The Daley Note: November 27, 2023
Targa Resources (TRGP) reported 3Q23 earnings about $35MM below Street estimates, and the name has traded down about 3% since November 2. East Daley Analytics continues to expect strong growth as TRGP follows a formula for outperformance.
Targa expects EBITDA to fall to the low end of the $3.5-3.7B guidance range for 2023.
EDA forecasts 10%+ CAGR for Targa from 2023 to 2025 in the company Financial Blueprint. The robust growth is a result of operational leverage tied to Permian growth as new infrastructure comes online to feed TRGP’s wellhead-to-dock value chain. We have highlighted Targa’s ambitions to stay the top natural gas processor in the Permian Basin. The company is building between the Midland and Delaware plants with more than 1.3 Bcf/d of processing capacity through 1H25.
Processing expansions have historically been a very good thing for Targa’s downstream assets. The figure shows TRGP’s Permian NGL plant volumes alongside throughput to Mt. Belvieu on the company’s Grand Prix NGL pipeline, according to the TRGP Blueprint data. Growth at the wellhead, unsurprisingly, drives growth on Grand Prix with a correlation of 0.98.
One adjustment East Daley made to Targa’s reported data is we have excluded NGLs produced by the Lucid system. Targa acquired the Lucid G&P system in July 2022 when those plants were already connected to competing pipelines owned by ONEOK (OKE; West Texas NGL), Enterprise Products (EPD; Shin Oak), Energy Transfer (ET; Lone Star), as well as the EPIC system. Targa gained scale from acquiring the massive G&P system in the Delaware, while the downstream benefits from the Lucid acquisition are deferred until existing contracts roll off.
Lucid’s plants went into service in 1Q17 (Red Hills II), 3Q17 (Roadrunner), 3Q18 (Red Hills III), and 3Q19 (Red Hills IV). Knowing in-service dates clarifies when legacy NGL production may be diverted to Targa’s own NGL pipeline, Grand Prix.
Growth in NGL production from new plants is straightforward – Targa will likely deliver NGLs from the tailgate of its new plants to its own NGL pipeline, as others like Enterprise would do. Legacy volume risk is more complicated, a topic East Daley will dive into in the 2024 Dirty Little Secrets on December 13. – Rob Wilson, CFA Tickers: EPD, ET, OKE, TRGP.
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