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Tallgrass Energy Partners Keeps on Growing

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Over the past 12 months, most investors have been averse to the idea of investing in crude pipeline assets.  But in the nuanced world of Master Limited Partnerships, the location of the pipelines, and the balance sheet of the acquiring entity, can make such assets look attractive  The Pony Express Pipeline (PXP), a 760 mile crude pipeline from Guernsey, WY to Cushing, OK, is an outlet for Bakeen, Niobara, and Powder River Basin crude production, which can transport up to 320,000 barrels per day,   PXP was originally a natural gas pipeline owned by Kinder Morgan, which was sold to Tallgrass Development (TDEV) in 2012.  TDEV expanded the capacity and converted the pipeline to carry crude in 2014.  Tallgrass Energy Partners (TEP) acquired an additional ownership stake in PXP  in July 2014 for 9x EBITDA.  In the Q3 earnings call, Tallgrass Energy disclosed that November volumes were 10% higher and the pipeline was operating at capacity, despite the drop is rig counts and crude strip prices.


After authorizing a 6.7% increase in their Q4 distribution on January 4th, Tallgrass Energy announced the acquisition of an additional 31.3% interest in PXP, raising their ownership to 98%.  The $743MM acquisition will be funded the issuance of 6.5MM new units to TDEV, with a call option to repurchase the units at $42.50 within the next 18 months.  The remaining balance of $475MM will be funded by their existing credit line, leaving $272MM available on their line after the acquisition.  This transaction has been expected, but perhaps TDEV funding the full equity allocation may have been a surprise given the 5.82% yield.   The last time they raised equity in the public markets, TEP was yielding 3.96%.   





The drop down will help fund their 20% distribution growth target through 2017.  A sponsor willing to purchase the equity needed to fund dropdown allows the balance sheet to remain in good shape to partially fund future drops, such as REX.   TDEV, by way of their ownership in Tallgrass Energy GP, will benefit from the increase in the IDR payments as a result of the increase in units outstanding, which are presently at the 50% split.  Below are TEP's unit metrics for the last several quarters, indicating current leverage near 3.0x prior to the acquisition.  






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