Is the Crestwood Merger a Good Entry Point for Investors in 2015?
According to Crestwood’s management, the current valuation provides an attractive entry point for investors who want stable distribution and substantial return potential.
The elimination of incentive distribution rights will reduce Crestwood Midstream’s cost of capital. It will also drive $3 billion of expansion opportunities.
Crestwood Midstream (CMLP) investors don’t seem satisfied with the expected distribution growth. CMLP stock 5.81% the day after the merger announcement and 11.6% on May 26.
The elimination of incentive distribution rights is expected to drive Crestwood Midstream’s (CMLP) cost of capital. CMLP has reached the top tier of its IDR structure.
In 1Q15, NGL and Crude Services was Crestwood Midstream’s top performing segment in EBITDA growth. The segment’s adjusted EBITDA increased 66% year-over-year.
Crestwood Midstream’s distribution growth has been flat for several quarters, since it’s using distributable cash flows to increase distribution coverage ratio.
Crestwood Midstream Partners (CMLP) released its 1Q15 earnings on May 6. Its major announcement was the merger of CMLP and Crestwood Equity Partners (CEQP).
Home price appreciation is decelerating on the West Coast, while in the Northeast, it’s accelerating. The Mountain states took over the lead, at 7.2%
As home prices rise, previously underwater homeowners gain the ability to refinance. This increases prepayment speeds.
The ten-year bond yield rose 7 basis points last week. Ginnie Mae TBAs gave up 20 ticks, while Fannie Mae TBAs only gave up 14 ticks.
Fannie Mae TBAs started the week at 104 15/32 and gave up 7/16 to close at 104 1/32. The ten-year bond yield increased by 7 basis points.
Last week, the ten-year bond yield increased 7 basis points, and mortgage rates rose from 3.85% to 3.9%.
Bond yields continue to march higher. Last week we saw more bond-unfriendly data with housing starts and an elevated consumer price index.
Last week we had some stronger-than-expected economic data with housing starts and building permits topping 1.1 million.
We have some important real estate data this week. If GDP does turn out to be almost a 1% contraction, it’s hard to see how the Fed could raise rates in June.
DPM has substantial liquidity of $1.25 billion under its revolver credit facility. With a current debt-to-EBITDA ratio of 3.3x and a TTM coverage ratio of 1.1x, DPM has a cushion for raising fresh capital.
DPM received a “buy” rating from 53.3% of the analysts, while 13.3% rated it as “sell.” The remaining 33.3% of the analysts recommended a “hold.”
DPM generates 60% of its earnings from fee-based contracts and 35% from PoP contracts. Under its PoP contracts, these earnings are linked to movement in energy prices.
NGL Logistics was DPM’s top-performing segment in 1Q15. The segment’s adjusted EBITDA increased by 129.4% in 1Q15 QoQ, driven by an increase in NGL pipeline throughput volumes.
The increase in DPM’s EBITDA was driven by strong operating performance from its NGL Logistics and Wholesale Propane Logistics segments.
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