for an amazing yield of 55.4% based on current unit price. Market cap of $690 million is less than two times distributable cash flow.

Financial Structure - CEQP simplified its operations through a merger which eliminated incentive distribution rights so that this feature of typical MLP financial structures does not have to be taken into account. Investors should also be aware that CEQP had a 1 for 10 reverse split in 2015 so that comparisons with past prices must be adjusted. CEQP has 69.5 million common units. It also has 60.7 million preferred units. The preferred units are entitled to dividends of $.2111 per quarter. For all quarters until June 30, 2017, CEQP can pay the preferred unit holders in additional units rather than in cash. This is done by calculating the amount of cash that would have been distributed to a unit holder and dividing that amount by $9.31 to determine the number of new units the unit holder receives. CEQP has been following a policy of paying preferred unit holders in shares rather than cash. In 2017, the preferred units can be converted into common units on a 1 for 10 basis. CEQP has $2.544 billion in debt with various covenants. The most important covenant requires that total debt be no more than 5.5 times adjusted EBITDA. For 2015 as a whole, the ratio was 4.75 to 1.

Why It Is Cheap - The price has been depressed because of the general concerns which bedevil the industry but also because of concerns about a bankruptcy of a customer (Quicksilver) of CEQP's. There has been a dispute about whether contracts with companies like CEQP which provide gathering, transportation and processing services can be "rejected" leading to a renegotiation of terms. This issue has sent tremors through the MLP world and the fact that CEQP is in the middle of it has led to serious investor morale problems. It doesn't help that there hasn't been a "stress test" analysis indicating what the "worst case" scenario would be. In this regard, it should be noted that a Chapter 11 debtor in possession or a successor would still have to have its natural gas moved to the market using existing gathering and transport facilities and a total loss of previous revenue is very unlikely. On the other hand, it is entirely possible that lower prices could be negotiated. The legal dispute seems to be going against CEQP (and the MLP industry in general) and I think that this is a big factor depressing the unit price. CEQP's sponsor, First Reserve, has been buying units (it has bought $90 million worth since September 30, 2015) and currently holds 23 per cent of outstanding units.

Future Scenarios - CEQP's current performance and unit price create significant room for adverse developments. For example, CEQP could reduce distributions from $5.50 per unit to $1.50 per unit and still have more than a 15% yield at the current price. Thus, even if distributable cash flow declined by $100 million in 2016 to a level of $261 million, payments to unit holders would be only $104 million so that more than $150 million a year would be available to pay down debt. CEQP is also large enough to sell off assets if necessary. CEQP's sponsor, First Reserve, will be receiving 23 per cent of whatever is distributed to common unit holders and it could use some of those funds for a "capital injection."

Conclusion - This is truly an extraordinary situation - a diverse company with attractive assets primarily involved in a growing industry (natural gas) but trading at less than two times trailing cash flow. The sponsor's recent enthusiasm for buying up the units is another sign that the sell off has been overdone. As with the other MLPs discussed in this series of articles, it is certainly possible and, indeed, likely that there will be a reduction in the distribution and that is definitely implied by the current 55% yield. And there may be other bad news as well. So the units may well trade down from here. But my bottom line is that it is just "too cheap" here and that buying at this price will pay off well in the long run. It may make sense to tip toe in here and see if more can be picked up at even lower prices. But there is always the "danger" of good news and that would definitely lead the price to spike so that I wouldn't wait forever.

Disclosure: I am/we are long CEQP, CPLP, AZUR, MEOH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.