Organic Investment and Atlas Acquisition Drive 35% Dividend Growth, 23%+ Capital Appreciation Potential
$2.6 billion investment on capacity expansion and Atlas Energy acquisition will drive earnings growth and increase distributions by 35% in 2015
Steady quarterly dividend growth since IPO offers solid dividend income
Shares trade 23% below average Wall Street price target
Targa Resources Corp. (NSYE: TRGP) owns general and limited partner interests, and incentive distribution rights (IDRs), in Targa Resources Partners LP (NYSE: NGLS), an energy Master Limited Partnership (MLP) focused on the midstream gas and natural gas liquids (NGL) sector. Targa Resources Partners (the “Partnership”) owns, develops, acquires and operates midstream energy assets that gather, compress, treat, process, store, fractionate and sell natural gas and NGLs, and gather, store and sell refined petroleum products and crude oil.
Targa has a significant footprint in America’s leading shale and resource plays (Bakken, Barnett, Permian, onshore Louisiana and Gulf of Mexico) which will drive near-term growth through significant capital investment ($2.6 billion) in organic capacity expansion across its asset base, driven by strong industry fundamentals in North America with facilities that cannot be easily replicated.
The company owns the second largest fractionation asset-base in Mont Belvieu, Texas, which is the hub of NGL operations in North America and is seeing growth related to NGL production and capacity expansion. In addition to its leading position at Mont Belvieu, Targa owns the Galena Park Marine Terminal, 1 of only 2 commercial NGL export terminals on the Gulf Coast, well connected to Mont Belvieu.
Shares Up 41% over Past Year
Targa Resources Corp. went public in December 2010. Since then, shares are up 345%, with a gain of 41% over the past year. Shares closed at $114.41 on 11/28/2014, giving the company a market capitalization of $4.81 billion and a dividend yield of 2.57%.
At $114.41, shares traded at the middle of the company’s 52 week range of $77.72 – $160.97, below their 50-day moving average of $121.62 and their 200-day moving average of $129.48, and offer compelling upside after coming off earlier highs. Shares trade with a price-to-earnings ratio of 49.41x and earnings per share of $2.31.
Shares trade at 49.4x trailing earnings and just 5.8x trailing cash flow which reflects significant upside as the company’s $2.6 billion in capital expenditures (initiated in 2013) start to grow cash flow through capacity expansion in gathering, processing, fractionation and export terminal connectivity, combined with solid profitability margins.
Steady Dividend Growth, Q3 2014 Dividend up 29% Annually (2.57% Yield)
Since its December 2010 IPO, Targa has steadily increased dividends quarter over quarter, without interruption, up from $1.03 annualized in Q4 2010 to $2.93 in Q3 2014.
On October 23, 2014, Targa Resources announced a Q3 2014 cash dividend of $0.7325 per common share ($2.93 per share, annualized) that was paid on November 17, 2014, up 29% year-over-year and up 6% over the previous quarter.
In addition, for Targa Resources Partners, the Board announced a Q3 2014 cash distribution of $0.7975 per share ($3.19 per share, annualized), paid November 14, 2014.
Ownership Structure (Pre-Atlas Acquisition)
Targa Resources Corp. owns an 11.2% limited partner interest in Targa Resources Partners (88.8% owned by public unitholders) and 100% of Targa Resources GP LLC, the General Partner, which owns a 2% GP interest and all the IDRs.
Targa Resources Partners operates two business divisions: Gathering and Processing, and Logistics and Marketing.
Well Positioned Midstream Gas, NGL Assets
The Gathering and Processing division owns and operates 11,300 miles of natural gas pipelines, 10 processing plants and 2 crude oil gathering and storage facilities, in the Permian, Fort Worth and Williston basins. The division also operates strategically located assets near the Henry Hub of Louisiana.
The Logistics and Marketing division has gathering and processing assets in Mont Belvieu, Galena Park and Lake Charles, and other integrated assets that deliver NGLs to customers under fee-based contracts. The division also owns and operates terminal facilities in several states to serve a broader market.
Strong Export Demand Will Fuel Long-Term Growth
Demand for US natural gas (propane and butane) has steadily grown over the years and shows no signs of abating as energy demand increases in an increasingly affluent and digital world. Targa should also benefit from a price advantage for US produced natural gas relative to Saudi Contract prices. Targa also benefits from ownership of 1 of only 2 operating LPG export facilities on the Gulf Coast.
Acquisition of Atlas Pipeline Partners LP (APL) Diversifies Portfolio for Growth
On October 13, 2014, Targa Resources Partners entered into a definitive agreement to acquire midstream natural gas company, Atlas Pipeline Partners LP. Atlas Pipeline owns 17 gas processing plants, 18 gas treatment facilities and 11,200 miles of gas gathering pipelines in Oklahoma, Kansas, Texas and Tennessee. Atlas Pipeline is a subsidiary of Atlas Energy LP (ATLS), an MLP that owns general and limited partner interests in upstream oil and gas company Atlas Resource Partners LP.
Targa acquired Atlas Pipeline for $38.66 per unit, valuing Atlas Pipeline at $7.7 billion. Atlas Pipeline unitholders will receive a $1.26 in cash and 0.5846 Targa Resources Partners (NGLS) units for each Atlas Pipeline unit held.
Post-acquisition, Targa owns a 9% LP interest in Targa Resources Partners and 100% of its General Partner.
As part of the deal, Targa Resources will acquire parent company Atlas Energy – for $1.9 billion – after it spins-off and distributes non-related Atlas Pipeline assets. Atlas Energy unitholders will receive $610 million in cash, 10.35 million Targa Resources shares and 100% of distributed assets.
Atlas Acquisition Will Deliver 35% Dividend Growth in 2015
The Atlas acquisition strengthens Targa’s presence in the Permian and Bakken Basins and extends its presence into the Mississippi Lime and Eagle Ford shales, making the Partnership one of the largest gas and NGL MLPs with an enterprise value of $23 billion and EBITDA of approximately $1.32 billion – $1.4 billion. The acquisition also increases Targa Resources Partners’ revenue diversification to 40% fixed fee and 60% percent-of-proceeds, up from 32% and 68% respectively.
The acquisition is immediately accretive to distributable cash flow at TRGP and NGLS, and distributions are expected to increase by 11% – 13% for Targa Resources Partners and by 35% for Targa Resources Corp.
With Atlas, Targa will also enhance its credit profile and move Partnership credit metrics closer to investment grade by using stronger cash flow to reduce debt and leverage.
Wall Street Bullish on Atlas Pipeline Acquisition
Following the Atlas acquisition announcement, several Wall Street firms upgraded Targa Resources shares and raised price targets, with 15 analysts calling shares a Buy with an average 12-month price target on $140 (23% higher than $114 price) and a target price range of $114 – $180 – so shares offer significant upside off current levels in addition to solid dividend income growth.
Senior Notes Offering to Reduce Credit Facility Borrowings
On October 28, 2014, Targa Resources Partners closed its public offering of $800 million of senior unsecured notes that yield 4.125% and mature on November 15, 2019. The notes were priced at 100% of the principal amount. Management will use net proceeds to reduce credit facility borrowings and for general partnership purposes.
Joe Bob Perkins serves as Chief Executive Officer of Targa Resources and has been with the company since its formation on October 27, 2005. Perkins previously held senior positions with Reliant Resources, Houston Industries, Coral and Tejas.
Matthew Meloy serves as Senior VP, Treasurer and Chief Financial Officer of Targa Resources and has been with the company since 2006. Meloy previously served as Assistant VP in the structured finance group of The Royal Bank of Scotland.
Michael Heim serves as President and Chief Operating Officer of Targa Resources. Heim has been COO of the company since its formation.
Over the years, management has proven itself through solid earnings and dividend growth, and share price appreciation, and with the Atlas acquisition, will continue to deliver on organic and acquisitive growth.
Strong Operating Margins Help Targa Resources Grow Net Income by 88%
On November 4, 2014, management released Q3 results for the three months ended September 30, 2014. Targa Resources Corp. reported net income of $30.7 million, or $0.73 per share, up 87% from $0.39 per diluted common share in Q3 2013. The company’s results are reported as consolidated with the Partnership.
Revenues at the Partnership rose on higher NGL and natural gas prices, volumes and export activity, directly related to capacity expansion across the company’s asset base.
As of September 30, 2014, Targa Resources Corp. had $78.8 million in cash and cash equivalents, $3.14 billion in long-term debt and $31 million in distributable cash flow.
Full Year 2014 Guidance
Looking ahead, management expects FY2014 EBITDA in the range of $925 million – $975 million, fee-based margin above 65%, growth capital expenditures totaling $780 million and dividend growth above 25% (rising to 35% in 2015 after the Atlas acquisition closes).
Targa Resources, after the Atlas acquisition, will further strengthen its midstream NGL and natural gas presence, with diverse sources of revenue from North America’s main shales, basins and resources. The company also expects dividends to grow by 35% in 2015 from the Atlas acquisition. Shares are currently priced 23% below Wall Street’s mean price target of $140 and offer solid capital appreciation and dividend growth potential, with stable cash flows driven by fee-based revenue growth and the company’s unique export capability.