Tallgrass Energy (TGE) is a relative unknown in the energy sector. While the company operates one of the more important natural gas pipelines in the country, investors have yet to catch on to its story. Because of that, shares of the pipeline company are cheap, which positions investors to potentially capture meaningful gains if the discount between its peers narrows. Add in a monster dividend and significant upside from some expansion projects it has in development, and Tallgrass Energy could deliver attention-grabbing returns in the coming years.
Growth and income for a cheap price
Tallgrass Energy has a lot to offer investors. The company currently pays a very generous dividend that yields 8.3%. Better yet, Tallgrass can cover that payout with cash flow by a very comfortable 1.18 times, which leaves it with excess money that it can invest in expanding its midstream footprint. Overall, the company expects to spend $628 million to grow this year, funding the balance with its strong balance sheet.
Those expansion projects position the company to grow its cash flow per share from its current run rate of $2.36 up to an estimated $2.68 by 2020 solely based on the current expansion projects in its backlog. Those figures imply that Tallgrass sells for about 10.3 times its current cash flow and around nine times 2020's estimate. That's cheap for a pipeline company, considering that the average one trades at approximately 12 times cash flow. Those numbers suggest that Tallgrass' stock is around 20% undervalued versus its peers and could rise 35% in the next couple of years if it achieves its cash flow growth target and shares eventually fetch a peer-average multiple. Add in the company's 8%-yielding payout and the total return could be even higher.
But wait, there's more
Tallgrass Energy's current forecast anticipates that the company's cash flow per share will rise by about 14% by 2020. The company based that estimate on the growth in cash flow it will see from the $628 million of expansions it expects to complete this year, as well as the upside from new contracts across its existing pipelines.
However, it has ample upside above that forecast if it can secure additional expansion projects. The company already has two needle-movers in development, which could significantly bolster its growth prospects.
The first one is the Seahorse Pipeline, which would move crude oil from Cushing, Oklahoma -- the termination point of the company's Pony Express Pipeline from the Rockies -- to the Louisiana Gulf Coast. The 700-mile pipeline would ship 400,000 barrels per day (BPD), with the potential for expansion up to 800,000 BPD. Crude from the pipeline would feed into the 2.5 million BPD local refining market as well as the proposed Plaquemines Liquids Terminal that Tallgrass also has in development. That facility, which would store as much as 20 million barrels of oil, could both import and export crude on ships designed to carry as much as 2 million barrels of oil. The export capabilities of the proposed facility would enable U.S. oil producers to have greater access to the more lucrative global markets. The projects could be in service as early as the second quarter of 2020 if Tallgrass secures enough customer contracts and the required permits.
In addition to those projects, Tallgrass could potentially expand its Pony Express Pipeline in the future given the growth potential of the regions it serves: the Bakken Shale, DJ Basin, and Powder River Basin. Oil output from those areas could grow between 600,000 to 1.5 million BPD over the next five years according to some estimates. Oil and gas companies Chesapeake Energy (CHKA.Q) and EOG Resources (EOG 0.43%) are particularly excited about the upside of the Powder River Basin. Chesapeake Energy recently said that the region was "quickly establishing itself as the growth engine of the company." Chesapeake's output has already doubled in the past year and is on pace to double again in 2019. Meanwhile, EOG Resources recently discovered an additional 1.9 billion barrels of recoverable oil and gas resources in the region, which will fuel high-return growth for the company in the coming years. Those volumes will need access to market centers, which bodes well for Tallgrass Energy's ability to expand its oil pipeline business in the future.
Attractive on so many levels
Tallgrass Energy has yet to catch the attention of most investors. Because of that, it sells for a steep discount to its peer group, which is one reason why it offers investors such a high dividend yield. In addition to those attractive qualities, the company also has lots of growth potential. Those factors position the company to potentially fuel big-time total returns in the coming years.