Please ensure Javascript is enabled for purposes of website accessibility

This 9.9%-Yielding Stock’s Growth Prospects Are Beginning to Crystallize

By Matthew DiLallo – Nov 27, 2018 at 5:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A high-yielding pipeline company is getting closer to locking up key expansion projects.

Tallgrass Energy (TGE) has grown its earnings at a healthy clip over the past five years, with its EBITDA expanding from $231 million in 2013 up to nearly $800 million in 2017. That has allowed the pipeline company to double its dividend over the past couple of years so that it now yields an attractive 9.9%. More growth could be on the way after the company took an important step toward some of its major expansion projects.

Securing some key pieces

Tallgrass Energy is developing two needle-moving expansions: the Seahorse pipeline and the Plaquemines Liquids Terminal (PLT). Seahorse would be a roughly 700-mile pipeline that would move between 400,000 to 800,000 barrels of oil per day (BPD) from an oil storage hub in Cushing, Oklahoma, to the Gulf Coast of Louisiana. From there, the oil could feed into local refineries or the PLT, which is an oil storage and export terminal Tallgrass hopes to build in Louisiana.

A hand putting another coin on a rising stack.

Image source: Getty Images.

The company recently took a crucial step forward on both projects. Tallgrass signed an agreement with an unaffiliated third party that will be an anchor shipper and equity partner on the proposed Seahorse pipeline, which means the customer not only signed a long-term capacity contract to ship oil on the pipeline but will also invest in the project. That agreement "provides strong proof of concept for our pipeline project," COO Bill Moler said.

In addition, the company purchased 600 acres along the Mississippi River about 30 miles south of New Orleans for about $30 million. That site will be the location for the PLT and provides enough space for the company to build storage capacity for 20 million barrels of oil and refined products, as well as export facilities.

Strategically connecting the Rockies to the Gulf Coast

The Seahorse pipeline and the PLT are part of a strategic effort by Tallgrass to connect fast-growing oil producing regions in the Rockies to the Gulf Coast. According to industry forecasts, oil output from the Bakken, DJ Basin, and Powder River Basin (PBR) is expected to grow by 600,000 to 1.5 million BPD over the next five years. The PBR could see the fastest growth rate, as oil production is on pace to expand from 100,000 BPD last year up to as much as 400,000 BPD by 2022 as producers like Chesapeake Energy (CHKA.Q) and EOG Resources (EOG 1.15%) ramp up in the area. Chesapeake, for example, has called the PBR the oil growth engine of the company, while EOG Resources recently expanded its resource estimate in the region by tenfold to more than 2 billion barrels of oil equivalent.

Tallgrass Energy has taken steps to capture this growing production by recently expanding a joint venture in Wyoming to improve the flow of crude oil produced in the Powder River Basin to the storage hub in Cushing. As part of that deal, oil will move through that system via jointly owned pipelines to a storage terminal in Wyoming, where it can then catch a ride on Tallgrass' Pony Express Pipeline. The company recently approved an expansion of that 400,000 BPD pipeline system by another 300,000 BPD, which it plans to complete in two phases by the third quarter of 2020. As part of that expansion, shippers on Pony Express have the option to sign contracts that would move their oil all the way to the PLT by way of Seahorse. Because of that, Tallgrass has the potential to offer one solution for shippers to move crude from the Rockies to the coast. 

The upside is starting to come into focus

Tallgrass Energy's ability to secure these two major expansion projects will further  clarify its long-term growth prospects. In the company's estimation, it can expand EBITDA from its current annual run rate of around $800 million up to more than $1.25 billion by 2020. That big uptick in earnings could enable the company to continue growing its high-yielding dividend at a fast pace, which could help deliver big-time total returns in the coming years.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tallgrass Energy, LP Stock Quote
Tallgrass Energy, LP
TGE
Chesapeake Energy Stock Quote
Chesapeake Energy
CHKA.Q
EOG Resources Stock Quote
EOG Resources
EOG
$127.53 (1.15%) $1.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.