On Tuesday, July 16, Targa Resource Partners, LP (NGLS) announced a quarterly distribution increase of $0.0175/share to bring its upcoming dividend payout to $0.715/share. It should be noted that this boost represents a 3.00 % increase from its prior dividend of $0.6975/share, which was paid on May 15. In the wake of Targa's distribution increase I wanted to not only examine the company's recent performance, but also take a look at several catalysts behind my decision to consider a long-term position in the company.
Performance and Trend Status
On Tuesday, shares of Targa Resource Partners -- which currently possess a market cap of $5.35 billion, a P/E ratio of 72.04, a forward P/E ratio of 30.84, and a forward yield of 5.43% ($2.86) -- settled at $52.59. Based on Tuesday's closing price, shares of Targa Resource Partners are trading 4.53% above their 20-day simple moving average, 7.77% above their 50-day simple moving average, and 23.84% above their 200-day simple moving average. These numbers indicate short-term, mid-term, and long-term uptrends for the stock, which generally translates into a buying mode for most traders.
An uptrend in Fractionation Spreads could help Targa
What are fractionation spreads and how do they affect companies like Targa Resource Partners? According to a recent article by Ingrid Pan, "Frac spreads depend on natural gas liquids and natural gas prices, and they increase when NGL prices increase relative to natural gas prices". Investors should keep in mind the fact that any change to the upside improves profits, and any change to the downside pressures profits.
When it comes to fractionation spreads, a number of companies in the natural gas processing sector tend to benefit when uptrends are present and tend to feel the heat when spreads are in a downtrend. Over the last 12 months fractionation spreads have fallen about 10% and if such trends continue the profits of not only Targa Resource Partners, but a number of its sector-based peers such as Williams Partners (WPZ) and Mark West Energy (MWE) could feel the associated pressure. In my opinion, each of these firms could see higher profits if spreads can demonstrate an improved performance over the next 12-24 months.
Recent Dividend Behavior
Since July 19, 2011, Targa Resource Partners, LP has increased its quarterly distribution in each of the last nine payable quarters (including the upcoming payout which will take place on August 15). From an income perspective, the company's forward yield of 5.43% ($2.86) coupled with its continued distribution increases make this particular stock a very viable income option for long-term investors in search of a higher-yielding play in the oil & gas pipeline sector.
When it comes to those who may be looking to establish a position in Targa Resource Partners, I'd continue to keep a watchful eye on not only the company's dividend behavior over the next 12-24 months, but also pay very close attention to any growth that may directly related to an increase in the fractionation spreads of natural gas. Since Targa Resource Partners is heavily dependent on the price of natural gas it should be noted that any significant drop could have a negative effect on both profits and subsequent distributions.