Expanding Permian Operations And Strategic Investments Set To Drive Robust Revenue And Earnings Growth

Key Takeaways

• Significant capacity expansion via new plants and strategic investments in pipelines indicate a focus on volume growth and infrastructure enhancement.
  
• Aggressive growth capital spending forecasts and common share repurchases demonstrate strong financial health and a commitment to boosting long-term financial performance.
  
• Targa Resources faces risks including strained cash flows from capital expenditures in the Permian Basin, volatile commodity prices, and operational challenges impacting revenue and net margins.

Catalysts

Together with its subsidiary, Targa Resources Partners LP, owns, operates, acquires, and develops a portfolio of complementary domestic midstream infrastructure assets in North America.

• The introduction of new plants in the Permian Basin, such as the Roadrunner II plant and the Train 9 fractionator, indicates significant capacity expansion, which should drive volume growth and subsequently increase revenue.
  
• The company's participation in the Blackcomb pipeline joint venture showcases a strategic investment in natural gas transportation infrastructure, projected to enhance future earnings with a capital investment of less than $200 million.
  
• Enhanced volume commitments and higher-than-anticipated Permian volumes highlight operational excellence and market demand fulfillment, likely leading to increased revenue and improved net margins through optimized asset utilization.
  
• A record $355 million of common share repurchases reflects strong financial health and confidence in future growth prospects, potentially improving earnings per share (EPS) through reduced share count.
  
• Updated growth capital spending forecasts ($2.7 billion for 2024, $1.7 billion for 2025) underscore an aggressive investment in growth projects, expected to significantly boost EBITDA and bolster long-term financial performance through strategic capital deployment.

Assumptions

• Analysts are assuming Targa Resources's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $9.44) by about October 2027, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2027 earnings, down from 33.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.8x.
• Analysts expect the number of shares outstanding to decline by 2.0% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Risks

• The significant increase in capital expenditures, particularly for growth in the Permian Basin, could strain Targa Resources' cash flows and impact net margins if the anticipated volume growth does not materialize as expected.
  
• Exposure to volatile commodity prices, despite hedging strategies and fee-floor contracts, presents a risk to earnings given the unpredictable nature of energy markets.
  
• The reliance on a strong Permian activity level for volume growth carries the risk that a downturn in drilling and production in the region could adversely affect revenue and earnings.
  
• Operational risks, such as those related to the execution of large-scale infrastructure projects on time and budget, could negatively affect net margins and earnings if delays or cost overruns occur.
  
• The potential for regulatory and environmental challenges, particularly around new projects like carbon capture initiatives or natural gas pipelines, could introduce unforeseen costs or delays impacting revenue and net margins.

Valuation

• The analysts have a consensus price target of $166.93 for Targa Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $202.0, and the most bearish reporting a price target of just $111.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.7 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $164.41, the analyst's price target of $166.93 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.