Company Reports

Targa's first-quarter earnings generally met our expectations. The 2024 EBITDA guidance by management is unchanged at a midpoint of $3.8 billion, matching our forecast. We expect to leave our fair value estimate unchanged at $99 as well as our no moat rating.

After updating our model to reflect the existence of strong fee floors within Targa's gathering and processing business, or G&P, plus the demand-pull nature of Targa's pipes (Grand Prix and soon Daytona) serving as a ready demand source for G&P volumes, we're raising our fair value estimate to $99 from $79. Our EBITDA multiple for 2024 is about 9.2 times, in line with peers, versus a discount.

Targa Resources is primarily a gatherer and processor of natural gas. Seventy percent of its gathering and processing, or G&P, assets are in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions, with Lucid in 2022 for $3.5 billion its biggest deal yet. To date, it has contributed to very healthy near-term growth. Fee floors provided protection for Targa downside for 10 out of 12 months in 2023, and we expect a similar outcome for 2024 given the delay in LNG projects and demand uplift.

Targa's fourth-quarter earnings and 2024 guidance were a bit lower than our expectations, primarily as lower oil, gas, and natural gas liquids pricing is trimming opportunities. However, similar to peer Energy Transfer, which is also materially weighted toward natural gas liquids, we expect that as 2024 progresses, Targa will capture incremental marketing opportunities, boosting earnings. Initially, we expect to leave our $79 fair value estimate unchanged, as well as our no-moat rating.

After several years of thoughtful capital allocation moves, we are upgrading Targa’s Capital Allocation rating to Standard from Poor. Management, in our view, has learned from past mistakes and is committed to a more thoughtful and shareholder-friendly capital allocation policy. The latest example is its willingness to commit to a policy where it will return 40%-50% of adjusted operating cash flow to shareholders via dividends and opportunistic (not programmatic) share buybacks. Our fair value estimate of $79 per share remains unchanged, as does our no moat rating.

Targa Resources is primarily a gatherer and processor of natural gas. Seventy percent of its gathering and processing, or G&P, assets are in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions, with Lucid in 2022 for $3.5 billion its biggest deal yet. To date, it has contributed to very healthy near-term growth. Its fee floors are already being tested in this market; with prices below fee floor levels, they are providing a margin uplift.

Targa’s third-quarter results were fairly good, and it boosted its planned dividend for 2024 by 50% to $3 per share. After re-assessing Targa’s growth portfolio across 2024 and 2025, including 1 million cubic feet per day of Permian gathering and processing plants, 240,000 barrels per day of planned fractionation capacity, and the 400,000 barrels per day Daytona expansion, we are boosting our fair value estimate to $79 per share from $72. Our no moat rating remains unchanged.

Targa Resources is primarily a gatherer and processor of natural gas, with 70% of its gathering and processing assets in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions as well, with Lucid in 2022 for $3.5 billion its biggest deal yet. To date, it has contributed to very healthy near-term growth. Its fee floors are already being tested in this market; with prices below fee floor levels, they are providing a margin uplift.

Targa Resources is primarily a gatherer and processor of natural gas, with 70% of its gathering and processing assets in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions as well, with Lucid in 2022 for $3.5 billion its biggest deal yet. To date, it has contributed to very healthy near-term growth. However, we expect its fee floors and balance sheet to be tested in a down market over the next few years.

Targa Resources is primarily a gatherer and processor of natural gas, with 70% of its gathering and processing assets in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions as well, with Lucid in 2022 for $3.5 billion its biggest deal yet. To date, it has contributed to very healthy near-term growth. However, we expect its fee floors and balance sheet to be tested in a down market over the next few years.

Targa Resources is primarily a gatherer and processor of natural gas, with 70% of its gathering and processing assets in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions as well, with Lucid in 2022 for $3.5 billion in what its biggest deal yet. To date, it has contributed to very healthy near-term growth. However, we expect its fee floors and balance sheet to be tested in a down market. We will likely see exactly this scenario in mid- to late 2023.

Targa Resources' second-quarter results were solid, in our view. The firm reaffirmed 2023 EBITDA guidance at the midpoint of $3.6 billion; this is slightly below our estimate of $3.7 billion, as we think volumes are tracking to better results. We continue to expect near-term volume strength across Targa’s portfolio to offset pricing and marketing weakness in the short run. 2023 growth capital spending guidance also is unchanged at a midpoint of $2.1 billion. After updating our model, we maintain our $72 fair value estimate and no-moat rating.

Targa Resources is primarily a gatherer and processor of natural gas, with 70% of its gathering and processing assets in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions as well, with Lucid in 2022 for $3.5 billion in what its biggest deal yet. To date, it has contributed to very healthy near-term growth. However, we expect its fee floors and balance sheet to be tested in a down market. We will likely see exactly this scenario in mid- to late 2023.

Targa’s first-quarter results were boosted, in our view, by unexpected LPG strength, which helped offset weakness elsewhere. The firm reiterated 2023 EBITDA guidance at a midpoint of $3.6 billion, with our forecast at $3.65 billion, despite commodity prices being lower than their embedded assumptions. While Targa is maintaining its 2023 EBITDA guidance, it typically only hedges one year out. This position means that while it still may be able to offset lower oil and gas prices in 2023, 2024 results may be more materially impacted as it resets its hedging position. We expect to maintain our $72 per share fair value estimate and no-moat rating.

Targa Resources is primarily a gatherer and processor, or G&P, of natural gas, with 70% of its gathering and processing assets in the Permian, which generates about 80% of its volumes. The firm has historically outgrown Permian production growth, given its leverage to growth-oriented customers and robust gas/oil ratios. It has aggressively made acquisitions as well, with Lucid in 2022 for $3.5 billion in what its biggest deal yet. To date, it has contributed to very healthy near-term growth. However, we expect its fee floors and balance sheet to be tested in a down market.

After updating our model for fourth-quarter results, we are increasing our fair value estimate to $72 from $64 per share. The main driver of our fair value increase is higher expected Permian volumes in 2023, as well as double-digit increases in fees given inflation. Our valuation implies a 2023 EBITDA multiple of 7.6 times. We believe the main driver in the near term will be Targa's gathering and processing operations in the Permian, where we expect volumes to increase about 40% in 2023, which is about 10% higher than fourth-quarter exit levels given the large impact of the Lucid deal.

Targa's aggressive investments continue to pay off in this robust oil and gas market as full-year 2022 EBITDA of $2.9 billion was up 41% over 2021 levels, and 2023 guidance calls for more growth with another 24% increase. 2023 EBITDA guidance at a midpoint of $3.6 billion is slightly above our $3.5 billion forecast. Targa hasn't been shy about putting capital to work with at least $6 billion in capital investment since 2018, which is sizable compared to the $14 billion of property, plant, and equipment on its balance sheet in the third quarter. At first glance, we maintain our $64 per share fair value estimate and no-moat rating.

Targa Resources has agreed to buy the remaining 25% of the Grand Prix pipeline it does not own from Blackstone Energy Partners for $1.05 billion. We consider the Grand Prix pipeline one of Targa’s most valuable assets, so complete ownership is certainly helpful, and the valuation multiple of 8.75 times 2023 EBITDA is reasonable. The deal will boost Targa’s reliance on fee-based income, and after incorporating the deal into our model, we expect leverage to remain comfortable at about 3.5 times for 2023. Since we view the multiple as fair for the asset, our fair value estimate and no-moat rating remain unchanged.

Targa Resources is primarily a gatherer and processor, or G&P, of natural gas with an attractive position in the Permian Basin and other key U.S. shale plays. The firm weathered a very difficult 2020 via sharply reduced capital spending, a nearly 90% dividend reduction, and expense cuts. With a more stable 2021, it reduced debt by $1 billion that year, which we think was a good move. With leverage now at reasonable levels, we think returning the dividend to $1.40 a share from $0.40 per share annually makes sense.

Targa’s third-quarter results met our expectations, and the firm reaffirmed a midpoint of 2022 EBITDA at $2.9 billion. However, with natural gas liquids prices well below the firm’s assumptions underlying its guidance during the quarter, we’ve trimmed our 2023 estimates downward to account for lower spreads and fees. We now expect $3.2 billion in 2023 EBITDA compared with earlier forecasts of $3.3 billion. We continue to believe that Targa remains more exposed to volatility in hydrocarbon prices than peers within our North American midstream coverage universe. Despite the lower estimates, we are maintaining our $64-per-share fair value estimate and no-moat rating.