Crestwood Equity Partners LP (ET) Earnings Call Transcript & Summary

Good morning, and welcome to today's conference call to discuss the recently announced transaction between Crestwood Equity Partners LP and Energy Transfer Partners LP. Joining us today from Crestwood with prepared remarks are Founder, Chairman and Chief Executive Officer, Bob Phillips; and President, Robert Halpin. Additional members of senior management will be available for the question-and-answer session with Crestwood's current analysts following the prepared remarks. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, distributable cash flow and free cash flow will be discussed. Today's call is being recorded. [Operator Instructions] With that, I'll turn the call over to Mr. Phillips.

Thank you, operator, and good morning to everyone. Thank you all for joining us on very short notice. I'm here, very excited today to talk about this compelling transaction -- merger transaction that we announced this morning. Along with the press release, we have posted a presentation on the Crestwood Company website. We plan to reference certain slides during this call from that presentation. So if you a chance, get to it, fine, if not, I think it's easy to follow on the call script. Following our remarks, we're going to have a short Q&A Robert, Johnny and Will are all here, Diaco and Joel, the entire executive team are here to answer any questions that you might have regarding the deal. Now turning to the deal this morning, Crestwood and Energy Transfer announced that we've entered into a definitive merger agreement, under which Energy Transfer will acquire Crestwood in a tax-efficient all-equity transaction valued at approximately $7.1 billion including the assumption of debt and preferred equity securities. Under the terms of the agreement, each Crestwood unitholder will receive 2.07 common units of Energy Transfer for each Crestwood common unit, representing an at-the-market exchange ratio for both companies. Upon the closing of the transaction, which we expect to occur in the fourth quarter of 2023, Energy Transfer will issue to Crestwood approximately 219 million common units, which will represent approximately 6.5% of Energy Transfer's outstanding common stock. So if you have the slides available to you, starting with Slide 5 is an overview of the transaction, give you the specifics there. Let me just jump to 5 and 6 real quick before I turn it over to Robert. We think this transaction represents a highly attractive next step for the Crestwood unitholders who will be exchanging their equity into one of the largest and most diversified infrastructure companies in North America. Over the last 12 years, we've built a truly outstanding midstream company here at Crestwood. I can't tell you how proud I am of the job that the team has done. We have significant reach and scale across 3 key basins. We also have a reputation for industry expertise and customer service and a steadfast commitment to sustainable operations and safe operating principles. All of these were driving factors behind Energy Transfer's interest in acquisition of our company. Over the last few years, Crestwood has been a staunch proponent of consolidation within the midstream space. As we have executed on a regional consolidation strategy, in the Bakken and the Delaware Basins to build up core franchise assets while divesting our lower growth G&P and storage assets across the country. We've also simplified our structure over the last few years, eliminating most of our joint ventures and creating a cleaner, simpler company that is focused on maximizing free cash flow generation and long-term value for our unitholders. This strategic transaction announced today with Energy Transfer is a result of a comprehensive review conducted by our Board of Directors and management team, which gave significant consideration to Crestwood's growth potential as a standalone business as compared to our potential as part of a much larger organization with the scale and diversification of Energy Transfer. Energy Transfer, as you know, is an incredibly balanced well integrated asset portfolio, spanning the entire midstream value chain and we believe pressed with assets have much greater value within that platform versus on a stand-alone basis. And I really want to take my hat off to the job that Kelcy and Tom and Mackie and others at Energy Transfer have done over the last few years to build up what we think is a premier company, and we're very happy to be merging into Energy Transfer. Before I turn the call over to Robert, I want to walk through the strategic rationale of the deal, and I'd like to personally thank the hard-working and dedicated employees of Crestwood who collectively have built one of the leading midstream companies in the industry. Over the past 12 years, the employees of Crestwood have worked tirelessly to build a first-class organization focused on providing safe, reliable and sustainable midstream services to our customers as well as developing an asset portfolio of high-value and critical infrastructure. Today's announcement highlights the value that our employees have built since the company's founding back in 2010, 2011 and for that, I could not be prouder. And with that overview and rationale, Robert, I'll turn the call over to you.

Thanks, Bob, and thank you all again for joining us this morning. To reiterate what Bob said, we are really excited about this combination and the growth potential it can unlock for Crestwood. We believe the transaction provides a very compelling value proposition for our unitholders and I will walk you through why we believe that it is the best path forward for the company. So turning back to the slide deck. I'll begin my comments on Page 7, which speaks to the value proposition of this deal for Crestwood's unitholders. At a high level, following the close of the transaction, Crestwood unitholders will own approximately 6.5% of the common units of Energy Transfer, one of the largest and most diversified midstream energy companies in North America. Energy Transfer has a fully integrated wellhead-to-water asset base that includes significant NGL fractionation, hydrocarbon export capabilities, natural gas, crude oil, NGL transportation and storage assets as well as LNG facilities. CEQP unitholders will benefit from Energy Transfer's diversification and scale as well as cash flow stability supported by significant take-or-pay contracts from investment-grade counterparties. From a financial perspective, we expect the transaction to result in accretion to Crestwood's unitholders distribution per unit in 2024 which will be driven by Energy Transfer's public target of 3% to 5% annual distribution growth rate. In addition, we are also highly encouraged by the long-term value upside potential as holders of Energy Transfers units based on their extensive backlog of attractive growth opportunities and financial flexibility to execute on its business plan. Energy Transfer can also realize additional growth over time through combining Crestwood's gathering and processing and storage and logistics operations into Energy Transfer's fully integrated asset base and capturing greater value across the full midstream value chain by connecting Crestwood's assets into that network. From a balance sheet standpoint, Energy Transfer has an investment-grade balance sheet with positive outlooks from all 3 rating agencies. Crestwood unitholders can benefit from Energy Transfer's attractive cost of capital which is increasingly important in today's highly competitive midstream industry. In addition, we expect Energy Transfer will have the ability over time to recapitalize meaningful portions of Crestwood's debt and preferred equity capital structure at much lower cost of capital than CEQP stand-alone. As I briefly touched upon on the earlier slide, Energy Transfer has a fully integrated coast-to-coast asset base that includes significant NGL fractionation, hydrocarbon export facilities, natural gas intrastate and interstate, crude oil, natural gas and NGL pipelines and LNG facilities. The pro forma company will have an enterprise value of approximately $108 billion and adjusted EBITDA of approximately $14 billion. In addition to scale and being one of the largest midstream players in North America, Energy Transfer benefits from cash flow diversification with a very balanced asset mix based on product, service offering and customers which high grades our gathering and processing weighted portfolio and provide stability through periods of commodity price volatility. Now turning to Slide 9. In connection with our valuation of this transaction, and consistent with the all equity financial structure, we consider the relative value of both Energy Transfer and Crestwood. At the current unit price levels, we believe Energy Transfer has significant unit price appreciation potential based on a number of valuation metrics including the research analyst price target median of approximately $17 per unit. At the transaction exchange ratio of 2.07x, the analyst price target of $17 represents an approximately $35 per unit price on an exchange basis for CEQP, representing a more than 30% upside potential from current CEQP pricing levels. In addition, we believe there is further upside potential in Energy Transfer's unit price over time through execution of the business plan and the company re-rating towards the peer group meeting and trading multiple of above 9x firm value to EBITDA. We believe exchanging into Energy Transfer units meaningfully derisk the status quo business outlook and provide significant upside value for our unitholders over the long-term. Now flipping to Slide 10. In addition to unit price appreciation over time, we expect Crestwood unitholders will benefit upon closing of the transaction from an increased distribution per unit. As Crestwood has publicly disclosed, our status quo capital allocation priorities are focused on deleveraging our balance sheet to our long-term targets. And as such, we would expect our distribution to remain flat at [ $0.655 ] per unit per quarter for the foreseeable future. Based on Energy Transfer's public target of 3% to 5% annual growth and the exchange ratio of 2.07x, we would expect Crestwood unitholders to experience accelerated distribution growth versus the status quo beginning immediately in 2024 after the transaction has closed. Energy Transfer generates a substantial amount of free cash flow and the scale, diversity and stability of that cash flow provides Crestwood unitholders a lower risk path to accelerated distribution growth. In addition, Crestwood will exchange its units into a company with an investment-grade balance sheet and a significantly lower cost of capital. We expect Crestwood unitholders will benefit from the lower cost of capital over time, especially as Energy Transfer looks to recapitalize Crestwood's capital structure in the future. Before we move on to the Q&A session, I want to quickly summarize the transaction highlights for the unitholders and stakeholders of Crestwood. Through this transaction, Crestwood unitholders will own approximately 6.5% of the common units of the pro forma Energy Transfer. We expect Crestwood unitholders will benefit from Energy Transfer's enhanced scale, asset diversification and fully integrated coast-to-coast asset base, which provides greater cash flow stability through periods of commodity price volatility and business cycles. We expect to enhance our stand-alone growth outlook by combining Crestwood gathering and processing and storage and logistics operations into Energy Transfer's fully integrated business, which spans the full midstream value chain. And financially, Crestwood unitholders will be exchanging into a company with an investment-grade balance sheet while also receiving greater distributions per unit based on Energy Transfer's targeted distribution growth rate and substantial value uplift potential in the future. In short, we believe the transaction delivers to our unitholders a higher yield and value proposition with a lower overall risk profile, representing a very compelling value opportunity over the long-term. We are excited about the future as part of Energy Transfer and look forward to bringing our 2 organizations together. With that, operator, we would like to open the floor up for questions.

[Operator Instructions] Our first question comes from the line of Tristan Richardson with Scotiabank.

Appreciate the time and appreciate the discussion of the strategic rationale. Curious in terms of -- thinking about consideration, thinking about value, all stock versus cash component and then also thinking about just where Crestwood is thinking about 2024 from a stand-alone perspective in terms of free cash flow production and delevering and what we all had assumed would be kind of potentially a resumption of distribution growth. So with that in mind, could you talk about kind of the contemplation of value in this transaction, especially when we think that Crestwood over the past year has traded up $30 and has averaged somewhere closer to $28. Yes, just curious about that discussion of consideration and value.

Yes, absolutely, Tristan. Tristan, it's a good question. And I'll speak to really both components of it, kind of the status quo, Crestwood outlook, coupled with the value proposition as we see it through the transactions announced this morning. And so first commentary around the transaction, as you mentioned, in an all-equity consideration mix, we look at the relative value contributions and the implied exchange and benefits that come as a result of that exchange. And as we said in our commentary, after conducting a comprehensive review, understanding the outlook for our business, the outlook for Energy Transfer's business and the enhanced outlook for each company combined, we believe that the relative exchange provides significant upside potential, including the opportunity to accelerate distributions immediately following the close as well as potential for substantial upside and valuation as the company's pro forma company continues to execute on its business plan. So while we have not provided Crestwood's status quo 2024 outlook, clearly, we will be putting out a proxy statement here in the coming weeks and months. And we'll give full color into the full comprehensive evaluation of our business outlook. But overall, we absolutely believe that this transaction significantly derisks the business, while not foreclosing or allowing for a significant growth potential and upside through both distribution and income as well as capital appreciation.

Appreciate it, Robert. And then just on the follow-up. Can you maybe talk about your view on the Williston just over the past couple of quarters, just where volumes have trended and understanding that some of that is isolated incident. But has the view on the Williston been changed at all over the past year? And has that view on the Williston maybe accelerated this negotiated transaction today?

No, Tristan, to answer your question directly, our outlook for the Williston is completely unchanged. It continues to be a core component of Crestwood's trajectory and outlook going forward, we continue to have significant levels of activity from our customer base and a long runway of attractive inventory. So while -- we've had a couple of isolated events related to weather and other instances up in North Dakota, just given the operating environment, nothing has changed in terms of our outlook for the business. And in fact, we think a big element of this transaction, both in the Williston and in other basins, is the value creation that can occur through integrating a significant gathering and processing position into a fully integrated downstream market. And so we love that element of it. We think that's one of the most compelling value propositions from a midstream standpoint is that integration model, and we're really excited about the opportunities that this transaction affords as it relates to that.

Our next question comes from the line of Neal Dingmann with Truist Securities.

Bob, maybe my first question for you, I consider my first question around critical mass. And I guess what I'm getting at is you all continue to highlight the scale of the combined companies. I'm just wondering do you -- I guess looking forward now in the midstream market, do you believe to have this materially large footprint is necessary in the future midstream market to be competitive? I'm just -- again, it was really noticeable how many times you talked about the -- obviously, the pro forma scale. So maybe just if you could talk about that.

Thanks, Neal. And that is one of the real highlights of this deal. We've been looking at how we could continue to grow Crestwood beyond the 3 basins where we have established franchise gathering and processing assets. And as you know, there aren't many pipelines for sale. But we also, in a very competitive world at the wellhead in the Bakken, the Powder and the Delaware, we know how important it is competitively to have direct access to the markets, whether it be LNG for gas or fractionation for NGLs, we have been looking for opportunities to get all the way to the market, and we just haven't seen an opportunity to do that at a reasonable price. The combination of Crestwood and Energy Transfer gives us that solid wellhead to burner tip or wellhead to water, as they describe it in their materials at Energy Transfer, integrated value chain, and it makes our gathering and processing assets so much more valuable over the long-term where we can compete for new supplies. We can make sure that our producer and customers are getting the highest netbacks possible because we have that direct link to the market. And this is one of the real long-term strategic benefits of this merger transaction. And that is simply tying the franchise, gathering and processing assets we have in those 3 basins to the market through existing and future Energy Transfer pipelines and we just think it's going to make a great combination for our customers, and we're really excited about the future of being able to compete when we have connections to the market. We haven't had the luxury of being able to do that for the past 13 years. But I think the transaction highlights the really important strategic nature of the gathering and processing assets that we bring to the table, and it certainly makes a lot of sense to combine those with the downstream market access that Energy Transfer has. So I'm really -- probably the most exciting part of the deal for me is to be able to see that fully integrated value chain from wellhead to burner tip whether it's from the Bakken or the Williston, or whether it's from the Delaware, our assets are going to be key, important critical infrastructure to get that production to market. So we're excited about that.

And Bob, that leads me to a second question, just on all the synergies you mentioned, I think, around $40 million. Is that -- just by combining that around the entire process or maybe talk about just the synergies you're seeing near-term. And is there potential others realize down the line?

Yes. I would say that the synergy numbers, obviously, it's a combined outlook from the Energy Transfer side and from our side. The synergy numbers of $40 million in aggregate, $20 million kind of realization in calendar '24 is largely a function of just the operational benefit and cost benefit of having the 2 organizations together. I would say, the full integration, commercial value over time that Bob is referencing is not captured in that and part of potential future upside and value from the transaction. And in addition to that, while maybe a lesser consideration but more immediate impact, we do think there's pretty meaningful financial and synergy value associated with just our capital structure and the potential to recapitalize components of that at a much lower cost of capital in the investment grade structure of Energy Transfer.

Our next question comes from the line of Spiro Dounis with Citi.

First question is a bit of a 2-parter just on background. I'm not sure how much you can provide before the proxy, so I want to respect that process. But just curious if you can just give us some details on how you got to this point today, maybe what some of the other options were you were considering and if there were any other merger candidates that you had looked at. And it sounds like scale is a big driver of this deal, which I think makes a lot of sense. So just curious why you think now is the right time to merge. What's changed in the last few years that makes scale that much more critical now?

Yes. Thanks for the question, Spiro. It's a great question. And obviously, as you said in your intro, a lot of our response will be better covered in the proxy materials when they're made available here in the near-term future but a slight bit of color on kind of Crestwood's evaluation. So as I think we've been fairly public with, we -- our Board always conduct comprehensive reviews of our business outlook, the upsides and risks as it relates to our portfolio and ways in which we can maximize value for our investors through the asset base, which we have. And as you've said in your comments, our determination through that evaluation is that the benefits of scale and integration of assets across the full value chain, it's just a model that's very difficult to compete with and really the greatest value proposition for wellhead-oriented assets over the long-term. And so I think all the detail and background of the Board and management team's full evaluation as it relates to this process will be disclosed in the coming weeks. But we remain extremely excited with the operational and strategic benefits this deal creates coupled with the very compelling financial opportunity we think it creates through the acceleration of distribution and opportunities to participate in the upside potential around owning Energy Transfer units going forward.

Got it. Okay. Helpful. We'll certainly stay tuned for the proxy. Second question, just on integration. Curious how we should think about the timeline for ET to be able to integrate downstream with liquids off your system. I imagine you have several firm transport and frac contracts in place. And so just trying to think about the exploration time of some of those.

Yes, sure. I think that there's more color to come on that in the future once we get further along in the integration process. I think that no surprise, and I think pretty consistent with what we said all throughout this call and in past comments, we see a tremendous amount of value and though we share that view with the Energy Transfer team around integrating wellhead franchise positions into the downstream network. But I would say, full characterization and crystallization of that to be realized over time and more to come as we work through the integration process here in the coming months.

[Operator Instructions] Our next question comes from the line of Michael Blum with Wells Fargo.

Just one quick one for me. Just a question on how the vote works. From a Crestwood perspective, is the vote based on 50% of votes cast or 50% of total units outstanding?

50% of total units outstanding.

Our next question comes from the line of Jeremy Tonet with JPMorgan.

Just wanted to follow up on the vote question, I guess, and just mechanics here. First Reserve is treated like other units? Or is there anything different to think there? And with the preferred outstanding, does this trip any conversion factors there? Just curious on those aspects of the vote.

Yes. So the First Reserve question first. They're just like any other unitholder. I think they own in a round number, 10% of the units outstanding, and we'll be just treated as every other unitholder as part of the vote process. The preferred security will be a part of -- those units also vote on an as-converted basis aligned with the comment as it relates to the transaction. And that agreement through our partnership agreement stipulates some options that they have around the closing of this transaction and how those can be dealt with. The general base assumption is that there will be an assumption of some of that, but the actual mechanics of that election process from the preferred will be conducted through a part of the proxy process.

Got it. That's helpful there. And then just wanted to follow up on some of the prior questions, maybe in a little bit different viewpoint as far as why now? I mean it seems like Crestwood had undergone a number of strategic transactions in recent years. And I don't know if everything quite settled out from those moves. And so I guess, was there a view that everything had been achieved from prior deals and now is the right time to move forward? Or just kind of curious on thought process for why now, right on the heels of these moves.

Yes, Jeremy, it's a great question. I would say that a lot of the actions that we have undertaken over the last several years were designed to build scalable franchise positions in the core areas in which we have competitive advantages to grow our platform over the long-term. And nothing has changed with respect to that. And I think we still -- in response to Tristan's question earlier, still very much are excited about the inventory outlook and producer activity across all of our core G&P assets. What has always been the case, as we've said, is the integration of gathering and processing assets into the market-oriented assets or downstream assets, has always enhanced competitive positioning significantly, enhanced returns on investment and just drives a much larger value opportunity going forward for wellhead-oriented assets. And so that view and thesis has never changed. And as we evaluate our portfolio and the growth outlook, we expect that we'll continue to see heightened levels of activity across all 3 basins from our customers, driving supply growth. But now through the combination and have our investors have an opportunity to benefit in the full value chain, downstream of our assets through the integration, which we think is an extremely compelling opportunity and one in which we do not believe we could have created on a status quo basis.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Phillips for final comments.

Thank you, operator, and thanks to everyone that joined us on short notice. I want to just highlight the deal one more time. Scale is important. We had a couple of questions on that. I think everybody that's involved in the business knows how important scale is. Particularly wellhead to burner tip, wellhead to export dock, wellhead to the water, that kind of strategic integration is what makes companies really competitive in a market where critical infrastructure is the most important element of the midstream service that we provide. We're going to see distribution growth through this combination and an opportunity to see stronger valuations going forward over time. Clearly, Energy Transfer's investment-grade cost of capital was a big element to us, and we're going to see benefits there. There's visible growth in this combined portfolio, a backlog of several billion dollars. We think that is going to lead to a significant growth potential in the stock overall. And the synergies, I think, are obvious anytime you combine 2 companies like this, you're going to see operating cost synergies, financial as well as commercial synergies. Before we leave, I want to thank the people that made this happen, the deal teams on both sides plus their advisers did a great job, really thankful to them. I want to thank the Crestwood employees again for their hard work over the last 13 years now since we started this company from scratch, we've made quite a reputation for ourselves in the business, and I'm really proud of the job that they've done. I want to thank our customers and speak directly to our customers. This is a great deal for Crestwood and a great deal for Crestwood's customers. We're really proud of that. And then finally, the Crestwood Board of Directors, stuck with us through this thing, did a great job of guidance, supervision of oversight and making our strategies come real with this, given this opportunity. So operator, I think that's it for today. We appreciate your time, and thanks to everyone on the call. And that will end the call today.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.