Tallgrass Energy Partners Earnings: Is Wall Street Right to Hate This High-Yield Dividend Stock?

Source: MPLX

Collapsing energy prices have resulted in both an incredible long-term opportunity for income investors as well as a major challenge. With so many formerly beloved midstream MLPs' prices crashing, which pipeline operators represent incredible value? And which are cheap for a reason?

Take for instance, Tallgrass Energy Partners (NYSE: TEP), and its general partner Tallgrass Energy GP (TGE), which has, up to now, posted spectacular growth that Wall Street seems to be ignoring completely.

TEP data by YCharts

With Tallgrass Energy's 2015 results now in, let's take a look at why Wall Street is so bearish on this MLP and its GP. More importantly, find out what risk factors dividend investors need to be aware of in 2016 that could make the difference between Tallgrass proving incredibly undervalued or best to be avoided.

Spectacular 2015 seems to indicate market has long its dang mind

Source: Tallgrass Energy earnings release

Note that Tallgrass Energy GP derives all its cash flow from its ownership stake in its MLP and its incentive distribution rights. Management pays out all cash flow each quarter in the form of a dividend resulting in a DCR of 1.0 meaning that its payout sustainability is entirely based on the distribution security of its MLP.

From a purely year over year basis the market's sell off of Tallgrass Energy Partners seems to make no sense. Thanks to major drop downs from its sponsor the MLP achieved some of the best growth in the midstream MLP industry. Better yet, in the fourth quarter of 2015 Tallgrass Energy Partners completed its accretive acquisition of an additional 31.3% ownership stake in a major pipeline, the Pony Express.

According to President and CEO David G. Dehaemers Jr., the MLP has sufficient capital to avoid tapping debt or equity markets in 2016, which, combined with the additional DCF its larger ownership of Pony Express will provide this year, should allow for continued strong payout growth. More importantly management expects this larger distribution to grow "at least 20% through 2017" and sustainable due to 95% of its 2016 projected cash flow being derived fee-based contracts.

With Tallgrass Energy Partners anticipating this year's full year DCF growing 29.3% to 38.3% it simply doesn't make sense for Wall Street to be so pessimistic about Tallgrass Energy Partners. Which is why we need to examine a few other factors to see if this MLP is really as undervalued as it initially seems.

Payout profile seems too good to be true

• Forward Yield: 8.4%
• 2016 DCR Guidance: 1.05-1.15
• Long-Term Payout Growth Guidance: 20% through 2017

The first thing dividend lovers should look at for any midstream MLP is the distribution profile, which consists of: the yield, long-term payout sustainability, and realistic long-term distribution growth prospects.

Again, it doesn't seem to make sense for the market to be valuing Tallgrass Energy Partners so cheaply given management's optimistic outlook for the next year. Especially since 85% of Tallgrass Energy Partners' forecast Adjusted EBITDA through the first half of 2016 is derived from "take or pay" contracts which means the MLP has very low exposure to commodity price or volume risk.

Yet Tall Grass Energy Partners' high-yield certainly indicates that Wall Street thinks something might go awry this year to invalidate management's rosy guidance. So let's look at three major risk factors that might explain why Tallgrass Energy Partners' unit price has collapsed over the last few months.

Risks to watch for in 2016
First off investors may have less confidence in high distribution growth guidance after what just happened to fellow hyper-growth midstream MLP MPLX (NYSE: MPLX). MPLX management, citing worsening energy market conditions and the collapse of its unit price, slashed its long-term payout growth guidance by 50%, from 25% per year through 2017, to just 12% to 15% per year.  

Certainly a lack of cheap access to equity markets to raise growth capital is a major concern for all midstream MLPs right now. However, with management stating that, unlike MPLX whose leverage ratio (Debt/EBITDA) is a high 4.7 and makes additional borrowing challenging, Tallgrass Energy Partners' much stronger balance sheet (leverage ratio 3.2)should make borrowing growth capital in 2017 relatively easy.

Thus the market may be signaling it believes that, should energy prices remain low through 2017, Tallgrass Energy Partners' weak access to equity growth capital might threaten its long-term growth plans.

Speaking of long-term growth, perhaps the biggest risk to the MLP is the fact that its sponsor's drop down pipeline of growth projects is nearly tapped out. In fact, after this last acquisition of the Pony Express pipeline stake, Tallgrass Energy Partners has just a 50% stake in the REX pipeline system and a 20% stake in a Cushing, Oklahoma storage terminal left to purchase from its sponsor.

After that, only organic growth prospects will remain to continue growing DCF, which means that the MLP's super fast growth days would likely have been numbered even without a crash in energy prices.

Bottom line
From an analysis of Tallgrass Energy Partners' 2015 results, 2016 guidance, and risk factors I believe that the MLP and its GP represent reasonably undervalued long-term income growth opportunities.

However, investors need to remember the risks facing Tallgrass Energy, and keep in mind that, given its short growth runway and the current state of energy markets, future growth is likely to be far less impressive than in recent years.