Kansas MLP, Tallgrass Energy Stand Out with Dropdown Opportunities

During the last two days, three investment banks have started covering Tallgrass Energy Partners LP (NYSE: TEP), a master limited partnership (MLP) steeped in pipeline acquisition opportunities.

Deutsche Bank, Scotia Howard Weil and U.S. Capital Advisors have each initiated coverage of the MLP and its general partner, Tallgrass Energy GP LP (NYSE: TEGP).

The Tallgrass conglomerate also includes the holding company, Tallgrass Development LP, which is expected to sell down gas storage and pipeline assets in the Rocky Mountains and Midwest portion of the United States into the MLP.

As analysts at USCA explained in a Tuesday note to investors, it’s well-executed MLP characteristics that make Tallgrass attractive.

Capitalizing on the relative independence of midstream assets when it comes to commodity prices, the majority of Tallgrass’ current and future revenue comes from a fee-based cash flow.

“Additionally, outside of some contracts in the natural gas transportation and processing segments, the majority of these fee-based cash flows are also take-or-pay where [Tallgrass] will receive cash independent of whether or not customers utilize their assets,” USCA said.

In addition, development group has a significant backlog of assets that it could sell into the partnership, which would enable the partnership to double its distribution by 2020.

“With [the partnership] buying mostly incubated assets from [the development group], organic capex needs are fairly limited,” USCA said. “Thus, [the partnership] will likely only have to tap the capital markets when making what should be highly accretive acquisitions.”

USCA initiated coverage with a Buy rating and a $60 per unit price target. By late Tuesday morning, the MLP was trading up almost 1 percent at $51.27 per unit and the general partner was down almost 1 percent per unit, trading at $31.37 each.


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