Tallgrass Energy (NYSE:TGE) is one of several pipeline companies that emerged from the rubble of the oil market downturn very different from how they entered it. Like many of its peers, Tallgrass recently consolidated its corporate structure by acquiring its master limited partnership (MLP). That transaction strengthened its financial profile. And that positions the company to deliver a sustainable income stream with significant upside potential from expansion projects coming down the pipeline, making it a much more appealing option for income seekers.
A look at the new Tallgrass
Tallgrass Energy is mainly a natural gas pipeline company. Overall, the company gets 55% of its earnings from its natural gas pipeline segment, driven by its 75% stake in the Rockies Express (REX) Pipeline, which moves gas produced from both the Rockies and Appalachian regions across the country's midsection.
In addition, the company also operates a large crude oil transportation system (which contributes 37% of its earnings) and a gathering and processing business (8% of profits). Long-term, fee-based contracts underpin the bulk of the company's assets, with 95% of the company's earnings coming from firm commitments, which gives Tallgrass clear visibility into future cash flow.
Currently, the company generates enough cash to cover its 7.7%-yielding dividend by a comfortable 1.18 times. That provides Tallgrass Energy with some excess money to finance expansion projects. The company complements that metric with a low leverage ratio of 4.3 times debt-to-EBITDA. That conservative financial profile recently earned the company a credit upgrade to an investment-grade rating, making it easier and cheaper to borrow money in the future to fund expansion efforts.
What the future might hold for Tallgrass Energy
Tallgrass currently expects to invest about $630 million into its expansion efforts in 2018. One noteworthy project is its Iron Horse oil pipeline joint venture with Silver Creek Midstream. The new line will connect growing supplies of crude from the Powder River Basin (PBR) to the company's new oil hub in Guernsey, Wyoming, where it can catch a ride on Tallgrass' Pony Express Pipeline and others in the region.
In addition, the company is building some gathering pipelines in the PRB, expanding its Cheyenne natural gas pipeline and hub as well as constructing some new water infrastructure in the Rockies region. Tallgrass currently expects that these investments will generate about $106 million in annual EBITDA, which would boost its total by more than 14% from last year's level of $770 million.
In addition to the projects under construction, Tallgrass Energy recently unveiled that it's developing a new pipeline to move crude from the country's oil hub in Cushing, Oklahoma, to a major refining center in Louisiana. The proposed 700-mile Seahorse Pipeline could transport up to 800,000 barrels per day to the Gulf Coast. And the company has also proposed the development of the Plaquemines Liquids Terminal, which would be a major storage and export terminal on the Louisiana Gulf Coast. These projects could begin coming on line by mid-2020, with full service possible in late 2021 if everything goes according to plan.
In Tallgrass Energy's estimation, when it adds the long-term contracts on its legacy assets to the upside potential of its growth projects, the company believes it could generate as much as $1.25 billion in EBITDA by 2020. That's a more than 60% increase from last year's pace, which would provide the company with excess cash that it could use for debt reduction, funding additional expansion initiatives, repurchasing shares, and increasing its dividend.
Worth watching closely
Tallgrass Energy currently offers investors an increasingly secure high-yield dividend that it could potentially grow at a high rate in the coming years. That makes it an interesting income stock to watch, with all eyes on whether the company can lock down its oil projects in Louisiana. If it can, then this pipeline stock could potentially fuel high-octane returns for investors in the coming years, which would make it a very compelling option to consider buying.