Targa Resources Corp. (NYSE:TRGP): A Midstream Giant Poised for Continued Growth

Published on September 24, 2024 | Ticker: TRGP

Targa Resources Corp. (NYSE:TRGP) is a leading provider of midstream services and one of the largest independent infrastructure companies in North America. The company owns, operates, acquires, and develops a diversified portfolio of complementary domestic midstream infrastructure assets. Targa's operations are primarily focused on gathering, processing, transporting, and marketing natural gas, natural gas liquids (NGLs), and crude oil.

Business Overview

Targa's business is structured into two primary segments: Gathering and Processing, and Logistics and Transportation. The Gathering and Processing segment includes assets used in the gathering and/or purchase and sale of natural gas produced from oil and gas wells, removing impurities and processing this raw natural gas into merchantable natural gas by extracting NGLs. The Logistics and Transportation segment includes the activities and assets necessary to convert mixed NGLs into NGL products and also includes other assets and value-added services such as transporting, storing, fractionating, terminaling, and marketing of NGLs and NGL products, including services to LPG exporters.

Financials

In the fiscal year 2023, Targa reported annual revenue of $15.62 billion and net income of $835.8 million. The company's annual operating cash flow was $3.21 billion, and its annual free cash flow was $826.2 million. These strong financial results demonstrate Targa's ability to generate substantial cash flow from its diversified midstream operations.

During the first quarter of 2024, Targa continued to deliver impressive operational and financial performance. The company reported quarterly revenue of $4.56 billion and net income of $332.6 million. Targa's adjusted EBITDA for the quarter was a record $966 million, a 1% increase over the fourth quarter of 2023. The company's natural gas inlet volumes in the Permian Basin averaged a record 5.4 billion cubic feet per day, a 2% increase compared to the fourth quarter of 2023.

Targa's Gathering and Processing segment reported an adjusted operating margin of $744.5 million in the first quarter of 2024, a 3% increase compared to the same period in the prior year. This growth was driven by higher natural gas inlet volumes and higher fees in the Permian Basin, partially offset by lower natural gas and NGL prices.

The Logistics and Transportation segment reported an adjusted operating margin of $622.1 million in the first quarter of 2024, a 3% increase compared to the same period in the prior year. This growth was due to higher pipeline transportation and fractionation margins, as well as higher LPG export margins, partially offset by lower marketing margins.

Outlook

Targa's management team remains optimistic about the company's future prospects. The company continues to estimate full-year 2024 adjusted EBITDA between $3.7 billion and $3.9 billion, which management believes is reflective of the importance of Targa's fee-based contracts and fee floors in its Gathering and Processing business, which are supporting the company's continued investment in infrastructure despite the current lower commodity price environment.

Recent Developments

To support the expected growth in Permian Basin volumes and resulting NGL supply, Targa announced the construction of a new 275 MMcf/d cryogenic natural gas processing plant in Permian Midland (the "Pembrook II plant") and a new 150,000 barrel per day fractionation train in Mont Belvieu, Texas ("Train 11"). The Pembrook II plant is expected to begin operations in the fourth quarter of 2025, and Train 11 is expected to begin operations in the third quarter of 2026. These projects are in addition to the company's previously announced Greenwood II plant in Permian Midland, which is expected to begin operations in the fourth quarter of 2024, and the Daytona NGL Pipeline expansion, which is expected to be in service in the fourth quarter of 2024.

Liquidity

Targa's strong financial position and liquidity provide the company with the flexibility to continue investing in high-return organic growth projects while also returning capital to shareholders. As of March 31, 2024, Targa had $109.9 million in cash and cash equivalents and $2.6 billion of available liquidity under its credit facilities. The company's consolidated net leverage ratio was 3.6x, well within its long-term target range of 3 to 4x.

Consistent with its capital allocation priorities, Targa's Board of Directors approved a 50% increase to the company's annual common dividend to $3 per share, effective for the first quarter of 2024. The company also repurchased $124 million of its common shares during the first quarter of 2024 at a weighted average price of approximately $104 per share.

Geographic Footprint

Targa's geographic footprint is primarily focused on the Permian Basin, which continues to be a key driver of the company's growth. In the Permian Midland, Targa's natural gas inlet volumes averaged 2,746.1 MMcf/d in the first quarter of 2024, a 17% increase compared to the same period in the prior year. In the Permian Delaware, natural gas inlet volumes averaged 2,648.9 MMcf/d, a 6% increase compared to the first quarter of 2023.

The company's Logistics and Transportation segment also saw strong performance, with NGL pipeline transportation volumes averaging 717.8 MBbl/d in the first quarter of 2024, a 34% increase compared to the same period in the prior year. Fractionation volumes averaged 797.2 MBbl/d, a 5% increase, and export volumes averaged 439.0 MBbl/d, an 18% increase.

Risks and Challenges

Targa's risk management activities have also been a key component of its success. The company has entered into derivative instruments to hedge the commodity price risk associated with a portion of its expected natural gas, NGL, and condensate equity volumes, future commodity purchases and sales, and natural gas transportation basis risk. These hedging activities have helped to mitigate the impact of commodity price volatility on Targa's financial results.

Conclusion

Looking ahead, Targa's management team remains confident in the company's ability to continue delivering strong operational and financial performance. The company's premier Permian supply aggregation position, coupled with its integrated NGL system, positions Targa well to capitalize on the growing demand for midstream services in the region. Additionally, the company's focus on fee-based contracts and fee floors in its Gathering and Processing segment, as well as its disciplined approach to capital allocation, should continue to support Targa's long-term growth and shareholder value creation.

Overall, Targa Resources Corp. is a well-positioned midstream infrastructure company with a diversified asset base, strong financial profile, and a proven track record of operational excellence. The company's strategic investments in the Permian Basin and its integrated NGL system position it for continued growth and success in the years ahead.

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