Seeking Alpha • Feb 17
Crestwood Equity: Dealmaking Has Transformed The Company
Summary
Acquisitions and divestitures have re-positioned CEQP's assets.
Improved in-basin scale will allow for more high-return projects or bolt-on acquisitions.
Stock is one of the cheapest in the midstream sector.
Gathering and processing operator Crestwood Equity Partners (CEQP) has had a busy couple of years strategically re-positioning its portfolio through various acquisitions and divestitures. The deals have left the company with two very strong gathering and processing platforms located in two of the strongest oil basins in North America. Despite this, CEQP stock trades at one of the cheapest valuations on the midstream space.
What I would call phase 2 of CEQP’s transformation began in July of 2021 when it and Consolidated Edison (ED) sold their Stagecoach JV to Kinder Morgan (KMI) for nearly $1.2 billion, giving CEQP $600 million in proceeds for its half. Notably, CEQP sold half of this same natural gas storage facility to ED for $975 million in 2016 (a $1.9B valuation), but tough NY state regulations made it difficult for CEQP and ED to grow the asset. The original asset sale was the beginning of phase 1 of its transformation.
CEQP then turned around and acquired Oasis Midstream for $1.8 billion, consisting of 33.8 million units and $160 million in cash. The deal made the company the 3rd largest natural gas processor in the Bakken. The acquisition closed in February of 2022.
Continuing its dealmaking, CEQP purchased Sendero Midstream for $600 million as well as First Reserve’s 50% equity interest in Crestwood Permian Basin Holdings for $320 million to bolster its position in the Delaware Basin. The company projected the acquisitions were made at a 7x next twelve-month EBITDA multiple.
At the same time, the G&P sold its Barnett Shale systems to EnLink (ENLC) for $275 million in cash. For its part, ENLC said the deal was made at a 4x EBITDA multiple. All three deals closed in July of 2022.
Most recently, the company sold its Marcellus gathering and processing system to Antero Midstream (AM) for $205 million in cash. CEQP said the deal was done at an over 7x multiple to 2023 EBITDA. Since 2017, the production on this system has been in natural decline as producer Antero Resources (AR) has favored drilling the western side of its Marcellus acreage, where AM has the dedication.
Discussing the company’s strategic moves on its Q2 conference call, CEQP CEO Bob Philips said:
“I just want to highlight that we've transformed Crestwood from a company that was generating adjusted EBITDA of about $527 million in 2019 with a relatively scattered asset base and limited competitive advantage in these high-growth basins, and we are now at generating north of $820 million a year of adjusted EBITDA. That's an increase of over 55%, and we're generating that with an asset base that is solid and competitive in the regions where we operate with enhanced competitive positioning, much larger scale, operational synergies and a strong customer base in our core areas of the Williston, the Delaware and the Powder River.
“So just a quick update on our strategy. We think we're in a really good position right now to generate some real strong growth in these areas. Our acquisitions have been timely. They offer significant operational and commercial synergies, and they're easily integrated into our core positions in each of these basins. Most importantly, they allow Crestwood to continue to grow while avoiding significant future capital expenditures due to the excess processing and compression capacity that we acquired in each of these acquisitions.”
Assets
Following all the deals, CEQP now primarily operates in 3 basins, while also having a Storage & Logistics operation.
Williston Basin (~65% of EBITDA)
The Williston (or Bakken) is CEQP’s largest basin where it has over 535,000 dedicated acres in North Dakota and eastern Montana. The company’s assets include over 1,200 miles of gathering pipelines with 400 MMcf/d of natural gas gathering capacity, 225 MBbls/d of crude oil gathering capacity, and 383 MBbls/d of produced water gathering capacity. It also has 430 MMcf/d of natural gas processing capacity at its Bear Den and Wild Basin processing complexes and 149,250 horsepower of gas compression.
Company presentation
Its systems connects to various outlets including DAPL, Hiland, Tesoro, the Bakken-Link pipeline, as well as CEQP’s transloading facility COLT Hub.
Key customers include Chord Energy (CHRD), Devon (DVN), Enerplus (ERF), and XTO, which is a subsidiary of Exxon (XOM).
Delaware Permian (22% of EBITDA)
In the Delaware Basin, meanwhile, CEQP has over 534,000 dedicated acres in New Mexico and western Texas. The company’s assets include over 660 miles of gathering pipelines with 650 MMcf/d of natural gas gathering capacity, 95 MBbls/d of crude oil gathering capacity, and 165 MBbls/d of produced water and disposal gathering capacity. It also has 550 MMcf/d of natural gas processing capacity and 191,415 horsepower of gas compression.
Company Presentation
Key customers include ConocoPhillips (COP), Mewbourne Oil, Percussion, and Novo Oil & Gas.
Powder River Basin (7% of EBITDA)
In the PRB, CEQP is the largest well-head service provider in the basin. It has over 400,000 dedicated acres in Wyoming. The company’s assets include over 360 miles of gathering pipelines with 241 MMcf/d of natural gas gathering capacity and 345 MMcf/d of natural gas processing capacity at its Bucking Horse Processing Plant. It has 85,688 horsepower of gas compression.
It primarily serves Continental Resources (CLR) in the basin.
Storage and Logistics (7% of EBITDA)
Through various storage and transportation assets, CEQP is a leading NGL marketer primarily for Marcellus and Utica producers. The company has 13 liquefied petroleum gas ((LPG)) terminals with 10 MMBbls of contracted storage and pipeline capacity, as well as 13 trucking and rail terminals.
CEQP’s COLT Hub transloading platform and crude oil storage facility in the Bakken and the Tres Palacios gas storage facility on the Texas coast are also part of this segment.
Valuation
Turning to valuation, CEQP trades at 8.4x the 2023 EBITDA consensus of $865.3 million. For 2024, its trades at 7.9x the 2024 EBITDA consensus of $919.7 million.
It trades at about 5.3x my estimated DCF of $531 million, and has a 2023 FCF yield of about 12%.
The stock currently yields 9.9% with a solid 1.9x coverage ratio last quarter.
Opportunities
CEQP has already done a really nice job of transforming itself through its aforementioned acquisitions and dispositions. In doing so, it’s become a prominent midstream operator in two of the largest oil basins in the U.S. (Permian and Bakken) that have attractive oil-price breakevens, and it has a solid foothold in a third basin, the Powder River Basin.
Company Presentation
Prior to the acquisition, Oasis Midstream was projecting solid mid-teens growth from increased producer activity, while CEQP should continue see some solid synergies as well. The Sendero acquisition, meanwhile, now gives the company the scale needed to be a bigger player in the Permian.
Despite high-grading its portfolio and turning itself into an oil-centric midstream provider in a strong oil environment, the stock remains one of the cheapest midstream operators out there. Its improved in-basin scale also likely allows for more high-return projects or bolt-on acquisitions.
CEQP also should see solid growth opportunities to serve its largest customer in Chord Energy. With the Oasis-Whiting merger, CHRD is solely focused on the Bakken and is in a strong financial position with net cash on the balance sheet following the sale of its CEQP units.
CHRD Presentation
