New Plants And Pipelines Will Expand Permian Supply Access

Key Takeaways

• Continued infrastructure investments and new plant projects are set to increase volume growth and positively affect future revenues and net margins.
  
• Strong capital allocation strategy focuses on EPS growth through share buybacks and maintaining a solid balance sheet.
  
• Oil price volatility and climate-related interruptions may impact Targa's volume growth, revenue, and margins amidst global market and competition challenges.

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 Resources is expecting meaningful volume growth due to no material changes in their customers’ drilling programs for 2025 and 2026, which should positively impact revenues.
  
• Several new plants and projects are on track to come online in 2025 and 2026, such as the Pembrook II, Bull Moose II, and Falcon II plants. These additions are expected to drive volume growth particularly in the Permian, impacting revenues and potentially net margins.
  
• Targa's continuous investment in infrastructure, like the Traverse pipeline project and Delaware Express NGL transportation pipeline, is anticipated to provide flow assurance and access to important markets, supporting supply growth and impacting future revenues positively.
  
• The planned LPG export expansion will increase loading capacity, supporting revenue growth by meeting strong global demand and maintaining a cost advantage in U.S. supply.
  
• By maintaining a strong balance sheet and executing share buybacks, Targa aims to enhance earnings per share (EPS) growth as part of its capital allocation strategy.

Targa Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Targa Resources's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $11.0) by about May 2028, up from $1.2 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 22.2x on those 2028 earnings, down from 28.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 2.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Targa Resources Future Earnings Per Share Growth

Risks

• Volatility in oil prices could lead to lower drilling activity and thus impact Targa's volume growth expectations, potentially reducing revenue from lower throughput.
  
• The impacts of winter weather events on Targa’s operations demonstrate vulnerability to climate-related interruptions, potentially affecting revenue and net margins if these become frequent.
  
• Global tariffs and evolving market dynamics could increase project costs, potentially impacting net margins if costs exceed budgeted estimates.
  
• Increased competition in LPG exports, coupled with uncertain global trade relations, could affect Targa's ability to maintain volume growth and pricing power, influencing future revenues from this segment.
  
• Economic uncertainty and potential shifts in capital allocation could redirect funds from growth projects, possibly affecting long-term revenue growth and earnings potential.

Valuation

• The analysts have a consensus price target of $209.555 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 $23.4 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $157.32, the analyst price target of $209.55 is 24.9% higher.
  
• 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.