Targa Earnings: Volume Strength Goosed by Recent Deal Activity, Offset by Lower Pricing

Targa Resources’ TRGP second-quarter results were solid, in our view. The firm reaffirmed 2023 EBITDA guidance at the midpoint of $3.6 billion; this is slightly below our estimate of $3.7 billion, as we think volumes are tracking to better results. We continue to expect near-term volume strength across Targa’s portfolio to offset pricing and marketing weakness in the short run. 2023 growth capital spending guidance also is unchanged at a midpoint of $2.1 billion. After updating our model, we maintain our $72 fair value estimate and no-moat rating.

Targa’s second-quarter EBITDA was $789 million compared with $666 million last year. The improvement is mainly attributable to higher gathering and processing volumes driven by deal activity in 2022, as well as higher natural gas liquids volumes on the logistics side. Still, EBITDA declined 16% sequentially, as the 54% year-over-year drop in realized natural gas liquids pricing is having an impact. Pricing is now below Targa’s assumptions underlying 2023 guidance. Despite the near-term weakness in pricing, Targa announced two new gathering and processing plants in the Permian due online in late 2024 and mid-2025 to meet demand from Permian gas producers.

From a capital allocation standpoint, Targa bought back $149 million in shares in the quarter, taking its total for 2023 so far to $201 million. As the average price was about $71.49 compared with our $72 fair value estimate, we see the repurchases as value-neutral.