Targa Earnings: Higher Permian Volumes Drive Growth Higher Than Expectations

No-moat Targa’s second-quarter results were much better than our expectations. With higher volumes out of the Permian and new growth projects in place, we expect to increase our 2024 and 2025 forecasts, boosting our $99 fair value estimate in the high-single-digit range. Targa management boosted its 2024 EBITDA forecast to a midpoint of $4 billion, 5% higher than prior expectations and above our $3.8 billion forecast. Our 2025 estimates of $4.3 billion are likely too low as well, as Targa has added about $500 million in new growth capital spending in 2024 and 2025. Volume growth continues to be substantial. Year-over-year gathering and processing volume growth in the Permian was about 12%. Fractionation volumes were up 14%, natural gas liquid pipeline volumes 26%, and natural gas liquids exports volumes up 30% over the same time frame. In a very low gas price environment, these volumes are especially healthy. The linchpin for growth was the final investment decision on a massive 2.5 billion cubic feet per day Blackcomb pipeline from the Permian Basin to the Agua Dulce region, due online in 2026. Frankly, the competition for new gas takeaways pipelines from the Permian is intense, so sanctioning this effort amid stiff competition is a solid achievement. Although Targa will only have a 17.5% share in the pipeline, it now can construct the gathering and processing plants needed to provide the necessary volumes for the pipeline and other related assets. Unsurprisingly, Targa announced 550 million cubic feet per day in new gas plant processing capacity due online in 2026. Further fractionation, natural gas liquids export, and storage opportunities are likely to be realized over time as well, demonstrating the value of an integrated midstream approach.