Crestwood Equity Partners (NYSE: CEQP) initially thought 2020 would be a banner year. The Master Limited Partnership (MLP) was putting the finishing touches on a multi-year expansion program, which should pay dividends in 2020 and beyond. Unfortunately, oil prices crashed early in the year, which torpedoed his grand plan. Due to this slowdown, MLP shares have lost about 35% of their value this year. This pushed its payout yield to 12.5%.
Here is an overview of whether the energy company has the fuel to make a comeback in 2021.
Explore the numbers from Crestwood Equity Partners
Crestwood Equity Partners entered 2020 believing it could generate between $590 million and $620 million in adjusted revenue EBITDA This year. This implied a 15% increase from the 2019 level at the midpoint. Meanwhile, the company estimated it could produce between $350 million and $380 million in cash. That would have been about enough to cover its payout, which the company grew 4.2% quarter-over-quarter at the start of the year, as well as most of its $150-200 million in remaining capital expenditure.
Unfortunately, soaring oil prices put a damper on that plan, forcing most of its customers to shut down some producing wells and stop drilling new ones. Meanwhile, one of his biggest clients, Chesapeake Energy, filed for bankruptcy. For this reason, Crestwood only expects to produce $520-570 million in adjusted EBITDA this year. Although this is a measly 3.5% ahead of the 2019 midpoint level, the company currently expects to meet or exceed the upper end of this range. Additionally, after reducing capital expenditures to a range of $140-160 million, the company expects to generate enough cash to cover its distribution and capital expenditure plan with headroom, giving it donate funds to pay off debt.
To put these numbers in a different perspective, Crestwood currently has a enterprise value by $4.4 billion after its units fell 35% this year. With MLP on track to generate $545 million in EBITDA in the middle of its guidance range, it trades at around eight times its EBITDA. That’s a very cheap valuation for a company generating stable cash flow.
Explore what awaits Crestwood Equity Partners
Although it’s still early days, Crestwood recently released its preliminary guidance for 2021. The company currently estimates that it can generate approximately the same amount of EBITDA next year as it did in 2020, or between $520 million and $570 million. dollars. Meanwhile, he only plans to invest $40 million in growth capital projects. As such, it is expected to generate a significant cash surplus in 2021 after funding its distribution program and capital expenditures. This will give it the flexibility to pay down debt, make acquisitions and buy back some of its beaten up equity. While maintaining low leverage is a near-term priority, Crestwood expects to end 2020 with a debt-to-EBITDA ratio between 4.0 and 4.1 times, which is just in the mid-range. above its long-term target range of 3.5 to 4.0 times.
Meanwhile, there are benefits to this plan if oil prices rebound strongly, which would give its customers the liquidity and confidence to ramp up their drilling activities. On top of that, the company could add more fuel if it makes an acquisition. On the other hand, it could increase its earnings per share by using its available cash to buy back a significant amount of its discounted equity.
Get paid well while waiting for the rebound
Crestwood’s operations have proven remarkably durable during this year’s oil market downturn. For this reason, it’s one of the few midstream companies that hasn’t cut its high-yield payouts this year. That stability seems achievable again in 2021, given what Crestwood is planning. Add to that its performance, strong balance sheet and updated valuation, and Crestwood looks like a compelling buy these days for investors who have the patience to wait for the oil market to rally.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.