Morningstar | Increasing Our Tallgrass FVE to $28 From $25.50 After 2Q
After taking a deeper look into Tallgrass' earnings and its revised reporting given the recently closed simplification transaction, we have boosted our fair value estimate to $28 per share from $25.50. Our narrow moat rating is unchanged. The main changes to our forecast include boosting our expectations around Pony Express volumes to average 343,000 barrels per day for 2018 from below 300,000 previously, and our expectations for REX contributions to $376 million compared with $336 million previously. We've also adjusted our forecast for REX west-to-east pricing from 2020 onwards to around 40 cents compared with 25 cents earlier. These changes reflect stronger year-to-date results on both pipes, due to both savvy Tallgrass investments and new competing pipes not affecting flows as much we first thought. We continue to consider the firm undervalued, as investors seem to anticipate that earnings from both Pony Express and REX will decline in the coming years, when it is becoming increasingly clear that these are highly resilient pipes with opportunities for further growth with intelligent capital allocation.
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