Stock pick (actually MLP pick) Targa Resources announced $1.25 billion in new projects–enough to keep distributions climbing
On August 1 Targa Resources Partners (NGLS) disappointed the market with a second quarter earnings report that missed analyst estimates by 17 cents a share. Revenue rose 9.3% year over year to $1.44 billion versus the $1.72 consensus.
And yet Targa Resources didn’t plunge. The price has retreated a relatively small 5.7% from the August 1 high at $51.75 to $48.80 at the close on August 19. Given the general retreat in the dividend income sector on fears of a September move by the Federal Reserve to reduce its monthly purchase of Treasuries and mortgage-backed assets, the stock-specific drop is almost non-existent.
Which is a good reminder that master limited partnerships (MLPs) such as Targa Resources aren’t judged by the market on earnings but by their ability to pass cash flows through to unit holders—and by their ability to increase those distributions over time.
On that basis, the company’s second quarter report was a solid success
The big problem hanging over units of Targa Resources isn’t the falling price of natural gas liquids due to a glut in the shale geologies of the mid-continent energy boom. Read more
Not surprisingly Targa Resources Partners (NGLS) has show a little weakness recently after the February 14 date (record date January 28) for paying the master limited partnership’s fourth quarter dividend.
What’s surprising is how small the retreat has been. I suspect that this strength in a dividend-paying stock after the dividend payout is a sign that investors are feeling a little less aggressive and a little more conservative at current high.
The retreat wasn’t very large—from $41.88 on February 14 to $41.04 on February 20—but decline pattern is normal for stocks and master limited partnerships (MLPs) that pay hefty dividends. (Targa showed a projected dividend yield of 6.5% at the February 14 price.) Some holders of the stock, having collected the quarterly dividend, sell with the idea of buying something else about to pay a dividend and maybe returning to hold Targa closer to its next dividend payout.
The dividend for the fourth quarter of 68 cents per unit ($2.72 per unit on an annual basis) is a 3% increase from the third quarter and a 13% increase from the dividend in the fourth quarter of 2011. The partnership continues to project a 10% to 12% increase in distributions for 2013.
If you believe those projections, and I think they’re reasonable, then that $2.72 in dividends turns into $2.99 to $3.05 a share at the end of 2013. And that would equate to a $45 a unit price and at a 6.8% yield at end of the year. (Which is–$45 by December 2013—what I’m going to set as my new target price for Targa in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .)
On February 14 Targa Resources Partners reported financial results for the fourth quarter of 2012 and for the full 2012 year. Read more
Quick, name the best performing sector for 2013 to date.
Did you say energy? The sector is up 8.6% for the year as hopes for global growth (or is that hopes of Chinese growth?) drive visions of growing global demand. West Texas Intermediate crude is up another 1% today and Brent crude is up 0.6%.
Shares of U.S. refiners with geographic exposure to the U.S. oil boom in regions such as North Dakota’s Bakken formation or Texas’ Permian Basin have done as well—HollyFrontier (HFC) is up 8.4% in 2013—or better—Marathon Petroleum (MPC) is up 13.9%.
And going forward I think refiners with U.S. oil boom exposure are likely to outperform in any dip in the sector created by worries that higher oil prices will put a damper on global growth. (Well, oil prices could at some point. At $97.40 a barrel for West Texas Intermediate and $114.16 for Brent, oil is near the point where its price does start to bite into growth.)
Why are U.S. refiners a good bet to keep climbing even in a dip for the rest of the sector? Read more
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