Income Investors: This Mid-Cap Energy Stock Offers a Dividend Yield of 8.3%

Investing in dividend-paying stocks is a popular strategy for those looking to generate passive income. Historically, dividend stocks have outpaced the S&P 500 Index by a significant margin but an issue that has plagued investors is the impact of federal taxes on these payouts. While enterprises pay taxes on earnings before they distribute dividends to shareholders, a tax is also levied on investors which impacts overall gains.

But investors can avoid the double taxation by investing in MLPs or master limited partnerships such as Crestwood Equity Partners. Basically, MLPs are registered as partnerships which mean they are not subject to corporate income taxes. Here, income is taxed at the level of the individual partner and the rate is significantly lower compared to corporate taxes.

A lower tax structure allows Crestwood Equity Partners (NYSE: CEQP) to pay investors annual dividends of $2.5 per share, indicating a forward yield of 8.3% at current prices. Crestwood Equity Partners provides infrastructure solutions to liquids-rich natural gas and crude oil shale companies in the U.S. It has three business segments that include Gathering & Processing, Storage & Transportation and Marketing, Supply & Logistics.

Crestwood Equity Partners is up 64% in 2021

Shares of Crestwood Equity Partners have managed to outpace the broader markets in recent years. In fact, CEQP stock is up 64% year-to-date and has gained 135% in dividend-adjusted returns in the last five years.

A favorable pricing environment allowed Crestwood Equity Partners to report an adjusted EBITDA of $140 million in Q3 and a distributable cash flow of $85.8 million. A positive cash flow in the September quarter enhanced its financial strength and flexibility which is highlighted by a leverage ratio of 3.5x.

Strong Q3 results also positioned Crestwood to exceed the upper end of its previously disclosed EBITDA guidance of between $570 million and $600 million.

In the second quarter of 2021, Crestwood Equity Partners increased adjusted EBITDA by 14% year over year to $145.7 million, and distributable cash flow by 15.3% to $85.8 million.

What next for investors?

Crestwood Equity Partners announced it entered into a merger agreement to acquire Oasis Midstream (NYSE: OMP) in a stock and cash transaction valued at $1.8 billion. The combined entity will have an enterprise value of $7 billion and generate pro forma adjusted EBITDA over more than $820 million in 2021.

Crestwood Equity will pay $160 million in cash and assume $660 million in debt to acquire Oasis Midstream Partners. It will also pay the balance via the issuance of 14.8 million units of its common stock.

This deal is expected to improve Crestwood’s position in its Williston and Delaware basins, creating a top-three midstream operator in the Williston Basin and by increasing processing capacity by 3x.

Further, the acquisition will allow Crestwood to increase adjusted EBITDA by 37%, distributable cash flow by 51% and free cash flow by 38% in 2021.

This rapid expansion in EBITDA and cash flows should put the company’s already tasty dividend yield on a firmer foundation. Crestwood in fact expects to generate cash that will result in a payout ratio of less than 50% in the next year while lowering its debt-to-EBITDA ratio to below 3.5x.

Crestwood will increase its distribution by 5% after the acquisition is completed and is expected to generate $45 million in cost savings in the near-term.

Analysts covering Crestwood Equity Partners have a 12-month average price target of $32.4 for the stock which indicates an upside potential of over 10%. After accounting for its dividend yield total returns will be closer to 19% in the next year.

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