Crestwood Equity Partners (NYSE: CEQP) is nearing an inflection point. The master limited partnership (MLP) is winding down a three-year expansion program that will fuel accelerated cash flow growth in the coming quarters. With cash flow on the rise and capital spending set to fall, it's on track to generate significant free cash flow after paying its 7.2%-yielding distribution next year.
Because of that, the midstream company expects to start boosting the amount of money it delivers to its investors again for the first time since it cut the payout to its current level in 2016. That was clear from the comments of the company's management team on the recent second-quarter conference call.
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Nearing an inflection point
CEO Bob Phillips started the Q2 call by stating that: "I guess it's obvious this is a really exciting time at Crestwood. Another quarter, one step closer to reaching our goals to become free cash flow [positive] in 2020 and another step toward delivering on our three-year DCF per unit compounded annual growth rate target of 20% per year."
Crestwood has worked hard over the past few years to shore up its financial foundation while also investing in high-return expansion projects. That strategy is already paying dividends, which was evident in the company's second-quarter report. Earnings surged nearly 18% year over year while cash flow jumped 19%, which helped boost the company's distribution coverage ratio to a comfortable 1.5.
Crestwood also made excellent strategic progress during the quarter. The highlight was its acquisition of full control over its gathering and processing business in the Powder River Basin. In addition, the company stayed on track to finish its Bear Den II processing plant in the Bakken Shale by early September and its Bucking Horse plant expansion in the Powder River Basin early next year.
Once the company completes those two projects, it should start generating significant free cash flow. That's because capital spending is projected to decline from a range of $425 million to $475 million this year to a range of $100 million to $150 million in 2020. At the same time as spending falls, cash flow will soar due to the completion of those new processing plants. "That clearly provides a path to generating substantial free cash flow for Crestwood and our investors in 2020," stated Phillips.
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Where the windfall will go
Crestwood's plan for its free cash was a major topic of conversation on the second-quarter call. An analyst asked whether the company had a preference between returning it to investors via stock buybacks or distribution increases. CFO Robert Halpin drove the response, and stated that cash returns could come in several forms, including repurchasing both common or preferred units. However, he also said that "we do think some amount of distribution growth makes sense."