Why TEGP Should Not Have Strong Correlation With Crude Oil
Tallgrass Energy GP
Tallgrass Energy GP (TEGP), Tallgrass Energy Partners’ (TEP) general partner, has the tenth-highest correlation with crude oil among MLPs. On October 6, 2017, TEGP’s one-year correlation with crude oil was 0.436, while TEP’s was 0.398. TEP is in the 21st spot. TEGP’s and TEP’s correlation with crude oil may not be justified, considering their low commodity price exposure. Of TEP’s 2016 adjusted EBITDA (earnings before interest, tax, depreciation, and amortization), 97% was from take-or-pay contracts, 2% was volumetric based, and 1% was linked to commodity prices. TEP’s slight commodity price exposure is due to its involvement in the natural gas processing business.
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Moreover, TEP has continued to grow its distribution despite challenging energy prices. TEP declared a distribution of $0.93 per unit in 2Q17, which represented a 10.8% sequential rise, and a 22.5% rise from 2Q16. TEGP declared a distribution of $0.34 per unit in the second quarter, representing a 19.1% rise from the previous quarter and a 39.8% rise from 2Q16.
Of the analysts covering Tallgrass Energy GP, 61.5% recommended “hold,” 30.8% recommended “buy,” and the remaining 7.7% recommended “sell.” TEGP has not seen any rating updates in 2017. TEGP’s average target price of $29.10 implies a ~4% upside potential based on its current price.