Morningstar | Targa's First Quarter Meets Expectations; Full-Year Guidance Remains Reasonable
Targa's first-quarter results met our expectations, and full-year guidance by management looks achievable. We plan to maintain our $48 fair value estimate and no-moat rating. This quarter marks a bit of a lull before a number of Targa projects come online in the second half of 2019, primarily the Grand Prix natural gas liquids pipeline, which should drive second-half 2019 earnings and boost 2020 numbers as well. The pipeline will move 300,000 bpd of natural gas liquids to Mont Belvieu from the Permian Basin, connects Targa assets at both ends (G&P, fractionation, LPG exports), and is expandable to 550,000 bpd. Overall EBITDA of $314 million was down sequentially as Targa recognized a large non-reoccurring payment for a since terminated splitter arrangement in the fourth quarter, but modestly increased year over year due to higher gathering and processing volumes in the Permian. A coverage ratio of below one would normally be a negative, but we don't expect it to persist with the second-half ramp-up.Targa's persistent need to fill capital gaps has been solved for the near term with the Badlands sale, which raised $1.6 billion in cash from Blackstone. We expect leverage to peak this year at over 5 times before deleveraging in 2020, given a much lower expected capital spend of around $950 million compared with about $2.3 billion this year. The spend has been worth it in terms of building a tighter level of integration between Targa assets, linking its gathering and processing operations to new pipelines (Grand Prix and the Gulf Coast Express(GCX)), and downstream assets such as fractionation and LPG exports. The downside is that in order to fund its effort, Targa had to sell down its stakes in the pipeline projects, so it only retains 55% of the Grand Prix Permian to Mont Belvieu connection (the primary fee generator, in our view) and 5% of the GCX. Targa retains 100% of any Grand Prix economics that move from North Texas, and Southern and Central Oklahoma.
Targa Resources is a provider of midstream services and is a midstream energy company. The company operates in two segments: Gathering and Processing, which consists of gathering, compressing, dehydrating, treating, conditioning, processing, and marketing natural gas and gathering crude oil; and Logistics and Marketing, which includes activities necessary to convert mixed natural gas liquids (NGLs) into NGL products and provides certain services such as storing, fractionating, terminaling, transporting and marketing of NGLs and NGL products, storing and terminaling of refined petroleum products and crude oil and certain natural gas supply and marketing activities in support of its other businesses.
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