Insiders Have Loaded Up on This 9.5% Yielder
This Overlooked High-Yield Stock Has Been an Insider Favorite
Most people have never heard of Crestwood Equity Partners LP (NYSE:CEQP), yet the partnership offers one of the most generous distribution policies in the current stock market. Moreover, while an ultra-high payout could be a sign of trouble, management of this high-yield stock have no problem putting their money where their mouth is. Let me explain.
Headquartered in Houston, Texas, Crestwood is a master limited partnership (MLP) that owns and operates midstream energy assets located primarily in the Delaware Permian Basin, Barnett Shale, Bakken Shale, PRB Niobrara Shale, Fayetteville Shale, and Marcellus Shale. The partnership has three main segments: Gathering & Processing, Storage & Transportation, and Marketing, Supply & Logistics.
Due to the downturn in oil and gas prices, the energy sector hasn’t been an investor favorite. But the cash distributions this energy partnership managed to dish out are nothing short of impressive. With a quarterly distribution rate of $0.60 per unit, CEQP stock offers a staggering annual yield of 9.5%.
Crestwood’s generous distribution policy is backed by a fee-based business. The partnership does not drill any new wells; instead, it provides a wide range of fee-based services, such as the gathering, processing, treating, compression, storage, and transportation of natural gas and the gathering, storage, transportation, terminalling, and marketing of crude oil. Management estimated that around 86% of the partnership’s forecasted earnings before interest, tax, depreciation, and amortization in 2018 will come from take-or-pay and fixed-fee contracts. (Source: “Investor Presentation: March 2018,” Crestwood Equity Partners LP, last accessed April 2, 2018.)
Crestwood also boasts a high-quality customer base. In the Gathering & Processing segment, the partnership serves well-known producers such as Royal Dutch Shell plc (NYSE:RDS.A) and Devon Energy Corp (NYSE:DVN). In Crestwood’s natural gas liquids Marketing, Supply & Logistics business, its customers include Williams Companies Inc (NYSE:WMB), Exxon Mobil Corporation (NYSE:XOM), and Total SA (NYSE:TOT), just to name a few.
By having long-term, fee-based contracts with high-quality customers, Crestwood can limit its direct exposure to commodity prices and generate stable cash flows.
Just take a look at the partnership’s latest earnings report and you’ll see what I mean. In the fourth quarter of 2017, Crestwood generated distributable cash flow to common unitholders of $56.8 million, providing 1.4 times coverage of its total distributions during this period. In other words, even though oil and gas prices were still far from making a full recovery, the partnership generated 40% more cash than what’s needed to cover its distributions to common unitholders. (Source: “Crestwood Announces Fourth Quarter 2017 Financial And Operating Results; Provides 2018 Growth Outlook,” Crestwood Equity Partners LP, February 20, 2018.)
For full-year 2018, management expects Crestwood to generated distributable cash flow available to common unitholders of between $195.0 million and $225.0 million. This would provide 1.2 times to 1.3 times coverage of its cash distributions, leaving a margin of safety.
Of course, most companies’ management are upbeat about their business. But note that at Crestwood, management is doing more than just talking; they also put their own money into the partnership. According to the latest investor presentation, management and insiders collectively own more than 30% of all Crestwood’s common LP units.
Such a high insider ownership represents a genuine vote of confidence. For those interested in owning a high-yield energy stock, CEQP deserves a serious look.