Analyst Note
| Stephen Ellis |Targa's first-quarter results were solid, in our view, as it boosted 2021 EBITDA guidance to a new midpoint of $1.85 billion from $1.725 billion. A material portion of the increase was related to the one-time $30 million EBITDA boost from Winter Storm Uri, while we estimate another $30 million EBITDA contribution from higher natural gas liquids and oil prices. On a stand-alone basis, we do not consider these two changes material enough to change our fair value estimate, so we will hold it and our no-moat rating intact while we incorporate Targa's results into our model.
The bigger shift, in our view, is Targa's new efforts to prioritize leverage reduction, and it is taking actions to support it. Targa is now targeting leverage to between 3 and 4 times, as well as an investment-grade rating, which is a marked shift from prior commentary. We think these targets are reasonable. We think both moves are much needed, as they will allow Targa to minimize the risk of selling valued assets too cheaply during a downturn to better manage its leverage, and enforce capital discipline if Targa wants to maintain its investment-grade rating. Targa used free cash flow to reduce debt by $383 million during the quarter, and leverage now stands at 4.3 times, and it expects leverage to be around 4 times by the end of the year.