Business Strategy & Outlook
Targa Resources is primarily a gatherer and processor, or G&P, of natural gas with an attractive position in the Permian Basin and other key U.S. shale plays. The firm weathered a very difficult 2020 via sharply reduced capital spending, a nearly 90% dividend reduction, and expense cuts. With a more stable 2021, it reduced debt by $1 billion that year, which was a good move. With leverage now at reasonable levels, returning the dividend to $1.40 a share from $0.40 per share annually makes sense. Targa’s longer-term growth picture over the next few years will be its Permian G&P position (where it added substantial assets with Lucid), liquefied petroleum gas exports, and the ramp-up of the Grand Prix natural gas liquids pipeline. The long-term concerns about the G&P business, because the high level of competitive intensity within the Permian will keep returns extremely low.
Targa is by no means particularly conservative on capital spending plans–its initial 2021 growth spending plans were twice to original expectations, as the rest of the midstream space hunkered down. While one has long expressed concerns about the leverage impact of the repurchase of the Stonepeak joint venture assets, Targa bought back the assets for $925 million, and then immediately sold off the Grand Coast Express stake for $857 million, essentially making the deal leverage neutral as management expected. Despite concerns about the G&P assets, were optimistic about the future of LPG exports and Grand Prix. LPG exports are largely under contract 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 425,000 barrels per day of NGLs by the estimates in 2022 (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 molecules and ability to earn multiple fees.
Financial Strengths
In 2020, Targa’s financial health was among the weakest in the midstream coverage universe. That 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 fell to 3.2 times by year-end, a commendable accomplishment for a firm that has historically run well over 4 times leverage. Before the Lucid deal for $3.55 billion, the expected leverage to decline to below 3 times in 2022, but it will end up around 3.5 times. After many years of operating as non-investment grade, Targa finally earned investment-grade ratings in 2022. Still, Targa’s exposure to weaker customers is greater than peers’, as it disclosed that less than half of its revenue by the 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 seem less likely after the Lucid deal, as Targa will not have any excess cash flow in 2022.
Bulls Say
- Targa is leveraged to the high-growth Permian, and its Grand Prix pipeline has been an important growth engine.
- 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 Description
Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.
(Source: Morningstar)
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