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Morningstar | Targa Reports Good Third Quarter, Adds More Fractionation Capacity

Targa's third-quarter report, like its other NGL-oriented midstream peers, was quite strong, thanks to wider differentials and higher production levels, particularly out of the Permian Basin. As results generally met our expectations, we plan to maintain our $62 fair value estimate and no-moat rating. We are pleased with Targa's latest growth investments, which now include two 110,000 bpd fractionation trains due online in the first half of 2020. Accordingly, the growth capital expenditure plans have been revised upward to $2.4 billion and $2 billion for 2018 and 2019, respectively. Prior expectations were $2.2 billion and about $1 billion, by our estimates. The boost in expenditures raises of the question of how Targa plans to fund it, given its low distribution coverage ratio that limits its ability to self-fund. We would expect a combination of debt, equity, and asset sales, and Targa has identified the sale of the minority interest in its Badlands asset. Overall 2018 EBITDA is now expected top guidance of about $1.3 billion, which we had already assumed, given the strong environment.

The Badlands assets are based in the Bakken/Williston Basin and include both crude oil pipelines and natural gas gathering assets, and Targa bought them for $950 million in 2012. Since the purchase, volumes across the assets appear to have at least doubled by our estimates, while the Bakken outlook has generally improved. However, Targa had to invest at least $250 million in growth capital to support those operations, and we believe that valuation multiples have generally declined over the past few years for quality midstream assets, certainly since 2012. In short, we don't expect a huge windfall for Targa here, but it should be an attractive asset to several third parties and certainly help close its financing gap.

Targa also revised its guidance to 2021 given the new growth investments made and is now outlining a range between $2.1 billion and $2.4 billion, up from $2 billion previously. These estimates are slightly above our current forecast of $2.1 billion, but given recent investments we still need to incorporate into our forecast, we consider them reasonable. Targa's assets from a NGL perspective (LPG exports) as well as a fractionation perspective are very well positioned to excel in this environment.

For more on our NGL forecast, please see our July Energy Observer, "The Natural Gas Liquids Rubik's Cube Solved."