I added Targa Resources Partners (NGLS) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because the units offer a really attractive potential for dividend growth and capital gains. The current dividend, at 6.81% on January 11, isn’t any too shabby either. (For the most recent update on that portfolio see my post http://jubakpicks.com/2013/01/11/reformatting-my-dividend-income-portfolio-for-a-period-when-dividend-investing-gets-more-important-and-tougher-too/
The big upside here comes from Targa’s acquisition of oil and natural gas pipelines from Saddle Butte Pipeline that for the first time moved Targa into the Bakken shale formation of North Dakota that is the heart of the U.S. oil boom. The deal also gave Targa its first oil pipelines—before that Targa had been a natural gas only pipeline play. The North Dakota oil boom is currently very underserved by pipelines, which gives pipeline companies with footholds in the area, and that now includes Targa, an opportunity to invest today’s cheap money in profitable new capital projects.
After the deal Targa reiterated its projections for 10% growth in distributions to holders of the MLP (master limited partnership) units in 2013 from 2012 levels. Read more
In my November 23 post on buying income assets in what increasingly looks like a bubble in income assets http://jubakpicks.com/2012/11/23/i-think-the-argument-that-were-in-an-income-asset-bubble-is-easy-to-make-deciding-when-it-might-burst-and-what-to-do-about-it-are-much-harder/ , I suggested opportunistically looking for income-producing assets that had been sold down at the moment for no good reason. From that point of view I suggested units of Targa Resources Partners (NGLS), which took a pounding from $42.83 on November 6 to $35.96 on November 16 on news that the company would price a secondary stock offering at just $36 a unit. It’s typical for secondaries to get priced below the current market in order to attract new money. But in this case the pricing seems to have been aggressively low and that took down Targa. After all if you can buy the secondary at $36, why pay $42 for units on the market?
What makes this drop a very interesting opportunity is that the capital raised is going to finance an acquisition that takes this pipeline master limited partnership (MLP) into North Dakota’s Bakken shale formation. (For more on this fast-growing oil region see my post http://jubakpicks.com/2012/11/20/the-oil-world-turned-upside-down-and-how-to-invest-in-the-rise-of-the-u-s-to-top-global-producer-by-2017/ .) Targa is buying Saddle Butte Pipeline’s crude oil pipelines and natural gas gathering and processing operations in the Williston Basin for $950 million. The growth potential here is very solid—not only is oil and gas production climbing in North Dakota but also the region is underserved by pipelines with 74% of North Dakota crude traveling by (more expensive) truck.
For Targa, which already operates in the Barnett and Wolf Camp areas in Texas’s Permian Basin and in Louisiana’s Tuscaloosa play, this is an initial foothold in the Bakken oil shale geology.
The deal also gives Targa its first oil pipelines, which increases the diversification of a company that had been hooked to natural gas and natural gas liquids. Read more
I’m going to continue to diversify my Dividend Income Portfolio by selling Enbridge Energy Partners (EEP.) It’s one of three pipeline master limited partnerships in the portfolio. The sale of this position plus the sale of Natural Resource Partners (NRP) earlier reduces the energy exposure of this portfolio to a still hefty 40% from a previous 60%.
I’m not worried about a collapse in energy prices in 2010, but I don’t see a significant rally in oil prices from current levels and natural gas seems stuck near lows for a while because in the short-tem supply seems ample to meet recovering demand. (For my very different take on long-term energy prices see my post http://jubakpicks.com/2009/12/08/the-return-of-the-oil-shortage-around-2015-and-why-the-industrys-logical-decisions-now-will-make-it-worse/ ) I see Enbridge Energy Partners with its bet on growing volumes of oil from Canadian oil sands as especially exposed to stagnant energy prices. Estimates are that it takes a price of $70 a barrel to make development of those resources attractive.
Why is that important? Read more