Crestwood Equity Partners: Giving Up $22 Million For The Greater Good

| About: Crestwood Equity (CEQP)

Summary

With the macro environment stabilizing, Crestwood is ready for a new beginning.

The "unfair" deal with Consolidated Edison is well worth the close to $1 billion upfront cash proceeds.

The management isn't aggressively pursuing growth, electing to return capital to unitholders instead.

I first talked about the stock back in July 2015, when Crestwood Midstream Partners (NYSE:CMLP) and Crestwood Equity Partners (NYSE:CEQP) were still separate entities. I stated that the distributions were not sustainable for either partnership. It took half a year, but the management eventually relented and slashed distribution by 56% from $1.375 to $0.60 per quarter.

The stock has recovered nicely along with natural gas and oil:

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Clearly, the market is becoming more comfortable with the company's future prospects. I concur with this sentiment. Now that the worst has passed, I believe that Crestwood is ready for a new beginning

Joint Venture Gives New Life

Earlier this June, the company closed the JV transaction with Consolidated Edison (NYSE:ED). Through the JV, Crestwood will contribute some of its assets to the JV in exchange for $975 million of cash from Consolidated Edison. This will provide a huge liquidity boost to the company. If there were any concerns regarding the company's debt, there should not be any now. The balance of $763 million on the credit facility can be wiped clean, with some cash left over.

There is a trade-off of course. Even though Crestwood is contributing the assets and it's a JV (i.e. 50/50 interest), Consolidated Edison will get 65% of cash distributions for the first two years and 60% for the third year. The JV is expected to generate $145 million of EBITDA, so Crestwood could be giving up $22 million per year in the first two years. However, I believe that this sacrifice was well worth the cost. The upfront cash proceeds will help lower the leverage ratio from 4.8x at FYE 2015 to 3.8x in Q1 (pro forma), giving the company substantially more space for future maneuvers (covenant caps the leverage ratio at 5.5x).

Not Reckless

Unlike Kinder Morgan (NYSE:KMI), whose management has continued to pour cash after growth, Crestwood's management has chosen to rein in expansion. Capex will decline from $183 million in 2015 to just $50-$75 million in 2016. Considering that the company already spent a significant portion in Q1 ($56 million), there will be ample amount of cash to fund the already lowered distribution in subsequent quarters. If we even out the projected capex of $63 million (midpoint of guidance), we get just $16 million per quarter. Given Q1's adjusted operating cash flow of $85 million, Crestwood should be able to comfortably support the common distribution of $42 million and the preferred distribution of $13 million. Furthermore, the company could also choose to pay the preferred distribution in units, effectively lowering the cash burden.

Takeaway

Since the macro environment has improved and the management is making smart decisions, I believe that the worst is over for equity holders. The JV significantly de-risked Crestwood's balance sheet, combined with a restrained capital budget, unit holders can be fairly confident that the company will not enact another distribution reduction in the near future.

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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.