Why Did Tallgrass Energy Partners Increase Its 2016 Guidance?

(Continued from Prior Part)

Rockies Express Pipeline

Tallgrass Energy Partners’ (TEP) increased 2016 financial guidance is backed by its acquisition of 25% interest in Rockies Express Pipeline LLC for ~$440 million. The Rockies Express Pipeline was placed in-service in 2009. It has “attractive access to both supply basins and large end user markets.” Currently, it moves both Rocky Mountain and Appalachian production. Tallgrass Energy Partners forms ~1.2% of the First Trust North American Energy Infrastructure Fund (EMLP).

Encana extension

Encana (ECA) is Rockies Express Pipeline LLC’s “largest West-end shipper.” Encana agreed to extend its contract with the company. This provides Rockies Express Pipeline LLC with additional contracted cash flow through 2024. It significantly reduces its future re-contracting risk. The above figure shows how the Encana contract extension provided long-term cash flow visibility to Tallgrass Energy Partners. This is useful even though “Encana’s rate is lowered in the near term.”

Future growth

The Rockies Express Pipeline has ~$400 million of EBITDA (earnings before interest, tax, depreciation, and amortization) contracted through mid-2024. Tallgrass Energy’s vision is to make the Rockies Express Pipeline “a fully bi-directional header system across all zones creating superior supply and demand optionality for its customers.”

Tallgrass Energy Partners intends to distribute cash flows from the Rockies Express Pipeline assuming that its “near-term cash flows may be larger than the long-term ‘run rate’ cash flows.”

Analysts’ recommendations

Of the analysts surveyed by Bloomberg, 57% rate Tallgrass Energy Partners a “buy,” 36% rate it a “hold,” and 7% rate it a “sell.” The consensus target price for the stock is $49.5. This is close to its current price of $49.4. It implies no price returns in a year.

RBC Capital Markets, Scotia Howard Weil, Robert Baird, and Capital One Securities rated Tallgrass Energy Partners after its guidance update on May 17. All four firms provided a “strong buy” recommendation for the stock with target prices of $47, $46, $60, and $46, respectively. This indicates that Tallgrass Energy Partners’ run yesterday might have already brought it near its price target.

As for its peers, only 17% of the surveyed analysts rated TC Pipelines (TCP) a “buy” and 20% rated Enbridge Energy Partners (EEP) a “buy.”

Browse this series on Market Realist:

• Part 1 - Why Did Tallgrass Energy Partners Increase Its 2016 Guidance?