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Morningstar | Post-Blackstone Investment, Tallgrass Faces Uncertainty

After a complete reversal of natural gas flows in the northern United States over the past few years, thanks to the emergence of Marcellus/Utica gas production, Tallgrass has expertly repositioned the Rockies Express Pipeline, or REX, its crown jewel. Over the past few years, Tallgrass has made the pipeline bidirectional and is able to move 2.6 billion cubic feet per day of gas out of the Northeast. Producers have eagerly snatched up the capacity, signing contracts for 15 to 20 years, greatly mitigating the recontracting risk due to occur in 2019 and 2020 as its original west-to-east contracts expire.Still, REX and Tallgrass must continue to be nimble. A considerable number of pipelines remain under construction in the Appalachian region. Not all of these pipelines are likely to be built, but it’s clear that the region will be amply supplied with takeaway capacity within a few years. However, the key advantage that REX still holds is its 15 interstate pipeline connects along its recent Zone 3 addition across Missouri, Illinois, Indiana, and Ohio, offering access to these Western markets versus competing pipelines that are largely heading south and southeast. As a result, we believe REX will maintain its relevance.Tallgrass’ other major asset is the Pony Express, moving oil from the Powder River, Bakken, and DJ basins, with major outlets in the Williston and Niobrara basins to Cushing, Oklahoma, among other markets. Tallgrass is engaged in a large expansion here, and we expect it to add 300,000 bpd of capacity (existing capacity is 400,000 bpd) by late 2020. The additional capacity is largely serving Tallgrass' efforts to move barrels via the planned Seahorse pipeline to the Gulf Coast and ultimately export markets. Further, Tallgrass has invested over $200 million recently in storage and pipeline assets to support Pony Express flows, which we think is excellent progress. The fact that the pipeline offers batched streams is attractive to refineries, and the pipeline now serves over 550,000 bpd of refinery demand, further boosting its prospects.