Analyst Note| Stephen Ellis |
Targa was able to navigate a difficult second quarter with better-than-expected volumes and fees. We also think the risk of a liquidity issue has been reduced, given its efforts around reducing capital spending and costs (Targa now expects to materially exceed its $100 million in expense savings target), as well as the earlier dividend cut, resulting in current liquidity of over $2.1 billion. We expect Targa to generate excess cash flow after its capital spending and distribution payouts, and its next maturity is in May 2023. That said, adjusted leverage remains high at 4.1 times versus a covenant level of 5.5 times. Given our improved outlook for volumes, fees, and a lower cost of capital, we've increased our fair value estimate to $19.50 a share. We retain our no-moat rating, as well as our extreme uncertainty rating given the still-highly uncertain outlook.