Tallgrass Energy Partners LP (NYSE: TEP) stock hasn’t been a big mover this year. In fact, TEP stock is up only 1.6% year-to-date. But don’t let that cool your interest.
As a matter of fact, this should be viewed as a great time to buy this midstream U.S. energy company and latch onto its 7.8% dividend yield.
But before we dive into what makes TEP stock so appealing, I’d like to give you a quick review of the three “streams” in the energy patch.
Upstream: These are the exploration and production (E&P) companies that are drilling for oil, natural gas and natural gas liquids (NGLs). Sometimes they’re broadly described as the drillers. The price of oil or nat gas is crucial to their success.
Midstream: These are the companies that essentially ship the energy from the E&Ps to storage facilities to refineries. They are like tollbooth operators. They make their money shipping the commodities from Point A to Point B. The price of energy doesn’t matter to them as much as volume. The greater the demand, the busier they are and the more money they make in “tolls.”
Downstream: This is the storage and distribution from the refineries to the gas pumps or tank farms or, for NGLs, the manufacturers who use the products. This again is a market that functions off the price of the refined product and demand at the retail level.
In the current spot on the energy cycle, midstream is a great way to play it.
The Strength Behind TEP Stock
First, OPEC (primarily Saudi Arabia) is still trying to make it hard for U.S. shale producers to compete by manufacturing a sustainable price. In 2014, it tried to wipe out U.S. production to boost its exports, which lasted for a while. But now shale E&Ps are much more efficient and can be profitable at lower prices.
That’s a big plus for U.S. energy independence, and it also helps E&Ps grow their business in the U.S. without a lot of competition from overseas. And all this energy flows through midstream firms’ (like Tallgrass Energy) networks.
Second, the economy is improving. That means individuals and businesses are starting to move around more, increasing demand for fuel.
While prices have been stabilizing after the hurricanes in Texas and Florida, as long as demand is growing, midstream players like TEP are making money. This is the reason now is an ideal time to look to midstream players.
Pricing is irrelevant for Tallgrass Energy — it rises and falls on volume. And an improving economy means growing demand, which means larger volumes for it.
And as a limited partnership, you are technically an owner of the company. All profits pass through the partnership tax free to the “owners” as distributions (aka, dividends). That’s why the dividend is so high for TEP stock.
Moving forward, it’s likely that investors will head back into midstream players like Tallgrass Energy and its business will start to consistently improve.
Having a stake in this sector now is a very good idea.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.