Targa Earnings: Unexpected LPG Strength Offsets G&P Weakness

Targa’s TRGP 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.

With acquisition activity muddying the year-over-year growth rate of 24% for EBITDA, we think the 12% sequential increase to $941 million provides a bit more insight into Targa’s performance over the near term. Like peer Enterprise Products Partners, the LPG outperformance was unexpected and the biggest contributor and offset the gathering and processing (G&P) weakness due to lower prices.

We expected the LPG market to be weaker in the first half of 2023. The primary factors driving this forecast were faster-than-expected supply growth in the U.S., weaker Chinese demand due to COVID-19 lockdowns, and general inventory destocking among petrochemicals players amid a more uncertain economic environment. Part of the difference appears to be reduced supply, as several propane dehydrogenation plants were unexpectedly offline during the quarter. On the demand side, China appears to have recovered quicker than expected on the LPG demand front by starting up several plants and running them hard, though it may very well be a timing issue with future quarterly demand dropping off a bit.