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Morningstar | Tallgrass Announces Good 4Q and Major Investment By Blackstone

Tallgrass’ fourth-quarter results met our expectations, as did 2019 guidance of $965 million to $1,035 million, compared with our 2019 expectations of $1,041 million. We don’t plan to make a material change to our $28 fair value estimate or narrow moat rating. We continue to remain impressed with management’s ability to creatively solve midstream challenges, as evidenced by its recent series of announcements around the Seahorse and Pony Express pipelines. Tallgrass has been able to leverage its planned Plaquemines Liquids Terminal, or PLT, and related Seahorse pipeline into a major expansion for Pony Express (300,000 barrels per day on top of its existing 400,000 bpd capacity) as well as an agreement with Kinder Morgan to contribute assets to expand capacity to a combined 1 million bpd of light and heavy crude. In a series of moves, Tallgrass has obtained export capacity exposure despite not having access to the Permian, and obtained substantial customer backing for the effort in an environment with multiple other competing projects for the same export barrels, essentially ensuring it will go forward.

In a separate announcement, Blackstone Infrastructure Partners agreed to purchase 100% of Tallgrass’ general partner and a 44% economic interest in Tallgrass Energy LP for $3.3 billion in cash. The transaction represents a buyout of partnership holdings versus providing capital to be invested in pipeline projects. The sellers include two private equity firms (Kelso and the Energy and Minerals Management Group), as well as Tallgrass CEO David Dehaemers. All appear to have completely sold their stakes in Tallgrass, which is not a surprise for the private equity firms as they have been involved since 2012 and likely want the liquidity.

The 44% economic interest in Tallgrass Energy LP is what the general partner held of the limited partner after the consolidation completed in mid-2018. The valuation implied by the transaction seems to suggest that Blackstone paid roughly market prices for the units versus a sharp discount or premium.

The timing and motivations for the sale do introduce a level of uncertainty around the future. We see pluses and minuses. On the positive side, adding Blackstone to the mix provides a window into private equity deal flow that is unmatched across the industry, giving Tallgrass first crack at some potentially highly attractive and strategic assets. Blackstone could also provide substantial assistance with capital raising for future projects and deals, if not provide the capital itself.

On the negative side, Blackstone could seek to merge Tallgrass Energy LP with other private equity midstream holding structures, not only creating a new midstream entity with incentive distribution rights, but also a taxable transaction for unitholders. These type of roll-up private equity structures have been popular recently as pathway leading to a sale of the merged entity to another firm. The fact that CEO David Dehaemers has sold his stake as well makes sense in terms of his ongoing frustration with the undervalued units, but also means that Tallgrass unitholders are now essentially along for the ride with Blackstone.