Investments In Permian And Delaware Basins Will Expand Future NGL Volumes

Key Takeaways

• Infrastructure expansion in key basins and successful project execution will increase NGL volumes and service capacity, boosting revenue and earnings growth.
  
• Strategic financial maneuvers and shareholder returns initiatives indicate strong financial health, enhancing cash flow, net margins, and EPS.
  
• High capital spending and strategic investment plans could heighten financial risk and impact margins amid economic and execution uncertainties.

Catalysts

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

• Targa's investment in expanding infrastructure, such as new plants in the Permian and Delaware Basins, is expected to drive significant growth in NGL volumes, positively impacting revenue and adjusted EBITDA.
  
• Accelerated commercial success and new projects like the Delaware Express pipeline, new fractionators, and LPG export expansion are positioned to accommodate increasing demand, contributing to higher revenue streams and robust earnings growth.
  
• Successful project execution with Train 12 and the LPG export expansion at Galena Park is anticipated to increase capacity significantly, enhancing revenue and EBITDA through expanded service offerings and volume throughput.
  
• The buyout of the preferred equity in Targa Badlands and refinancing at a lower cost with debt will result in annual cash savings and increased free cash flow, contributing positively to net margins and shareholder value.
  
• Targa's plan for a 33% increase in the annualized 2025 common dividend per share, alongside ongoing opportunistic share repurchases, reflects strong cash flow generation and financial health, likely boosting earnings per share (EPS).

Targa Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Targa Resources's revenue will grow by 14.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $10.95) by about March 2028, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.0x on those 2028 earnings, down from 35.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Targa Resources Future Earnings Per Share Growth

Risks

• Targa Resources is accelerating its growth spending on additional downstream infrastructure, which may impact free cash flow and increase financial risk if anticipated volume growth does not materialize as expected.
  
• Economic conditions such as weak natural gas and NGL prices can impact Targa's revenue and profitability, despite efforts to hedge a portion of its non-fee-based margins.
  
• The announcement of multiple projects increases execution risk, which could affect project timelines and financial outcomes, potentially impacting future earnings and growth projections.
  
• The strategic focus on high capital spending in an inflationary environment and the potential imposition of new tariffs may lead to higher project costs, impacting net margins or returns on investments.
  
• Targa's leverage is set to increase due to strategic repurchases and investment plans, which could affect the company's financial flexibility and shareholder returns if operating results do not meet expectations.

Valuation

• The analysts have a consensus price target of $217.848 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 $259.0, and the most bearish reporting a price target of just $157.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.3 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of $205.57, the analyst price target of $217.85 is 5.6% 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.