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ssuaphoto
Back in early December, I wrote that Targa Resources (NYSE:TRGP) had some of the best growth prospects in the midstream space, starting coverage of the stock with a “Buy” rating. The stock has returned nearly 20% since then. With the company reporting results last month, let’s catch up on the name.
As a quick reminder, TRGP is a midstream company that operates in a number of basins throughout the U.S. Within its Gathering & Processing (G&P) segment the company gathers, processes, treats, and transports natural gas, and to a lesser extent it the gathers and stores crude oil. The Permian is its biggest area of operation for the segment.
The company’s Logistics & Transportation segment, meanwhile, is involved in NGL transportation & fractionation, LPG exports, and marketing. The Grand Prix pipeline is its most important asset in this segment.
For its Q4 reported in mid-February, TRGP saw its adjusted EBITDA increase 14% to $959.9 million from $840.4 million a year ago.
The company’s G&P segment saw its adjusted operating profit be essentially flat $722.0 million.
Natural gas throughput for the quarter was 7.1 Bcf/d, an increase 10% year over year. NGL throughput rose 15% year over year to 881.7 MBbl/d. Crude throughput in the Badlands averaged 105.2 MBbl/d, a -7% year over year decrease, while Permian crude throughput fell -3% to 27.5 MBbl/d
In the Permian, natural gas throughput climbed 11% to 5.3 Bcf/d, while NGL throughput jumped 15% to 708.9 MBbl/d.
In its Logistics & Transport segment, adjusted operating margin rose 24% to $638.6 million.
NGL transport volume soared 44% to 722.0 MBbl/d, while fractionation volumes rose 13% to 844.8 MBbl/d. Export volumes climbed 45% to 434.5 MBbl/d.
TRGP generated $709.7 million in distributable cash flow in the quarter and $2.62 billion for the year. Free cash flow was $73.7 million for the quarter and $392.7 million for the year.
TRGP ended the year with leverage of 3.6x. It bought back 475,040 of its shares at a weighted average price per share of $85.52 in the quarter.
Looking ahead, TRGP guided for adjusted EBITDA of between $3.7-3.9 billion, representing about an 8% increase. It said a 30% change in its commodity prices assumption of $75 WTI, 65 cents NGLs, and $1.80 Waha natural gas would impact results by -$75 million on the downside, while having a $165 million positive impact if prices rose 30%.
TRGP forecast growth capex to be between $2.3-2.5 billion. It is expecting maintenance capex of around $225 million.
For Q1, the company is expecting adjusted EBITDA to be lower than Q3 2023 due to cold weather impacting volumes.
For 2025, it is looking for growth capex to drop to around $1.4 billion, as key expansions get completed in early 2025.
Discussing its 2025 outlook and beyond on its Q4 earnings call, CFO Jennifer Kneale said:
“We believe that there will continue to be strong growth in Permian volumes on our system going forward, which is going to drive incremental volumes through our downstream assets, requiring continued investments, which will continue to be at attractive returns, particularly given our efforts around adding fees and fee floors. Downstream projects are larger and spending is lumpier. As those projects come online and we benefit from the operating leverage associated with increased available capacity, our growth capital spending moderates as evidenced by our current expectation of $1.4 billion of capital spend in 2025. Across multiple years, we would expect growth capital spend in an environment of continued volume growth to approximate around $1.7 billion. We are bullish Permian growth going forward but are often asked the question, how much capital would it take to maintain volumes? And our answer is approximately $300 million. This is not a scenario that we anticipate. It is merely intended to be instructive and hopefully helpful in demonstrating the strength of the Targa value proposition across the downside scenario, when the strength of our free cash flow generation and balance sheet would leave us very well positioned.”
TRGP turned in a good quarter, solidly growing adjusted EBITDA and DCF despite weak natural gas and NGL prices. The company is about 90% fee based, but does have some commodity price sensitivity.
Meanwhile, the company forecast some nice growth in 2024, although 2025 should be really strong as a lot of projects come online at the start of the year. TRGP gets about a 5.5x build multiple on its capex spend, which should add over $400 million in EBITDA in 2025 from current projects, depending on timing. With a step down in growth capex spend in 2025, the company will then be able to reduce debt, buyback shares, and raise its dividend.
TRGP trades at 9.7x the 2024 EBITDA consensus of $3.83 billion. Based on the 2025 EBITDA consensus of $4.22 billion, it is valued at 8.8x.
The stock has a free cash flow yield of about 1.8% and DCF yield of around 11.8%. It pays out a dividend yield of 3% based on the 50% dividend increase it is expecting next quarter.
TRGP is one of the more expensive midstream operators, although it has some of the best growth prospects over the next couple of years due to its growth projects. It has also historically traded at a higher multiple, often over 10x EV/EBITDA.
TRGP Historical Valuation (FinBox)
Based on a 9-11x multiple on 2025 adjusted EBITDA, I’d value TRGP between $103-$141, with the midpoint at $122.
TRGP just posted some solid Q4 results and issued very positive commentary about 2024 and 2025. The company has some of the best growth in the midstream space, and is very well positioned to benefit from the growth coming out of the Permian.
Meanwhile, as capex comes down in 2025, the company will be set to generate a lot of cash, which it can then use to increase its dividend, buy back stock, and pay down debt. However, it will still have good opportunities to continue to grow in the Permian in the years to come as well.
Given its strong outlook and slate of growth projects, I’m going to take my target from $108.50 up to $122 to reflect this strong outlook. I continue to rate the stock a “Buy.”
The biggest risks to the stock would be a slowdown in growth in the Permian. The basin has seen natural gas takeaway bottlenecks in the past that have slowed down production growth. But with large companies like Exxon Mobil (XOM) and Chevron (CVX) touting strong Permian growth, this risk looks mitigated at this point. Of course, weak oil prices could always change drilling plans.