Category: Financial Markets

Business Strategy and Outlook

Targa Resources is primarily a gatherer and processor of natural gas with an attractive position in the Permian Basin and other key U.S. shale plays. 

Targa’s longer-term growth picture over the next few years will be its Permian G&P position, liquefied petroleum gas exports, and the ramp-up of the Grand Prix natural gas liquids pipeline. There are few long-term concerns about the G&P business, because of the high level of competitive intensity within the Permian will keep returns extremely low. 

 The future of LPG exports and Grand Prix are quite attractive. LPG exports are largely contracted out to 2022 and sent mainly to Asian and Latin American markets. India remains a potentially attractive option under a government scheme designed to encourage LPG usage. Targa has wisely expanded its export capacity recently, and volumes are at record levels.

The Grand Prix NGL pipeline will be a highly attractive asset that takes advantage of Targa’s position in the Permian Basin to move over 350,000 barrels per day of NGLs by our estimates in 2021 (expandable to 550,000 b/d) to Mont Belvieu, and links Targa assets at both ends of the pipe, giving it more control over the molecule and ability to earn multiple fees. The Grand Prix pipeline will reduce Targa’s costs for NGLs, as it will no longer pay third-party tariffs to transport its NGLs to market.

Financial Strength 

In 2020, Targa’s financial health was weak but  has changed in a strong energy market in 2021 and Targa’s own efforts to fix its balance sheet. Targa has repaid $1 billion in debt in 2021, funded with strong earnings and lots of free cash by cutting the dividend and capital spending, and leverage is expected to reach 3.25 times by year-end, a commendable accomplishment for a firm that has historically run well over 4 times leverage. Still, Targa’s exposure to weaker customers is greater than peers’, as it disclosed that less than half of its revenue by our estimates is from investment-grade or letter of credit-backed customers. Peers tend to be around 75%-85% investment-grade or letter of credit-backed.Targa has boosted the dividend to $1.40 per share annually in November 2021, up from the $0.40 annually it paid out since March 2020. Previously, the payout was $3.64 annually. Share buybacks are now on the menu, as even after the expected Stonepeak repurchase in 2022 for $925 million, Targa will still have about $250 million-$300 million in excess free cash flow.

Bull Says

• Targa is leveraged to the high-growth Permian, and its Grand Prix pipeline is expected to increase volumes 25% in 2021. 
• Targa has reduced debt by $1 billion in 2021, which is a good accomplishment for what has historically been a highly leveraged firm. 
• Targa is a significant fractionation player at the attractive Mont Belvieu hub.

Company Profile

Targa Resources is a midstream firm that primarily operates gathering and processing assets with substantial positions in the Permian, Stack, Scoop, and Bakken plays. It has 813,000 barrels a day of gross fractionation capacity at Mont Belvieu and operates a liquefied petroleum gas export terminal. The Grand Prix natural gas liquids pipeline recently entered full service.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

After NiSource’s separation from Columbia Pipeline Group in 2015, it now derives all of its operating revenue from its regulated electric and natural gas distribution utilities. About 60% of operating income comes from its six natural gas distribution utilities. The remaining 40% comes from its electric utility business in Indiana. NiSource to invest more than $10 billion over the next four years, including what could be nearly $3 billion of renewable energy projects in Indiana, where NiSource enjoys favorable regulation.

In October 2020, NiSource sold its Columbia Gas of Massachusetts utility and received $1.1 billion of proceeds that it used to strengthen the balance sheet and prepare for its planned infrastructure investments. The sale came nearly two years after a natural gas explosion on NiSource’s Massachusetts system killed one person north of Boston. Insurance covered roughly half of the almost $2 billion of claims, penalties, and other expenses, but the event was a public relations nightmare.

Financial Strength

NiSource has issued a substantial amount of equity in the past few years in part to fund its large infrastructure growth projects and in part to cover liabilities arising from the Massachusetts gas explosion. This dilution and the sale of Columbia Gas of Massachusetts has kept earnings mostly flat since 2018. NiSource’s debt/capital topped 67% at year-end 2017, but huge equity infusions have brought that down to more sustainable levels in the mid-50% range. NiSource issued over $1 billion of common stock and $880 million of preferred stock in 2018 and 2019. The Massachusetts utility sale in 2020 raised $1.1 billion, and NiSource issued $862.5 million of convertible preferred equity units in early 2021.

NiSource has grown its dividend nearly 40% since the 2015 Columbia Pipeline Group spin-off, but the growth has not been consistent. The company increased its dividend in mid-2016 by 6.5% and again by 6.1% in the first quarter of 2017, then by 11.4% in 2018. But the 2019 dividend increase was only 2.6% following the Boston gas explosion. It is Expected that dividend growth might pick up in 2024 once NiSource is past the peak of its five-year capital spending plan and its equity needs shrink.

Bulls Say’s

• Dividend is expected to grow near 5% annually during the next few years before accelerating to keep pace with earnings in 2024 and beyond.
• NiSource should benefit from Indiana policymakers’ desire to cut the state’s carbon emissions by replacing coal generation with renewable energy, energy storage, and possibly hydrogen.
• New legislation has improved the regulatory framework in Indiana for NiSource’s electric and natural gas distribution utilities.

Company Profile

NiSource is one of the nation’s largest natural gas distribution companies with approximately 3.5 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewables.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.