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Crestwood Equity Partners First Quarter 2022 Results

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   |    Tuesday,April 26,2022

Crestwood Equity Partners LP reported its financial and operating results for the three months ended March 31, 2022.

First Quarter 2022 Financial Highlights

• First quarter 2022 net income of $22.2 million, compared to a net loss of $38.3 million in first quarter 2021

• First quarter 2022 Adjusted EBITDA of $172.8 million, compared to $165.4 million in the first quarter 2021, an increase of more than 4% year-over-year

• First quarter 2022 distributable cash flow ("DCF") to common unitholders of $116.7 million resulting in a coverage ratio² of 2.0x; first quarter 2022 free cash flow after distributions of $28.3 million

• Ended the quarter with approximately $2.8 billion of total debt, including $560 million drawn on its revolving credit facility, resulting in a 3.5x leverage ratio

• Announced first quarter 2022 cash distribution of $0.655 per common unit, or $2.62 per common unit on an annualized basis, an approximate 5% increase year-over-year, payable on May 13, 2022, to unitholders of record as of May 6, 2022

Robert G. Phillips, Founder, Chairman, and Chief Executive Officer of Crestwood's general partner, said: "I am pleased to report another great quarter of achievements for Crestwood as we completed the $1.8 billion Oasis Midstream acquisition, made significant progress on the integration of our Williston and Delaware Basin assets, published our first Carbon Management Plan, expanded our board of directors and improved governance, all while delivering Adjusted EBITDA of $172.8 million, distributable cash flow of $116.7 million and free cash flow after distributions of $28.3 million during the first quarter of 2022. Our first quarter results were positively impacted by better-than-expected contributions from the Oasis Midstream Williston Basin assets, significant volume growth on our Delaware Basin assets, upside from favorable commodity prices across our Arrow and Barnett systems and our Storage and Logistics teams' ability to manage extreme price volatility during the quarter.

"I want to compliment our Williston Basin field personnel for adeptly managing the initial Oasis Midstream integration plan and our significantly larger Williston operations despite challenging weather conditions in North Dakota during the first quarter and in recent weeks. Further, based on first quarter operations, we remain confident in our ability to exceed our forecasted merger cost savings and revenue enhancements in both the Williston and Delaware basins during 2022 despite the inflation and supply chain headwinds that are generally affecting the industry. Going forward, we are currently seeing increased producer activity across the portfolio which should support growing volumes, margins and earnings and allow us to reaffirm our 2022 guidance. Based on that outlook, I am also pleased that the Board of Directors approved an approximate 5% increase in our common unit distribution, which is in-line with our capital allocation strategy to increase the return of capital to unitholders. Overall, I think the first quarter was a good start to another strong year of improving financial and operating performance as we look for opportunities to strategically grow Crestwood's competitive position in the basins in which we operate."

1Q2022 Segment Results and Outlook

Gathering and Processing North (G&P North) segment EBITDA totaled $133.3 million in the first quarter 2022, compared to $103.6 million in the first quarter 2021, an increase of 29% year-over-year. During the first quarter 2022, segment EBITDA increased as a result of two months of contribution from the Oasis Midstream assets and the favorable impact of higher commodity prices on the Arrow system. While the Oasis Midstream assets are performing above budgeted expectations, volumes in the G&P North segment were adversely affected by extreme winter weather in the Williston Basin and Powder River Basin during the first quarter which impacted producer facilities and development activity in January and February, pushing out completions on the Arrow system until the end of the first quarter. With milder weather expected in the second and third quarters and commodity prices remaining strong, Crestwood expects producers to accelerate drilling and completion (D&C) activity, driving an increase in well connects, volumes, and revenue for the remainder of the year.

Gathering & Processing South (G&P South) segment EBITDA totaled $27.4 million in the first quarter 2022, compared to $15.9 million in the first quarter 2021, an increase of 72% year-over-year. During the first quarter 2022, segment EBITDA increased primarily as a result of a 10% increase year-over-year in total gas gathering volumes across the segment. The Delaware Basin gas gathering volumes increased 29% year-over-year driven by strong producer activity on the Willow Lake system in New Mexico, with an average of three rigs operating during the quarter. The segment results also include two months of contribution from the Delaware Basin oil and water gathering assets acquired from Oasis Midstream. This system supports Percussion Petroleum ("Percussion"), a Carnelian Energy Capital backed portfolio company, and the midstream assets are wholly owned by Crestwood. Additionally, the Barnett assets continued to benefit from higher natural gas prices through incremental revenues generated by percent of index (POI) contracts.

Storage & Logistics (S&L) segment EBITDA totaled $25.2 million in the first quarter 2022, compared to $50.8 million in the first quarter 2021. Both periods exclude the non-cash change in fair value of commodity inventory-related derivative contracts and gain/loss on long-lived assets. First quarter 2021 segment EBITDA includes a $10 million contribution from Tres Palacios driven by Winter Storm Uri and a $14 million contribution from the Stagecoach Gas Services joint venture that was divested in July 2021. Additionally, first quarter 2021 excludes a $119.9 million impairment recorded by Crestwood's equity investment in Stagecoach Gas Services. During the first quarter of 2022, the NGL Logistics business was able to optimize its storage and logistics assets across the Midwest and East Coast to meet increased demand driven by winter weather. With 10 MMBbls of NGL storage and 13 trucking and rail terminals, the NGL Logistics business is well-positioned to capture incremental revenue opportunities arising from continued commodity price volatility. Additionally, the Tres Palacios gas storage facility exceeded internal expectations during the quarter as commodity price volatility drove incremental volumes to the facility.

Combined O&M and G&A expenses, net of non-cash unit-based compensation, in the first quarter 2022 were $77.2 million compared to $49.2 million in the first quarter 2021. First quarter 2022 O&M expenses increased due to expanded operations as a result of the merger with Oasis Midstream, while G&A expenses include $17 million of transaction costs related to the merger. Crestwood expects to realize approximately $25 million of run-rate O&M and G&A synergies related to the Oasis Midstream merger during 2022.

First Quarter 2022 Business Update

Williston Basin

During the first quarter 2022, the Williston Basin averaged crude oil gathering volumes of 80 MBbls/d, natural gas gathering volumes of 248 MMcf/d, natural gas processing volumes of 280 MMcf/d, and produced water gathering volumes of 173 MBbls/d. First quarter 2022 volumes include two months of ownership of the Oasis Midstream assets. Crestwood continues to benefit from increasing gas-to-oil ratios (GORs) across the basin, as well as the sustained higher commodity price environment. Five wells were connected to the Williston Basin gathering systems in the first quarter, all of which were DUCs (drilled but uncompleted wells), which is typical as producers reduce D&C activities in the winter months. Approximately 70% of the forecasted well connects in the basin are expected to come online in the second and third quarters, driving a step change in cash flow into the second half of the year. With the recent strength in commodity prices, the Williston Basin has seen a 70% increase in rig count since April of 2021, with four rigs currently operating on Crestwood's dedicated acreage.

During the first quarter 2022, Crestwood invested $15.1 million in growth capital in the Williston Basin, of which approximately 70% was for the expansion of the three-product gathering systems for Oasis Petroleum and new third party customers on the Oasis Midstream footprint. On the Arrow system, Crestwood continued to invest capital for incremental compression and the expansion of the produced water gathering system to meet producer development activity in 2022.

Following the closing of the Oasis Midstream merger on February 1, 2022, Crestwood has exceeded its integration schedule and expects to meet or beat its previously stated goal of $45 million in annual revenue and cost synergies in the first 12 to 18 months of ownership. Crestwood's operations team has identified numerous additional synergy opportunities across the portfolio, including the reduction of contract labor, and Crestwood's commercial team has continued to be successful contracting with several new third-party producers in the surrounding footprint.

During the first quarter 2022, the Powder River Basin averaged gathering volumes of 98 MMcf/d and processing volumes of 94 MMcf/d. During the first quarter 2022, six wells were connected to the Jackalope system and Crestwood continues to forecast a total of 10 to 15 well connects for the year. Late in the first quarter, Continental Resources (NYSE:CLR) ("Continental") closed on its acquisition of acreage owned by Chesapeake Energy Corp in the basin, resulting in Continental becoming Crestwood's largest producer customer in the basin. Continental is currently operating two rigs on acreage dedicated to Crestwood and expects first volumes to flow into the Bucking Horse processing plant via the Continental Express pipeline in late second quarter 2022. Crestwood invested $3 million in the Powder River Basin during the quarter, primarily related to construction of the Continental Express high-pressure pipeline.

During the first quarter 2022, the Delaware Basin averaged natural gas gathering volumes of 234 MMcf/d, an increase of 29% year-over-year, and processing volumes of 117 MMcf/d, an increase of 115% year-over-year. Gathering volumes on the Willow Lake system in New Mexico increased 125% year-over-year, as private producers continue to drive activity levels, operating an average of three rigs. During the first quarter, five wells were connected to the Willow Lake system and Crestwood continues to forecast a total of 100 to 110 wells across the Delaware Basin for the year. Additionally, produced water gathering volumes averaged 102 MBbls/d during the first quarter across Crestwood's two water gathering systems in the basin. Percussion is currently running two rigs on Crestwood's dedicated footprint, resulting in average crude oil gathering volumes of 20 MBbls/d for the two months of ownership.

In the first quarter, capital investment in the Delaware Basin was focused on the expansion of gathering and compression capacity in New Mexico to support the development plans of Novo Oil & Gas, the expansion of the oil and water gathering system for Percussion, and the drilling and completion of two shallow, produced water disposal wells to support increasing produced water volumes on the Desert Hills water system. Based on current producer forecasts, Crestwood estimates that the Orla processing plant will be near full capacity in the fourth quarter 2022 and is actively evaluating accretive investments to expand processing capacity to the system. Crestwood forecasts the Delaware Basin assets to generate more than $60 million of cash flow net to Crestwood in 2022.

Capitalization and Liquidity Update

Crestwood invested approximately $30 million in consolidated growth capital projects and joint venture contributions during the first quarter 2022 (excluding litigation-related capital pertaining to the Bear Den II processing plant). As Crestwood continues to build-out infrastructure on the Oasis Midstream footprint, the company expects capital investments to peak in the second and third quarters before declining in the fourth quarter, driving a significant increase in free cash flow by the fourth quarter of this year. As of March 31, 2022, Crestwood had approximately $2.8 billion of debt outstanding, comprised of $2.25 billion of fixed-rate senior notes and $560 million outstanding under its revolving credit facility, resulting in a leverage ratio of 3.5x and more than $900 million of available liquidity. Additionally, in April 2022, Crestwood was upgraded by Standard and Poor's to a credit rating of BB from BB- based on the company's increased financial and operational scale and improved financial strength following the Oasis Midstream merger.

Crestwood currently has 71.3 million preferred units outstanding (par value of $9.13 per unit) that pay a fixed-rate annual cash distribution of 9.25%, payable quarterly. The preferred units are listed on the New York Stock Exchange and trade under the ticker symbol CEQP-P.

Sustainability Program Update

Crestwood recently joined a collaboration with Cheniere Energy, Inc. ("Cheniere") (AMEX:LNG), and other leading industry participants to improve the overall understanding of GHG emissions and further the deployment of advanced monitoring technologies and protocols across the energy value chain. In collaboration with global emission researchers from Colorado State University and the University of Texas, the program will implement quantification, monitoring, reporting and verification (QMRV) of greenhouse gas (GHG) emissions at natural gas gathering, processing, transmission and storage systems.

The measurement protocol designed by the research group and Cheniere will be field tested at facilities operated by the participating companies, which include assets owned and operated by Crestwood, including the Jarvisville Compressor Station in the Marcellus, the Herradura Compressor Station in the Delaware Basin, and the Tres Palacios gas storage facility on the Gulf Coast.

Mr. Phillips commented, "Crestwood continues to advance our understanding of our GHG emissions to better quantify, measure and reduce our emissions. We remain resolute on evolving our emissions measurement capabilities in the field and believe participation in the QMRV project along with five other industry-leading peers will further propel Crestwood's, and the midstream sector's, understanding and use of leading measurement protocols and emissions monitoring technologies."