Cake

If you like dividends, this stock takes the cake

If you like dividends, this stock takes the cake

For 12 years, Crestwood Equity Partners ( CEQP 4.28% ) has built a strong midstream business. In this clip from “The High Energy Show” on Motley Fool Live, recorded on March 15Fool.com contributor Matt DiLallo looks at how the oil and gas infrastructure company continues to consistently deliver impressive dividends.

Matt DiLallo: Stick to this pick and shovel game idea. I really like the intermediate sector. We have seen it with soaring oil prices. E&P companies have soared, but midstream companies really haven’t grown too much. They are beaten. These are the companies that bring together, process the pipelines in all this infrastructure that we need.

One of my favorites is a small company called Crestwood Equity Partners. They collect and process. What they will do is they will connect the wells to bigger pipelines that will take them to processing plants where they can separate the natural gas from the natural gas liquids like propane and ethane and then they will remove oil and water production. Just basic services. But it generates a lot of cash flow.

They operate in some of the best basins in the Bakken, North Dakota. Powder River Basin in Wyoming, then the Permian Basin in Texas and New Mexico. The three best plays in America, that’s where they are. They pay a very good dividend of 8.8%. It might jump out at you or it’s too high, but they’re going to cover it with 2.2x cash flow this year.

They expected to increase it by 5%. They have just acquired Oasis Midstream which was Oil Oasisit’s (AEO 1.42% ) MLP and that will give them more liquidity. Oasis Petroleum was right in the news they are merging with Whiting Oil ( CMU 1.22% ) to create a super player in the Bakken. There is a strong player supporting this.

It’s a business that’s going to generate a lot of cash flow this year. Half of that goes into distribution, a quarter of what’s left goes into expansion projects. Because companies are drilling more wells, they need more of these connections. They will. They are building a pipeline for Continental Resources, for example in the Powder River Basin, to support their growth and other things.

Then they have some free cash flow that they’re going to use to maybe buy back some of their cheap stocks, shore up their pretty strong balance sheet, maybe fund some growth. They want to be a consolidator in the sector. There are a lot of these smaller MLPs and private equity players that they can gobble up and build a big player. They are one of my favorites. I think they are very well managed. I think they can take advantage of it.

There’s a bit of a price they get when they process natural gas. As gasoline prices rise, they retain a small portion of this basic contract structure. It’s just one of the very good middleman companies out there. But if you like an 8.8% dividend, that’s pretty good.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.