EUR 850.00 For Business Accounts Only

Morningstar | TRGP Updated Star Rating from 19 Feb 2019

In its second major investment in midstream following a $3.3 billion buyout of Tallgrass' general partner and 44% stake in its limited partner at the end of January, Blackstone (via its Tactical Opportunities and GSO Capital Partners funds) has agreed to purchase 45% of Targa's Bakken-based Badland assets for $1.6 billion. We don't expect a material change in our $52 fair value estimate or no-moat rating. Broadly, we think both investments by Blackstone speak to the general undervaluation of the midstream industry and highlight the valuation disconnect between what private parties are willing to pay for midstream assets versus the public markets. We would not be surprised to see further investments by Blackstone and other private equity players into the industry, given its propensity for relatively stable fee-based income and its ability to support high levels of debt, both features that are relatively important to private equity investors.

It's not clear how much the assets generate   in terms of EBITDA , but we do know that Targa paid about $950 million for the assets in 2012 and has invested at least $250 million in growth capital, while volumes have doubled over the same time frame. At the same time, valuation multiples for midstream assets have generally declined. Thus, valuing Badlands at $3.6 billion seems like a fair price, especially considering Targa was a motivated seller given the need to fund its 2019 capital spending plan. Blackstone will fund future capital commitments to Badlands on a pro-rata basis, and both Targa and Blackstone will receive quarterly distributions.

The transaction will essentially remove the risk of a large equity issuance this year and ease any potential constraints on its distribution per unit payouts. This level of funding certainty is useful as more volatile frac spread margins have introduced a higher level of uncertainty into Targa's near-term outlook.