Stock Analyst Update

Strategic Transaction for Kinder Morgan, Tallgrass

Stephen Ellis

 Tallgrass Energy (TGE) and  Kinder Morgan (KMI) agreed to work together to expand crude oil takeaway capacity from the Powder River and DJ basins and move those barrels via the Seahorse Pipeline to the Gulf Coast.

Financial terms of the transaction were not disclosed, but as Tallgrass is contributing its Pony Express system and Kinder Morgan is contributing portions of its Wyoming and Cheyenne Plains Gas pipeline (which will be converted to oil), we see this transaction as quite strategic. We do not plan to change our moat rating or fair value estimate for either entity.

Broadly, this transaction reaffirms the valuable nature of the Pony Express asset. Despite investor concerns about its location in a less desirable basin (DJ) and being exposed to weaker basin economics, now Kinder Morgan has agreed the asset has a bright outlook. The transaction further confirms the skill that Tallgrass' management team has in sourcing creative solutions to midstream challenges, as it now has a significant oil exporting asset despite not being located in the Permian.

For Kinder, this represents an incremental growth opportunity--albeit small--to deploy its substantial cash generation. We expect more details and strategic outlook from Kinder management at the company's analyst day Jan. 23.

The combined pipeline system will be able to move up to 950,000 barrels per day of light and heavy crude. It also means that Tallgrass' recent open season to add 300,000 bpd to Pony Express' existing 400,000 bpd of capacity is highly likely to be successful, and it represents a major vote of confidence in obtaining incremental commitments to fill Seahorse's planned 800,000 bpd of capacity. This effort is expected to come on line in the second half of 2020.

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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.