September 21, 2015 - 12:57pm EST by
2015 2016
Price: 2.50 EPS .50 .45
Shares Out. (in M): 757 P/E 5 5.6
Market Cap (in $M): 1,885 P/FCF 5 5.6
Net Debt (in $M): 2,670 EBIT 0 0
TEV ($): 4,555 TEV/EBIT 0 0

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  • MLP
  • General Partner Acquisition
  • Basic Materials
  • Oil and Gas


Crestwood Long
I am writing up Crestwood as a timely long based on an awful technical picture, that has made the stock
(actually units) exceedingly cheap. Overall Crestwood is a 90% fee driven midstream MLP, trading at an
insane 22% dividend yield and at 5x distributable cash flow (on a proforma merged basis). Comps tend
to trade at 8-9% yields today. I believe the distribution is sustainable.
There are 2 Crestwoods trading today. The parent, Crestwood Equity (ticker CEQP), is merging with its
LP subsidiary Crestwood Midstream (CMLP). At this point it makes little difference which one investors
buy. CEQP will be the surviving entity and will issue 2.75 shares per share of CMLP. The merger should
close by month’s end after unitholder approval (which based on cross holdings and conversations with
the company appears highly likely). IDR’s will be eliminated altogether.
As of this writing, CEQP is trading at $2.48, and CMLP is at $6.63, meaning CMLP is a little cheaper
($6.63/2.75=$2.41). CMLP got tossed out of the Alerian index (announcement Friday Sept 11), and the
final sale of some 11mm shares happened last Friday. In 2 weeks CMLP fell 13%. This is after falling from
over $22 a year ago.
CMLP and CEQP together should produce roughly 50c in Distributable FCF (EBITDA less maint capex less
interest). With a proforma dividend of $0.55, they are slightly overpaying today. In my numbers
however I included stock based comp. The company does and reports 1.05x distribution coverage (for
Q2 at CEQP proforma).
In almost any scenario I come up with, the stock appears cheap by 50-100%.
Leverage is not too high for an MLP (around 4.5x), and covenants provide lots of room (5.5x max
leverage). Liquidity is quite good, as the company combined proforma will have $700mm of revolver
capacity going forward. The next major maturity is the 6% bonds of 2020, which trade mid 90s and at a
pretty reasonable 7.5% YTW.
If one had bankruptcy concerns, it would be an easy pair against the equity.
Summary Financials:
Combined, Crestwood owns assets in 4 major regions. Over 70% of EBITDA comes from the Bakken
(including a rail loading facility and a gathering system), and the Marcellus.
Mostly the company owns gathering and processing assets. Volume concerns are an issue in the Barnett
(15% of EBITDA), as it’s a dry gas region with Quicksilver as a major customer. Since their bankruptcy
filing however, and even before, Quicksilver has not missed any payments.
The Bakken rail loading facility (the Colt system) has a major contract with Tesoro, and naturally in this
environment investors are worried about volume declines there and new pipelines. I note that the
Tesoro refiners that buy this crude are on the West Coast, where currently there are no major pipelines
either existing or planned. In Q2, volumes grew by 10%.
The other Bakken gathering assets are still showing growth in volumes (57MBbls/d in Q2 vs 55.8 in Q2
2014). EIA data also show increased production in the Bakken in the 1-2% range. Their acreage is quite
central and likely will be up a bit. Customers there include WPX, Halcon (a risk but they have liquidity),
QEP (good balance sheet), XTO and WLL. The company estimated that 75-80 new wells will be
connected in 2015 (with 38 through June).
In the Marcellus, the company has contracts with Anadarko, Antero and Cabot. Volumes have been firm
in the NE region of the Marcellus (where differentials are ok). In the SE region, Antero has scaled back
production and there are some volume declines. But recently, Antero has moved 3 rigs back to this area
and a new pipeline in Q4 this year should alleviate terrible differentials (pricing well below Henry Hub).
The company also recut a deal with Antero to provide some fee relief too, also providing incentives to
increase drilling.
In my downside case, I assumed the low end of guidance this year, then took out all deficiency payments
for MVC’s that are not being met, and reduced volumes by 10% outside of the Bakken/Marcellus. Recall
that 90% of the company’s EBITDA is generated from volume based contracts. The other 10% is NGL
price driven (primarily Butane and Propane, which seasonally hit in the winter).
That takes DCF to 43c/unit (of CEQP proforma). If the dividend were cut from 55c to 43c, and using a
10% yield, higher than other comps today, then the stock would trade to $4.30, up 70% before
distributions. The best comps probably are slow growth MLP’s with much of their EBITDA from fees (I
used WPZ, ETP, MWE, SMLP and PAA which are an 8.7% yield).