Crestwood Equity Partners LP has said "no, thanks" to Raging Capital Management LLC's "Crestwood Comeback" program, which includes a distribution cut and unit buyback.
However, both parties agreed that things are rough in the master limited partnership (MLP) sector (see Daily GPI, Oct. 22). Raging Capital, a "significant" Crestwood investor, gave a nod to the commodity price-induced carnage among MLPs but in the Monday announcement of its turnaround plan said Crestwood units are undervalued, even by current "MLP math."
Following last week's announcement by Kinder Morgan Inc. (KMI) that it would slash its distribution to shareholders, analysts have said to look for similar moves by midstream MLPs (see Daily GPI, Dec. 9). KMI was a set of MLPs before they were rolled up into a C-corp. last year (see Daily GPI, Aug. 11, 2014).
Raging Capital said this week "the last time we saw an at-scale, quality MLP as undervalued as Crestwood and trading at a similar and sustainable 35-40% distribution yield was in 2009. That obviously proved to be an attractive buying opportunity." The firm cited a recent announcement by Crestwood's largest equity holder, First Reserve, that it planned to buy $100 million worth of Crestwood units for its own account.
"While this is clearly a positive vote of confidence in Crestwood's value, we would much rather see the partnership itself buy back and retire units, thus directly benefiting the company's unitholders," Raging Capital said. "In our opinion, a direct buyback would be tremendously accretive."
Besides a buyback, Raging Capital also recommended cutting Crestwood distributions for "significantly improved coverage ratio," it said.
"Even at a reduced $3.50 per unit annual distribution (an approximate 35% reduction from current levels), Crestwood would still have a 25% yield at current prices, an approximate 1.5 times coverage ratio (after paying preferred dividends in cash), and substantial excess cash flows that would allow the company to repurchase units. Crestwood would also be in an even better position to take advantage of the numerous growth opportunities in its portfolio, particularly in the Marcellus/Utica, Bakken and Permian basins."
Crestwood CEO Robert G. Phillips said management is "fully committed to generating long-term value for Crestwood's unitholders. In 2015, we have taken several material and actionable steps to reposition the company in this depressed commodity price environment. Despite these important steps completed so far, as Raging Capital's letter highlights, there remains a material value disconnect between Crestwood's common unit price and the fundamentals that support our diversified asset portfolio."
Houston-based Crestwood's assets include natural gas storage in the Northeast; natural gas liquids marketing in the Marcellus and Utica shales; gathering infrastructure and rail facilities in the Bakken Shale; and gathering infrastructure in the Marcellus serving Antero Resources production. Additionally, Crestwood has a 50% stake in more than 300,000 acres in the Niobrara formation, which Raging Capital said receives "a guaranteed 15% return." Finally, Crestwood owns assets in the Delaware Basin, a sub-basin of the Permian that "is regarded as the most attractive shale oil basin in the current commodity price environment," according to Raging Capital.
"Crestwood is a scarce and unique MLP with many assets of great value. We view the current market dislocation as irrational and reminiscent of the 2008-2009 era."
Crestwood units were up more than 5% in early trading on Wednesday, but at about $18.65, they are far from their 52-week high of $84.60.