Targa: High yield from a top midstream MLP

This one is a way to play the growing market for natural gas liquids.

By TheStockAdvisors Mar 5, 2013 11:19AM
Oil refinery Kevin Burke CorbisBy Elliott Gue, Energy & Income Advisor

Targa Resources Partners (NGLS) faced a number of headwinds in 2012: a challenging year for ethane and propane prices; Hurricane Isaac, which cost the firm $8 million in EBITDA (earnings before interest, taxes, depreciation, and amortization); and $6 million worth of acquisition-related expenses.

Nevertheless, the MLP in 2012 generated record distributable cash flow of $354 million and increased its quarterly payout by 12.7%. More important, the partnership posted a comfortable distribution coverage ratio of 1.14, though this metric deteriorated in the back half of the year.

This impressive resilience in a challenging business environment is a testament to Targa Resources Partners' balanced asset base.

Although the gathering and processing division's operating margin plummeted by 25% because of weak commodity prices, the complementary assets in the MLP's logistics and marketing arm posted a record operating margin of $304.3 million -- up 29% from year ago levels.

With the price of natural gas liquids (NGL) bottoming out and an impressive slate of expansion projects on the horizon, the MLP should deliver distribution growth of 10% to 12% in 2013.

We remain particularly bullish on the near-term prospects for Targa Resources Partners' logistics and marketing division, which boasts the second-largest installed fractionation capacity at the hub in Mont Belvieu, Texas, and one of the nation's two propane export facilities.

Looking to 2014, we expect the MLP recently acquired midstream assets in the Bakken Shale to drive distribution growth. Beyond the next two years, the coming expansion of the domestic petrochemical complex should furnish the partnership with ample opportunity for expansion.

With an integrated suite of midstream solutions to gather, process and export NGLs, Targa Resources Partners boasts a balanced portfolio that provides upside exposure to any improvement in NGL prices and ample downside protection when commodity prices tumble.

The MLP has $1.7 billion worth of growth projects slated to come onstream over the next two years, providing ample support for its growing distribution.

Offering a current return of 6.5%, units of Targa Resources Partners would yield about 7.2% if the firm meets the low end of its guidance for distribution growth.

Targa Resources Partners LP rates a buy up to $44 per unit in the Medium Risk sleeve of our Focus List. Investors should add to their position aggressively if the unit price dips to less than $40.

More from TheStockAdvisors.com
Tags: NGLSoil


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124 rated 1
266 rated 2
452 rated 3
702 rated 4
671 rated 5
604 rated 6
640 rated 7
495 rated 8
267 rated 9
158 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.