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Morningstar | Reducing Targa's FVE due to Weaker 2019 Outlook

Targa, in our view, is one of the most exposed midstream firms in this environment, with G&P operations making up the majority of its business, leverage levels above 4 times on a consolidated basis, very low distribution coverage, and expected equity issuances in 2019. We are reducing our Targa fair value estimate to $52 per share from $62, as Targa's large G&P operations have substantial exposure to percentage of proceeds contracts, which will be less profitable with the recent decline in commodity prices.  We've assumed weaker product margins as a result. In addition, given frac spreads have declined significantly in recent weeks, we also assume lower growth across Targa's G&P portfolio, as it will be less economic to extract natural gas liquids. Given's Targa's fixed-cost structure, this has a fairly direct and material impact on its 2019 EBITDA forecast, which now stands at $1.1 billion versus $1.6 billion previously.

We are also increasing our uncertainty rating to high from medium. This change reflects Targa's reduced hedging in 2019 (estimated at 20%) versus 2018's 80% hedged. We also consider that Targa has much less financial flexibility than peers, given its already high leverage, need for a large equity issuance in 2019 ($1.5 billion by our estimates), and asset sales ($500 million) to meet its planned capital spending plans. We expect the coverage ratio to decline below 1 times in 2019, raising the prospect as well of a dividend cut if capital cannot be sourced at reasonable prices from other areas.