Tallgrass Energy GP LP :TEGP-US: Earnings Analysis: Q3, 2017 By the Numbers : January 4, 2018

Tallgrass Energy GP LP reports financial results for the quarter ended September 30, 2017.

Highlights

  • Summary numbers: Revenues of USD 175.67 million, Net Earnings of USD 15.87 million.
  • Gross margins narrowed from 55.38% to 55.19% compared to the same period last year, operating (EBITDA) margins now 55.55% from 55.64%.
  • Change in operating cash flow of 111.34% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 175.67 160.7 143.56 160.9 151.65
Revenue Growth (%YOY) 15.84 9.25 -1.3 7.15 9.96
Earnings (mil) 15.87 8.75 12.03 8.72 7.04
Earnings Growth (%YOY) 125.34 153.86 58.51 -50.69 59.19
Net Margin (%) 9.03 5.45 8.38 5.42 4.64
EPS 0.27 0.15 0.21 0.17 0.15
Return on Equity (%) 0.85 0.48 0.66 0.48 0.38
Return on Assets (%) 1.47 0.84 1.26 1 0.81

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, TEGP-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if TEGP-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 9.31% and earnings by 81.26% compared to the previous period.

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 55.19% to 55.38% for the same period last year, while operating margins (EBITDA margins) went from 55.55% to 55.64% over the same time frame.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

TEGP-US’s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days are now -44.59 days from -12.06 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

TEGP-US’s year-on-year change in operating cash flow of 111.34% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 41.91% to 42.01% and (2) one-time items. The company’s pretax margins are now 104.41% compared to 39.57% for the same period last year.

EBIT Margin History
PreTax Margin History

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Company Profile

Tallgrass Energy GP LP is a development stage company, which owns, operates, acquires, and develops midstream energy assets in North America. It operates through the following segments: Crude Oil Transportation and Logistics; Natural Gas Transportation and Logistics; and Processing and Logistics. The Crude Oil Transportation and Logistics segment owns and operates FERC-regulated crude oil pipeline system and crude oil storage and terminal facilities. The Natural Gas Transportation and Logistics segment manages FERC-regulated interstate natural gas pipelines and integrated natural gas storage facilities. The Processing and Logistics segment handles the operation of natural gas processing, treating and fractionation facilities, the provision of water business services primarily to the oil and gas exploration and production industry, and the transportation of NGLs. The company was founded on February 10, 2015 and is headquartered in Leawood, KS.

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