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Morningstar | Tallgrass Reports Decent Quarter; Blackstone's Intentions Remain Uncertain

Tallgrass Energy's first-quarter results met our expectations, and we plan to maintain our $28 fair value estimate and narrow moat rating. EBITDA of $246 million for the quarter puts our $1 billion forecast for 2019 within reach amid continued higher contributions from the Rockies Express pipeline. Tallgrass also announced the purchase of 92% of Central Environmental Services, an Appalachian water services provider, for $52 million. Tallgrass continues to make progress on its Seahorse pipeline, the Plaquemines liquids terminal, and the Pony Express expansion, and we expect them to be material earnings drivers in 2020. Kinder Morgan recently exited a competing crude oil export project, providing an opportunity for Tallgrass' own efforts.

Uncertainty still remains around Blackstone's plans for Tallgrass following its $3.3 billion purchase of the general partner and 44% of the limited partnership. CEO David Dehaemers exited the vast majority of his Tallgrass stake with the transaction and has dropped heavy hints about leaving the CEO role at the end of 2019 or early 2020 while staying on the board until the end of 2020. Bill Moler, a 30-year oil and gas veteran and member of Tallgrass management team since 2012, recently added president to his COO title, which strongly suggests he will succeed Dehaemers. A key part of the motivation for the transaction was to take out prior private equity partners EMG and Kelso, which were largely silent partners, in our view, over their seven-year involvement. Dehaemers has suggested that Blackstone could be a similarly silent partner, but he's also admitted that he doesn't know the Blackstone team very well.  With Dehaemers' likely departure, Blackstone will have enough power to control virtually every seat on the board.

We expect Blackstone to likely assist with capital, capital raising, and deal sourcing for future efforts. However, the potential also remains for a rollup of Tallgrass with other Blackstone oil and gas midstream investments at terms that may be unfavorable to existing unitholders. Blackstone has ample management resources to become a fairly active partner in Tallgrass if it so chooses. We may not get clear answers on this front until Dehaemers departs and we can get a sense of the new CEO's plans and the likely reconstituted board of directors.