Crestwood Equity Partners LP (CEQP): Comeback from Raging Capital
Crestwood Equity Partners: Classically Cheap
- 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
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
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
See full slides below.
