onurdongel
The Quarter
Crestwood (NYSE:CEQP) reported a lighter than expected quarter this morning (11/2) with EBITDA coming in at $209 million versus expectations of around $223 million. It was a funky quarter given all of the moving parts including the closing of the Sendero Midstream acquisition, the sale of the Marcellus assets (which closed on October 25th), and the repurchase of the units held by Chord (CHRD). I outlined these moves in my most recent write up on the company.
That all said, management largely blamed the “miss” this quarter on completion delays of wells primarily in the Williston basin. Per the conference call, the delay traces back to the severe weather in the area in April, which then pushed back a bunch of completions primarily from the third quarter into the fourth quarter and a few into Q1 next year. This issue similarly impacted the second quarter so it’s a bit disappointing that it was not resolved this quarter. However, not only do I trust management and take them at their word, but I have heard of delays from other producers, and the fact that there are rigs working in both the Williston and the Permian gives me confidence that producers are active and drilling.
The sale of the Marcellus assets and the push from Q3 to Q4 and part of Q1 led to a small cut to the midpoint of EBITDA guidance for the year from $820 million to $790 million. The $30 million reduction is broken down by about $5-7 million coming from the Marcellus sale and the rest from the delay. If history is any guide, then the company will likely hit or exceed the high point of the new guide range of $780-$800 million. While this is not ideal, I don’t think a $20 million or so delay of EBITDA should mean much to the stock, particularly when the Sendero acquisition is “going better than expected” according to management on the call and the amount of drilling activity in both major geographies.
I’ll also add that the distribution remains extremely well covered at close to 2x and the balance sheet is in great shape at just over 4x, which should come down to toward the 3.5x range as the Sendero acquisition is absorbed and new wells come online.
Valuation
I am changing EBITDA from my last write-up to reflect the revised guidance. The company usually hits or exceeds the high end of its guidance but given now two quarters of slight EBITDA disappointment, it pays to give them the room. That brings the multiple up to 9.5x although the run-rate is over $840 million and I suspect $900 million+ is in reach for next year.
| Market Cap (Using 105 million units at $30/unit) | $3.150 billion |
| Preferred Units | $612 million |
| Minority Interest | $430 million |
| Net Debt | $3.360 billion |
| Enterprise Value | ~$7.552 billion |
| EV/EBITDA (Using $790 million EBITDA midpoint) | 9.5x |
Risks
Clearly weather has been an issue this year. That could rear its ugly head this coming winter as well. The good news is the well connects are happening and the counterparties are in the best financial shape they’ve been in years, perhaps ever. Commodity prices are another risk that one always faces with these names, but as we’ve seen with CEQP, prices might vary for the underlying commodities, but volumes rarely fluctuate much. In the end, this is a volume game.
Conclusion
Despite this quarter’s shortfall, I continue to love the assets at this company. I think the M&A moves this year have bulked them up in the right geographies while keeping the balance sheet clean and simplifying the story with the dispositions. The distributions remain extremely compelling at a >8.5% yield and well-covered, and the balance sheet is basically investment grade in my opinion. I still don’t understand why this company remains below its pre-Covid level, and like it as both an income and capital appreciation play.
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