Pipeline companies across North America need to invest an estimated $321 billion in building new oil-related infrastructure by 2035 to support the industry's growth. One company looking to capture a piece of that opportunity is Tallgrass Energy (TGE). The pipeline company took another step in that direction this week by expanding a joint venture (JV) to build out new oil infrastructure in the emerging Powder River Basin. Those expansions are what would give it the fuel so that it can continue to boost its 8.2%-yielding dividend.
Expanding the partnership
Tallgrass Energy and privately held Silver Creek Midstream have agreed to expand their Powder River Gateway JV. It will now own the Iron Horse Pipeline, the Powder River Express Pipeline, and crude oil storage terminal facilities in Wyoming. From that terminal, oil can travel on Tallgrass Energy's Pony Express Pipeline to an oil storage hub in Oklahoma or on two other existing systems.
Iron Horse is an 80-mile pipeline that Tallgrass Energy and Silver Creek currently have under construction. It will have the initial capacity to move 100,000 barrels per day (BPD) when it comes on line in the first quarter of next year, though the partners could double its size in the future. The Powder River Express, meanwhile, is a 70-mile pipeline that currently carries 90,000 BPD, though the partners could expand it to 125,000 BPD in the future. Finally, the oil terminal has 370,000 barrels of current storage capacity that they could grow to 1 million barrels.
In an even better position to capture more growth
The partners are expanding their joint venture so that they're both in a stronger position to seize opportunities in the fast-growing Powder River Basin. The region has grabbed headlines in recent months as several big-name drillers provided bullish updates on their activities.
Chesapeake Energy (CHKA.Q), for example, recently said that the region was "quickly establishing itself as the growth engine of the company." Chesapeake Energy's recent results back that view as its production has exploded from 18,000 barrels of oil equivalent per day (BOE/D) at the end of 2017 up to 32,000 BOE/D by mid-July, with the company anticipating that its production will reach 38,000 BOE/D by the end of 2018. Furthermore, Chesapeake Energy believes its output will double in 2019 from this year's average.
EOG Resources (EOG -0.25%), in the meantime, said that it had discovered an astonishing 1.9 billion BOE of additional recoverable resources in the Powder River Basin, which is a nearly tenfold increase from its initial estimate. That vast resource base will enable EOG Resources to grow its production from the basin at a fast pace in the coming years.
One of the things that could hold back the region's growth potential is a lack of infrastructure. That's where Tallgrass Energy fits into the mix as it can build the pipeline space needed to move this oil out of the region. By expanding its joint venture with Salt Creek, it now has a larger footprint in the area to build on, which is part of its plan to construct an end-to-end solution for producers in the Powder River Basin. It wants to create a fee structure that will enable customers of the Powder River Gateway JV to also ship their oil on the Pony Express Pipeline as well as the Seahorse Pipeline. The company is developing Seahorse to move oil from Oklahoma to the Louisiana Gulf Coast, where it can feed into the local refining market or the Plaquemines Liquids Terminal, which it's developing as well to export crude to global markets. In addition to developing Seahorse and Plaquemines, Tallgrass is pursuing multiple expansions projects on the Pony Express Pipeline to meet the needs of shippers in the fast-growing Powder River Basin.
Another step forward
Tallgrass Energy currently gets about 37% of its earnings from crude oil transportation. However, the company is working to grow that business by expanding its JV with Salt Creek, which will put it in an even better position to capture more of the estimated $321 billion of investments needed to meet the industry's crude oil infrastructure needs in the coming years. The upside from these expansions could make Tallgrass Energy a big winner in the coming years.