Boosting Targa’s Valuation After Strong Q4

After updating our model for Targa’s TRGP 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 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.

Higher volumes from the Grand Prix, fractionation volumes, and export volumes will help. Export volumes are largely take-or-pay agreements, and Targa’s natural gas liquids storage operations should do well in this environment. These improvements will more than offset weakness at the rest of Targa’s non-Permian gathering and processing operations. We expect EBITDA of $3.7 billion in 2023. 2023 growth will be driven by the Lucid and Grand Prix deals, plus ongoing organic growth in the Permian.

Despite our persistent concerns about its balance sheet strength since 2020, Targa has effectively grown into a reasonably healthy balance sheet. Despite spending a net $13 billion by our estimates on capital spending and acquisitions between 2018 and including expected 2023 spending, it has largely funded the deals via cash from operations, asset sales, and debt, and relatively little equity. Put another way, EBITDA is expected to increase nearly 170% between 2018-23, while debt has only increased 73% over the same time frame. As a result, despite the large spending spree, we expect debt/EBITDA to fall to 3.3 times in 2023 from 4.9 times in 2018. It’s not a surprise that Targa finally earned investment-grade ratings in 2022.