Targa Resources: Performance Review And Way Forward

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About: Targa Resources Corp. (TRGP)
by: Aitezaz Khan
Summary

Financial analysis reveals improvement in balance sheet, revenues, operating income, and operating margins.

Operational analysis indicates a favourable outlook in FY 2019 due to expansion projects in the pipeline.

Technical analysis and short activity also indicate more upside in share price.

Thesis

In this article, I have analyzed the financial performance of Targa Resources (TRGP) during the 9-month period ended 30th September 2018. TRGP has improved its financial picture with a stronger balance sheet and has also witnessed growth in revenues, operating income and operating margins. Moreover, an evaluation of the operational performance and growth outlook of the company indicates that the stock shall witness more upside going forward, thanks to a few key pipeline projects that are expected to come online in FY 2019. Finally, a technical analysis of the company and the recent change in short selling activity indicates that the stock is likely to move north from the current levels.

Figure-1 (Source: Lawjobs)

Financial analysis

Let's consider the financial performance of TRGP during the nine-months ended 30th September 2018.

An evaluation of the balance sheet

TRGP has improved its financial picture with a stronger balance sheet. TRGP has witnessed an improvement in both current and non-current assets. However, there's a corresponding increase of ~$1 BB in its long-term debt. Moreover, the ~$0.8 BB increase in accounts payables and accrued liabilities (during the nine months), has been partially offset by a ~$330 MM decrease in other liabilities, as well as by a ~$210 MM increase in trade receivables. On the surface, this situation might indicate some issues with TRGP's working capital management, but the company has also strengthened its liquidity position by adding another ~$70 MM of cash assets during the period under review. Have a look at Figure-2, which identifies the key changes in TRGP's balance sheet during the 9 months (green and red circles).

Figure-2 (Source: Form 10-Q)

An evaluation of the income statement

In addition to a stronger balance sheet, TRGP has also witnessed an improvement in both revenues and operating income. Simultaneously, the company is also improving its operating margins (Figure-3).

Figure-3 (Source: YCharts)

This has helped TRGP to revamp its net income profile. Table-1 identifies the key items from TRGP's income statement at the end of Q3 2018. Table-1 [Prepared by Aitezaz Khan for Seeking Alpha]

We can see that the bottom line earnings (pertaining to the 9 months) have turned positive compared with a loss per share of ~$1.56/share. Going forward, this picture is expected to get better as TRGP is anticipated to deliver some key operational milestones during FY 2019 (discussed in the following section).

Operational profile and growth opportunities

TRGP's operations are significantly focused on its assets in the PB (Permian Basin). Apart from its Permian assets, the company also has asset positions in 3 other regions. These include Eagle Ford (in Texas), Bakken (in North Dakota), and the SCOOP/ STACK locations (in Oklahoma). Have a look at Figure-4 that identifies the locations of these assets.

Figure-4 (Source: January Presentation)

Furthermore, oil production from the PB has witnessed a continuous increase since FY 2010, and we can see (Figure-5) that the production chart has sharply gone up from ~ 100 MBbl/d (a thousand barrels/day) in 2010 to ~2,600 MBbl/d in 2018.

Figure-5 (Source: January Presentation)

TRGP has two target positions in the PB, namely the Delaware Basin and the Midland Basin. In the Delaware Basin area, TRGP plans to construct 2 new cryogenic plants (namely Falcon and Peregrine plants) with a capacity of processing ~250 MMcf/d (read: Million cubic feet per day) of natural gas. The Falcon and Peregrine plants are expected to go live by Q4 2019 and Q2 2020, respectively. Moreover, TRGP will also lay a high-pressure gas gathering pipeline covering an area of ~220 miles across the Delaware Basin. Figure-6 illustrates the locations of these expansion projects.

Figure-6 (Source: January Presentation)

On a similar note, TRGP will complete 2 processing plants in the Midland Basin. Each plant will have a capacity of 250 MMcf/d. The Hopson Plant is expected to go live by Q1 2019. Similarly, the Pembrook Plant will go live by the end of Q2 2019. The timely completion of these plants would mean that the share price will witness upside in the short-term as these plants would enhance the production potential attributable to the Midland Basin. Have a look at Figure-7 that shows the asset locations of these plants. Note that triangles 9 and 10 represent Hopson and Pembrook plants respectively.

Figure-7 (Source: January Presentation)

If we see Figure-6 and Figure-7 in tandem, we can identify red and blue dotted lines that emerge from the Delaware Basin and pass through the Midland Basin. The red line denotes the Grand Prix gas pipeline that is in progress and is expected to become fully operational by Q2 2019. This pipeline will transport raw NGLs including ethane, propane, butanes etc. through NGL fractionation trains and the end products are used for domestic and international supplies to petrochemical facilities, refineries, and other NGL customers.

In contrast, the blue line represents the GCX (read: Gulf Coast Express) residue gas pipeline and the end product transported from this pipeline is used in domestic power plants, utility companies, and industrial facilities.

Other near-term operational milestones: Apart from the operational outlook from the Permian assets, TRGP also has a few operational milestones in its SCOOP/STACK, Bakken and Eagle Ford properties. TRGP recently added 150 MMcf/d processing capacity at its Hickory Hills Plant in the Arkoma area (in the SCOOP region). Furthermore, it plans to add ~200 MMcf/d of processing capacity at its Little Missouri 4 Plant (in the Bakken area) by Q2 2019.

Technical Analysis

TRGP's 52-week price range lies between $33.55 and $59.21. At the time of writing, the stock last traded at ~$43.5 (below the mid-point value of the 52-week range). When we see the technical price chart (Figure-8) we can see that the share has witnessed a steep decline since October 2018, however, it's in recovery mode since the beginning of FY 2019. It's currently testing resistance levels between $42-44, however, its fundamental strength (demonstrated by improved financial performance and healthy operational outlook) indicates that the stock may explore the target price of ~$50 in the short-to-medium term.

Figure-8 (Source: Finviz)

Moreover, based on the recommendation of analysts, TRGP is a buy with a long-term target price of ~$55 (Figure-9).

Figure-9 (Source: Sharewise)

The possibility of upside is also strengthened by the fact that there has been a 3% decline in the number of TRGP shares shorted (Figure-10). In my view, this indicates that the market expects TRGP's price to go up from the current levels.

Figure-10 (Source: ShortSqueeze)

Conclusion

In the preceding discussion, we have seen that TRGP has strong footprints in the PB area and it's expanding its production and transmission capacity of both crude oil and natural gas (including NGLs). The company has a solid operational outlook in FY 2019 that is likely to enhance its production capacity.

TRGP has also improved its revenues, and operating income/margins during the period ended 30th September 2018. On the face of the balance sheet, the increased debt might be a problem. However, when we consider the operational outlook, then the enhanced debt does not appear to be a significant problem. Moreover, a technical price chart and the recommendations of analysts also support a buy call, which is reinforced by a decline in the short-selling activity in TRGP's shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.