Source: Tallgrass Energy Partners
It's no secret that the worst oil crash in 50 years has crushed almost all energy stocks. Even super fast growing midstream MLPs such as Tallgrass Energy Partners (NYSE: TEP) haven't been spared Wall Street's wrath.
Despite some of the fastest distribution growth in its industry -- management just raised the quarterly payout 46.3% year-over-year -- investors may understandably be concerned about whether or not Tallgrass Energy Partners' future growth prospects can survive the energy crash.
Perhaps more importantly investors need to know whether or not this midstream MLP is a better value at today's price than other super fast growing competitors such as Phillips 66 Partners (PSXP), MPLX (MPLX 1.25%), Shell Midstream Partners (SHLX), and Valero Energy Partners (NYSE: VLP). To help answer these questions let's examine three important factors that are likely to determine whether or not Tallgrass Energy Partners can keep its impressive growth streak alive in a world of low energy prices and is worthy of a spot in your diversified income portfolio.
Valuation is very appealing but...
| MLP | Forward Yield | EV/EBITDA | Price/Operating Cash Flow |
| Tallgrass Energy Partners | 6.8% | 12.2 | 8.3 |
| Phillips 66 Partners | 3.1% | 35.4 | 23.1 |
| MPLX | 6.3% | 12.2 | 10.7 |
| Shell Midstream Partners | 2.5% | 35.7 | 27.5 |
| Valero Energy Partners | 2.6% | 20.0 | 18.5 |
Sources: Yahoo Finance, Fastgraphs
As you can see Tallgrass Energy Partners is currently the cheapest of the fast growing midstream MLPs while Phillips 66 Partners and Shell Midstream Partners are the two most richly valued ones. However, a long-term income investment thesis doesn't consist of valuation alone, but also on payout sustainability and long-term growth prospects. From that perspective it becomes more clear why Tallgrass Energy Partners is trading so cheap relative to its peers.
Distribution profile is weakest of the group
| MLP | 2015 Q1-Q3 DCR | 2015 Q1-Q3 Excess DCF (Annualized) | Excess DCF/Revenue (Excess DCF Margin) | 5 Year Projected CAGR Payout Growth |
| Tallgrass Energy Partners | 1.18 | $32.5 million | 6.6% | 20.0% |
| Phillips 66 Partners | 1.44 | $62.5 million | 20.2% | 30.0% |
| MPLX | 1.37 | $61.2 million | 10.7% | 25.0% |
| Shell Midstream Partners | 1.40 | $42.4 million | 17.9% | 26.2% |
| Valero Energy Partners | 1.96 | $71.3 million | 36.0% | 30.4% |
Sources: Earnings releases, 10-Qs, 10-Ks, Morningstar, management guidance
Not only does Tallgrass Energy Partners have the lowest expected distribution growth rate but its distribution coverage ratioor DCR -- the best metric for measuring long-term payout sustainability -- is by far the weakest.
What's more management's guidance for the full year 2015 DCR is only 1.05-1.1, meaning that management is choosing a less conservative, short-term focused payout strategy that pays out around 93% of distributable cash flow or DCF (that funds the quarterly distribution) leaving precious little to reinvest into future growth.
Strong liquidity BUT long-term growth prospects limited compared to peers
| MLP | Debt/EBITDA (Leverage Ratio) | EBITDA/Interest Ratio | Average Interest Rate | WACC | ROIC |
| Tallgrass Energy Partners | 2.9 | 18.4 | 1.9% | 4.68% | 8.46% |
| Phillips 66 Partners | 5.1 | 7.9 | 2.5% | 13.03% | 19.3% |
| MPLX | 3.1 | 14.3 | 2.3% | 9.63% | 18.86% |
| Shell Midstream Partners | 2.8 | 68.2 | 0.5% | NA | 46.19% |
| Valero Energy Partners | 1.0 | 39.3 | 2.5% | NA | 25.1% |
Sources: Morningstar, Gurufocus
Note that Shell Midstream Partners' super low average interest rate is due to its complete use of short-term debt up to now. This is likely to rise as the MLP takes on long-term debt to continue funding future drop downs.
While Tallgrass Energy Partners has very low debt costs (thanks in part due to its low leverage ratio) and the lowest weighted average cost of capital of this group, I would also point out that its overall profitability is also the lowest.
In addition, its low excess DCF makes it the almost completely dependent on external debt and equity markets for growth capital, a potentially dangerous policy in today's market conditions.
Granted thus far Tallgrass Energy Partners seems popular with creditors, having just announced an increase in its revolving credit facility or RCF from $850 million to $1.5 billion. The MLP immediately used this new credit to purchase an additional 31.3% stake in the Pony Express Pipeline from its sponsor, privately held Tallgrass Development.
This brings its total ownership of this pipeline to 98%. However, the total cost of $743 million in cash and new units means that its RCF has only $272 million in remaining liquidity.
Which brings me to the main long-term growth problem for Tallgrass Energy Partners, especially compared to Phillips 66 Partners, MPLX, and Shell Midstream Partners.
Tallgrass Development has only two remaining assets to drop down to its MLP.
When combined with potential organic growth projects this might provide another one to two years of strong distribution growth however after that the low DCR means that the MLP's payout growth rate will have to likely slow substantially.
Compare this to MPLX which, thanks to its now dominant position in the Utica and Marcellus shale from its recent acquisition of MarkWest Energy Partners, has a potential growth backlog of $33 billion.
Source: MPLX investor presentation.
Similarly, the sponsors of Phillips 66 Partners, and Shell Midstream Partners own vast amounts of midstream assets whose probable future drop downs could fuel strong growth in their midstream MLPs for the next 10 to 15 years.
Bottom line:
Over the next one to two years I expect Tallgrass Energy Partners to continue growing at a healthy pace due to its existing sponsor's drop down pipeline and backlog of organic expansion projects as well as strong access to growth capital.
However, given management's aggressive payout growth policy that results in very little excess DCF, as well as the far smaller long-term investment potential relative to its peers, I recommend income investors consider Phillips 66 Partners, MPLX, and Shell Midstream Partners as better dividend growth prospects for the next five to 20 years.
