Crestwood Equity Partners LP (CEQP) (“Crestwood”) announced it has entered into a series of agreements under which the company will i) acquire Sendero Midstream Partners, LP (“Sendero Midstream”) for $600 million in cash, ii) acquire First Reserve’s 50% equity interest in Crestwood Permian Basin Holdings LLC (“CPJV”) for $320 million in Crestwood common units, plus the assumption of asset level debt, and iii) divest its legacy, non-core Barnett Shale assets to EnLink Midstream, LLC (ENLC) (“EnLink Midstream”) for $275 million in cash. The transactions are expected to close early in the third quarter 2022, subject to customary regulatory approvals.
“I am thrilled to announce this series of strategic transactions that greatly enhance the Crestwood franchise by creating immediate scale and additional runway in the Delaware Basin, high-grading our cash flow mix through the rationalization of non-core assets, and successfully maintaining our conservative balance sheet and financial flexibility,” commented, Robert G. Phillips, Founder, Chairman, and Chief Executive Officer of Crestwood. “The acquisition of Sendero Midstream is highly complementary to our existing Willow Lake assets, provides excess processing and compression capacity for current and future customer development activity, and solidifies Crestwood’s footprint in the leading North American shale play. Furthermore, the consolidation of First Reserve’s equity interest in CPJV simplifies our corporate structure and drives enhanced financial, commercial and operational flexibility. Both transactions are highly synergistic and will drive meaningful accretion to our distributable cash flow for many years to come.”
Mr. Phillips continued, “Today’s announcement also marks the culmination of our long-term investment and operating footprint in the Barnett Shale. The Barnett Shale is where Crestwood started dating back to October 2010 and I want to personally thank our field employees for their hard work, dedication, and loyalty over the past twelve years, as they have fully embodied Crestwood’s core principles with an unwavering commitment to operational safety and performance. We are excited to pass the torch to EnLink Midstream who shares Crestwood’s commitment to operational excellence and corporate stewardship. As we close this chapter in Crestwood’s history, we will continue to focus on building and optimizing our sizeable gathering and processing positions in the Williston Basin, Delaware Basin, and Powder River Basin. We believe the strategic actions we are taking today to divest a legacy asset to core up our position in one of the most prolific, economic, and active basins in North America, best positions Crestwood to deliver long-term value creation for our unitholders.”
Transaction Highlights and Rationale
- Significantly increases exposure to highly prolific northern Delaware Basin: The Sendero Midstream assets are located entirely in Eddy County, New Mexico, one of the most active regions of the Delaware Basin as evidenced by approximately 25% of total basin rigs focused on the county. The region benefits from an ideal combination of low oil breakevens, highly prolific wells, and significant amounts of gas production, making it a premier area for gas midstream investment. The acquisition of Sendero Midstream adds more than 75,000 dedicated acres with over 1,200 tier 1 drilling locations, long-term fixed fee contracts with commodity price upside, and a diverse and active set of private and public producer customers.
- Complementary asset footprint enables operational, capital, and commercial synergies: Sendero Midstream’s assets are highly complementary to the existing Willow Lake footprint, and can be integrated with minimal capital investment, enabling Crestwood to capture substantial cost and commercial synergies. The pro forma system will have total processing capacity of 550 MMcf/d with approximately 100 MMcf/d of unutilized space, which reduces the capital investment necessary to expand Crestwood’s existing Orla plant to meet existing producer customer needs. As the commodity price outlook remains favorable for an acceleration of activity across the basin, this expanded footprint positions Crestwood to aggressively pursue third party volumes to further optimize utilization of existing infrastructure.
- Further upgrades asset portfolio and cash flow and simplifies structure at attractive valuations: The combined Sendero Midstream and First Reserve transactions represent an estimated 7x NTM (next-twelve-months) EBITDA valuation multiple. The Sendero Midstream transaction provides a natural catalyst to execute Crestwood’s stated objective to consolidate First Reserve’s 50% equity interest of CPJV, which enhances scale and removes the structural complexity of the joint venture in Crestwood’s asset portfolio. Based on current and forecasted producer activity, Crestwood expects the Delaware Basin to become its second largest asset generating 2023E Adjusted EBITDA of approximately $190 to $200 million, which represents approximately 20% of the pro forma company’s cash flow. In addition, the divestiture of the Barnett Shale assets represents an attractive opportunity to recycle cash proceeds from a non-core asset into a high growth, stacked pay, core basin.
- Maintains strong balance sheet and enhances credit profile: The transactions will be prudently financed with a mixture of Barnett Shale divestiture proceeds, common equity, and revolver borrowings and are enhancing to the credit profile of the company due to increased cash flow scale, higher asset quality, reduced ownership complexity and expanded future free cash flow generation. Pro forma for the transactions, Q1 2022 leverage was approximately 3.8x, and Crestwood expects leverage to return to sub-3.5x in 2023 as the assets are fully integrated and synergies are achieved. Additionally, Crestwood continues to maintain flexibility under its $175 million common and preferred unit buyback program to further enhance returns and cost of capital opportunistically.
- Extends Crestwood’s ESG practices to Sendero Midstream assets: Following the close of the transactions, Crestwood will implement its sustainability best practices as it assumes operatorship of the Sendero Midstream assets. This includes incorporating the acquired assets into its carbon management plan with a focus on emissions reductions and increased methane emissions monitoring. The company will also maintain its strong commitment to biodiversity and ecosystem protection, safety, and community engagement efforts in New Mexico.