|Shares Out. (in M):||188||P/E||65.6||53.9|
|Market Cap (in $M):||3||P/FCF||10.0||0|
|Net Debt (in $M):||2||EBIT||0||0|
Crestwood Equity Partners (CEQP) is the General Partner of Crestwood Midstream Partners (CMLP), an MLP providing services to the oil & gas industry. As of 12/31/2014, CEQP had cash and equivalents of $8.8 million and $383 million of debt. It has a NGL supply and distribution business which did $53 million of EBITDA in 2014 and seems to be an okay/mediocre business. It owns 7.2 million shares of CMLP worth $110 million. CEQP received $11.7 million of dividend income from the shares in 2014. Last, it owns an IDR (incentive distribution right) on CMLP's dividend distributions. The IDR entitles CEQP to 50% of the quarterly distribution in excess of $0.37 per CMLP share. At the current time CMLP pays out $0.41 quarterly per share. The IDR was worth $30.1 million to CEQP in 2014. In 2014, after expenses, CEQP earned $0.30 per share. It's dividend rate was $0.55. It is overpaying. CEQP shares traded as high as $20 in 2010/2011 and $15 as recently as 2014. Yesterday Merrill Lynch reduced its rating from "Buy" to "Hold" on the shares of CEQP, and its shares declined 10% to $5.50.
CEQP has 186 million shares outstanding. At $5.50 its market cap is $1 billion and its enterprise value is $1.4 billion. Mr. Market is paying a lot for the future value of the IDR. First Reserve (an energy private equity investor) owns 53.8 million CEQP shares (28.7%). Officers and directors own another 22.4 million shares (11.9%). Together insiders own 76.2 million CEQP shares worth $419 million. They are stuck. First Reserve sponsors funds that invest in energy assets. It does not own energy assets directly that it can drop down into an MLP. Its funds have limited lives. The fund which holds CEQP shares is mature and unable to make further investments into the Crestwood structure. Without new investments, the IDR will not grow and the value of CEQP will decline. The owners of CEQP need to find a new sponsor to inject earning assets into CMLP so that the IDR can increase in value.
From the 2/24/2015 4th quarter earnings call transcript
Robert Phillips, Chairman of CEQP & CMLP
"...And so we've been pretty open about the concept of First Reserve, our current GP sponsor working with us to try to bring additional capital into the GP structure so that we can have more arrows in our quiver, so to speak. First Reserve has been a great partner, but as you know, given the fund that we were originally placed in back in 2010 when we started Crestwood, they have not been able to provide a lot of additional capital. They provided a lot of strategic and capital market support but have not been able to invest directly in the acquisition or development of assets like some of our competitors have, to warehouse those assets at the GP level and create the drop-down structure that investors are so fond of in this market. So certainly, First Reserve has recognized that we've fallen behind in that regard. They've been working with us over the last several months to come up with a plan that would allow us to look into the market and see if there's not additional potential sponsors that would like to co-sponsor this organization over the next cycle, which is probably a couple of years, and an important one where we're going to see deal prices come down substantially just like we did back in 2008, 2009 after the Lehman bankruptcy. So we're trying to set ourselves up and position Crestwood to be an acquirer over the next year or 2 at these much lower prices than the industry experienced in 2013 and 2014. And to do that, we think we need some help at the GP sponsor level. So there's a lot of different structures that we've talked about publicly and that anyone can conjure up, and ther's certainly been some very successful structures in our peer group over the last several years where GP sponsors have come in, made investments, moved to the side, had additional GP sponsorship come in, additional capital, very strong co-sponsorship for a period of time, transitioning to allowing the first guy out and the second guy to take over. And we think Crestwood is a classic opportunity for that type of restructuring, if you will, of the sponsorship. In any event, it will give visibility of growth that I think investors so desperately want. It's pretty obvious in the way that they priced the stock right now that investors don't see the growth potential of the stock. So we think bringing in a co-sponsor might give some viability to that, particularly at a time where Will Moore (CEQP Senior VP:Strategy) and I, I think, we're going to see some real opportunities in the market over the next 12 to 24 months, That's all the color I can give you, Brian. As you know, we're continually in discussions with different parties, and we think that there's real opportunity to do something here in 2015 and hope that we can get that done and it might have an opportunity to rewrite the stock."
CMLP has 188 million shares outstanding which at $15.00 are worth $2.8 billion. It has $2 billion of debt comprised of $555 on its revolver and $1.45 billion of fixed rate debt due between 2019 and 2022. In addition, it has $500 of preferred units of which $440 million are now outstanding and another $60 million will be issued in 2015. These preferreds were sold primarily to Magnetar and GSO. The preferreds were priced at $25.10 and pay quarterly at a $2.3216 annual rate. Through 6/17/2017 the dividend maybe paid in cash or in kind. They are convertible into common on a 1-for-1 basis and contain the normal provisions governing these types of instruments. CMLP has an enterprise value of $5.3 billion. First Reserve owns 28 million shares of CMLP worth $420 million. Officers and directors own another 6.8 million shares. Altogether, insiders owned CMLP shares worth $522 million at $15.00. In 2014 the company had adjusted EBITDA of $443 million, distributable cash flow of $328 million and spent $535 million on expansionary capital projects. For 2015 CMLP projects that it will have adjusted EBITDA of ~$500 million, distributable cash flow of~$350 million and will spend ~$120 million on expansionary projects. As is customary, almost all of the company's operations are on a take-or-pay basis. The operations are diversified as to producers and areas and are as follows;
Barnett Gathering & Processing
In 2010 Crestwood bought Quicksilver Gas Services for $700 million. In 2012 it paid $90 million for Devon's operations. These operations are entirely fee-based under take-or-pay contracts. Quicksilver recently went bankrupt. CMLP has addressed this in filings. Quicksilver's invoices are up to date and expected to remain so. The Quicksilver contact runs through 2020 and Devon's through 2032. The Barnett system should produce ~$90 million of EBITDA in 2015.
Marcellus Gathering, Processing, Compression & Storage
In 2012 CMLP bought Antero's systems for $375 million. In 2013 the agreement was expanded at a cost of $35 million. It was further expanded in 2014 at a cost to CMLP of $191 million. The contract has a life of 20 years. The system is expected to provide ~$225 million EBITDA in 2015. Antero continues to drill in the area.
Bakken Gathering, Transportation & Storage
In 2012 CMLP (Inergy) bought the COLT rail transportation and storage facility for $425 million. It provides rail transport for 150K bbl/d of oil under long-term take-or-pay contracts with refiners. In 2013 the Arrow gathering system was purchased for $750 million . It provides service to a number of producers under long-term take-or-pay contracts. The systems should provide EBITDA of ~$150 million in 2015.
PRB Niobrara Gathering & Processing
In 2013 CMLP acquired a 50% interest in the Jackalope system in the Powder Ridge Basin for $108 million. They are a 50% partner in the system with Williams Partners (WPZ). With expansions, CMLP has spent $175 million. The system has a 20 year contract with Chesapeake. The system is expected to provide ~$20 million of EBITDA in 2015. There is a lot of undeveloped drilling acreage associated with the system.
CMLP has some other assets which provide minor amounts of cash flow. In the scheme of things they are not important.
CMLP's dividend coverage is about 1-to-1. The company will not increase its payout until coverage is 1.1-to-1. The company's debt stands at about 4.5x EBITDA which is higher than management would like. It is management's hope to reduce leverage to 3.5x to 4.0x. These metrics are below the averages for comparables which are about 1.1x for dividend coverage and 4.2x for leverage. All-in-all, CMLP is okay but not great.
CMLP shares trade at about 10x EBITDA versus 14x for competitors. There is room for improvement.
CMLP's dividend is $1.64 and its yield is 10.9% versus 5.8% for competitors. There is room for improvement.
As Bruce Springsteen sang in "Thunder Road",
"You ain't a beauty but hey you're alright"
First Reserve finds an indusrty partner with assets to drop into CMLP.
CMLP simply grinds its way to improvement.
The risk is that neither of those happen, the dividend is cut, and CMLP's share price declines.
|Entry||04/09/2015 09:30 PM|
Thanks for the write up. We are interested in this as well. Could you talk a little bit about your views on Colt? What are your views on the longer term viability of Bakken rail?
|Entry||04/10/2015 09:26 AM|
It is my least favorite major asset. Rail is not the optimal transportation method for product. It is more costly and more dangerous than pipelines. However, it has been successful so far. In discussing 2014 results, the company reported that part of the increase in revenues "was higher volumes on our COLT Hub as a result of our expansion of the facility and increased utilization of non-firm capacity on the system." I would prefer it if the system was 100% utilized with "firm capacity" as that is under a long-term contract. The asset is on the books with $668 million of goodwill. In 2014 CMLP took some goodwill write-downs on a variety of assets. On page 66 of the 10-K the following statement is made; "In particular, a 8% decrease in the estimated future cash flows or a 0.6% increase in the discount rate used to estimate the fair value of our COLT (NGL and Crude Services) reporting unit could have resulted in an impairment of goodwill." So the question of valuation and cash flows has been addressed and, so far, the valuation of the facility based on future cash flows is affirmed. Next year there will be another test.
Hope that this helps.
|Entry||05/14/2015 10:42 PM|
any thoughts on the merger w/ CEQP? thanks.
|Subject||Re: deal thoughts|
|Entry||05/16/2015 10:01 AM|
CMLP has been paying out a $0.41 quarterly dvidend for a number of quarters. It has only recently fully earned that dividend rate. CEQP's IRD entitles it to 50% of the earnings in excess of a $0.37 dividend. As a result, CMLP has been subsidising CEQP. CEQP pays out a $0.55 dividend which is about 120% of its earnings. As I wrote originally, Mr. Market was paying a high price for the IDR. With this deal, it will not be Mr. Market who is paying a high price but the shareholders of CMLP. So, I am not in favor of the transaction. However, given the ownership positionsof the insiders, the deal will probably go through. Hopefully, the damage will be overcome through accretive investments. Right now, the deal means a dividend cut to $1.51.
|Subject||Re: Re: Re: deal thoughts|
|Entry||05/21/2015 08:49 AM|
First Reserve is a private equity investor in the energy space. They have been successful in the past, as they should have been, as in the past the energy sector was in a bull market. I assume that they have some problems on their hands like everyone in the space. Their desire is to make money for their partners. Up until this transaction, their interest was in maximizing their investment through the leverage provided by the IDR owned by CEQP. Having run out of time and money, First Reserve has decided to merge the structure and eliminate the GP. In the short run, this is beneficial to CEQP as the LP is paying a premium to the GP for the elimination of the IDR. I don't like it, but it does provide for a better structure. Despite the transaction, I do not think that First Reserve shady. I just think that they are looking out for their financial interests. In the history of the world, the GP has often done better than the LP. First Reserve has a fair amount of money invested in the Crestwood entity. They need to make the investment worth more in order to maximize their carried interest. I do not think that they will be sellers of stock in the immediate future.
The company released a presentation in the last few days. It reads fairly well and points out the cheapness of Crestwood's valuation relative to others in the space. Hopefully, the market will recognize the low valuation and boost the stock price. A higher stock price will provide a cheaper currency for transactions. In the meantime, you get a 10% yield and anokay collection of assets. it ain't pretty but it's alright.