Analyst Note| Stephen Ellis |
After updating our model to reflect Targa's higher guidance, our fair value estimate increases to $38 per share. Targa’s second-quarter results benefited from higher Permian gas volumes, thanks primarily to higher activity by private operators, in our view. The incremental gas is also being moved using Targa pipes and assets, generating additional fees, as both the Grand Prix pipeline and Targa’s fractionation assets hit record volumes. As a result, Targa increased its 2021 EBITDA guidance to a midpoint of $1.95 billion from its prior midpoint guidance of $1.85 billion last quarter. The incremental cash is being applied smartly toward debt reduction for the time being, as Targa’s 2021 leverage target falls to 3.5 times from 4 times last quarter. However, with the likely Stonepeak transaction, at a cost of around $1 billion, which could be formally announced in early 2022, it’s not clear if this improvement can be maintained.