Crestwood Equity Partners LP (CEQP): Comeback from Raging Capital

Crestwood Equity Partners: Classically Cheap

Crestwood Equity Partners

  • A fee-based midstream MLP with embedded IDRs that operates in three segments:
  • NGL and Crude Services: Includes its NGL supply and logistics business, crude oil rail terminals, and the Arrow gathering system
  • Gathering and Processing: Provides natural gas gathering, processing, treating, and compression services in the Marcellus, Barnett, Fayetteville, PRB Niobrara, and other basins
  • Storage and Transportation: Owns and operates natural gas storage facilities with an aggregate working gas storage capacity of approximately 79.3 Bcf

Why We Are Bullish on Crestwood

Raging Capital View:

  • CEQP’s stock is extremely undervalued and misunderstood
  • Investors are getting paid to wait
  • Attractive assets in Northeast storage, Marcellus, Bakken, Niobrara, and Permian
  • Embedded IDRs is an underappreciated benefit to unitholders over the long term
  • Partially cutting the distribution would provide multiple levers to drive unitholder value

Why Has CEQP’s Stock Come Under Pressure?

  • Failed strategic alternatives process
    • Multiple potential bidders/partners when stock was at a split-adjusted price range of $60 to $140 per unit, but a transaction was not consummated
  • Tax-loss selling and decreased liquidity following reverse stock split
  • MLP asset class pressure from energy price declines and technical factors
    • Many MLPs have direct exposure to oil and natural gas prices, as well as an IDR structure that is unfavorable to LP unitholders
  • Exposure to Bakken crude-by-rail and gathering contracts and a bankrupt Barnett Shale producer

MLP Valuation

  • Under our worst-case 2017 scenario of $529M in EBITDA, CEQP would trade at:
    • 3.4x P/DCF
    • 29.4% DCF yield
  • Under our base-case 2017 scenario of $607M in EBITDA, CEQP would trade at:
    • 2.7x P/DCF
    • 37.3% DCF yield
  • Based on their 2017 LP’s contributions, the average midstream MLP trades at:
    • 9.1x P/DCF, and 9.5x for companies with embedded IDRs
    • 11.8% DCF yield, and 11.2% for companies with embedded IDRs

Peer Valuations

Crestwood Equity Partners

Operating Highlights

  • No direct commodity exposure
  • 90% fee-based revenues
  • Embedded IDRs
  • 2016 run-rate costs savings of $25-30M, and $5M public-entity cost savings
  • EBITDA growth amid energy price declines

Crestwood Equity Partners

Crestwood Equity Partners

Asset-by-Asset Analysis

  • To really understand Crestwood, investors need to take a deep dive into each of its key assets
  • We explain why Crestwood’s assets are misunderstood and lay out potential scenarios as to how these assets are likely to perform

Asset-by-Asset Analysis: Natural Gas Storage

  • Description
    • Four storage facilities located in New York and Pennsylvania with 40.9 Bcfof capacity
    • Best asset is Stagecoach in NY, which has 26.2 Bcf of storage
    • Also have 50% ownership of Gulf Coast facility, Tres Palacios
  • Contract Type
    • Take-or-Pay
    • 100% contracted; 15% of capacity up for renewal in 2016
  • Customers: Consolidated Edison (ED), NJ Natural Gas, Repsol
  • 2016 Estimated EBITDA Contribution: $140-150M

Natural Gas Storage Highlights

  • Weighted average contract term of 4 years
  • Majority of contract renewals expected at or above existing rates
  • Northeast scarcity value and permitting challenges with new facilities
  • Stagecoach is the closest natural gas storage facility to NYC
  • MARC I Pipeline expansion adds $6.3M in revenue at 90% EBITDA margin

Crestwood Equity Partners

See full slides below.