Description

   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"

Catalyst

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.