Though crude oil prices have been rebounding lately, this spring’s price crash sent shockwaves through the U.S. midstream industry, which had just emerged from a decade of massive infrastructure investment in response to unprecedented upstream production growth. Just as midstreamers were looking forward to steady earnings growth, waves of huge capex cuts and well shut-ins by producers shattered forecasts and shifted strategic instincts toward survival instead of growth. Every company is different, of course, but a lot can be learned by examining a single firm in detail to see how it will fare in the current market environment, given its particular set of assets and arrangements. Take Targa Resources. An analysis of its performance provides insights into the outlook for integrated natural gas and NGL assets, especially in the Permian Basin, as well as the value of forming joint ventures. Today, we preview our new Spotlight report on Targa.
Spotlight is a joint venture of RBN Energy and East Daley Capital Advisors. With the support of Oil & Gas Financial Analytics, the Spotlight reports provide “deep dives” into the fundamentals that shape the outlook for midstream energy companies and is included as part of our Drill Down report series, which is available to RBN Backstage Pass members. Spotlight should not be viewed as investment advice.
Targa Resources was founded as a master limited partnership in 2003 by management and Warburg Pincus as the general partner of what was then called Targa Resources Partners. The MLP built a portfolio of natural gas processing and gathering assets in U.S. oil-weighted plays such as the Permian Basin, the Eagle Ford, the Anadarko and the Bakken, as well as crude oil gathering and terminaling assets in North Dakota and West Texas. After becoming one of the first midstream entities to simplify its structure by absorbing its MLP and eliminating incentive distribution rights (IDRs), Targa made the strategic decision in 2017 to invest more than $8 billion to become a major integrated natural gas and NGL midstream firm; it did so by building an NGL pipeline to connect its gathering and processing (G&P) systems in the Permian, North Texas and Oklahoma with expanding fractionation and export facilities in Texas and Louisiana. Although capital spending on the buildout significantly boosted debt, Targa expected that its operating margin and EBITDA growth, driven by growing associated Permian gas output and rising export demand for NGLs, would allow it to deleverage — or reduce its debt — as capex dropped off in 2020-23.
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