The Great Strategy Behind This Recent MLP Deal
Crestwood Midstream Partners was one day shy of completing its merger with Inergy Midstream, when CEO Bob Phillips told Bloomberg the partnership was already looking for more deals. Well, it turns out Crestwood had already found a deal, as we learned Thursday. The master limited partnership plans to acquire Arrow Midstream Holdings for $750 million.
Today we're looking at what exactly Bob Phillips is after with all this wheeling and dealing, and what investors should take away from it all.
Credit Where Credit is Due
One thing is clear: Bob Phillips is intent on building Crestwood Midstream into a top-notch midstream MLP. The former CEO of Enterprise Products Partners , Phillips knows a thing or two about how to run one of these things. He has acknowledged that one of the most important building blocks for success in this sector is an investment grade credit rating from Moody's and Standard & Poor's.
That's because the better your credit rating, the lower the interest you pay when you issue debt. Given that MLPs must issue massive amounts of debt and equity (relative to corporations) to grow their businesses, an investment grade credit rating will be one of the most important factors contributing to your long-term success.
An investment-grade rating from Moody's is Baa3 or higher, and at Standard & Poor's it's BBB- or higher. Right now, Crestwood is rated B3 from Moody's and B/Stable by S&P.
According to Phillips, for Crestwood to attain such a rating, it will need to generate annualized free cash flow of at least $500 million. He thinks Crestwood can attain that if it makes a few more acquisitions, and the partnership plans to target businesses in the $100 million to $1 billion range. Arrow Midstream falls within that, so we can take Phillips at his word here.
Why Arrow?
Crestwood is looking to grow in the geographic regions where it already has a foothold: the Bakken, Niobrara, Permian, Utica, and Marcellus shale plays.
Arrow Midstream's Bakken assets will make Crestwood a top pipeline and storage player in North Dakota's famous shale play. Right now, Crestwood's main asset in the Bakken is the COLT Hub, a crude oil storage and rail loading facility in Epping, N.D. Arrow's assets are crude oil, natural gas, and water gathering systems, therefore, the deal makes Crestwood a complete package player in the Bakken.
This is the sort of acquisition that the partnership will continue to search for in its quest to emulate the success of Enterprise Products Partners. That partnership offers a very wide range of crude oil, natural gas, and natural gas liquids services. That diversity allows Enterprise to mitigate ups and downs in particular business units, especially when one business is exposed to commodity risk. Whether Crestwood will become the power-player that Enterprise is remains to be seen, but it is certainly on its way to becoming a better business.
Bottom Line
Phillips' comments come on the heels of similar comments two weeks ago from Energy Transfer Partners CEO Kelcy Warren, who said, "You're going to see the resumption of some kind of M&A strategy that we deliberately shelved for quite a period now." The floodgates have officially opened. Investors should pay close attention to new acquisitions. Where are the new assets, what are they, and will they complement your MLP's existing footprint? They are all important questions to ask as the shopping spree begins.
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The article The Great Strategy Behind This Recent MLP Deal originally appeared on Fool.com.
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