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Why investors must watch future Energy Transfer and Targa merger

Part 3
Why investors must watch future Energy Transfer and Targa merger (Part 3 of 5)

Why Targa would add value for the potential merged entity

NGLS expects distributions to go up

Targa Resources (NGLS) and Energy Transfer (ETE) both have a number of projects in the pipeline, which are expected to propel growth in the short-term to medium-term. For NGLS, distribution growth for 2014 is estimated to be 7%–9% higher than in 2013. In the latest guidance, NGLS declared 2014 annual earnings before interest, taxes, depreciation, and amortization (or EBITDA) guidance of $820–$880 million, which at the midpoint is ~35% higher than in 2013. Margin for 2014 is estimated at 60%–65%.

Where will the growth happen?

During 2013, NGLS processed an average of 780.1 million cubic feet per day of natural gas and produced an average of 91.9 thousand barrels per day of natural gas liquids (or NGLs). The company plans to expand the capacity to by 37% to 1.34 billion cubic feet per day by end of 2014. Its Permian Basin activity is dominated by oil shale plays of SAOU, Sand Hills, and Versado. Its north Texas assets are located in the oiler portion of Barnett Shale where drilling activity has remained strong over the past few years. Also, in Bakken Shale oil production is expected to occupy a significant role for next few years.

NGLS Capacity Expansion project at field gatheringEnlarge Graph

Targa’’s ongoing project to add capacity

Higher drilling activity at the Permian and Bakken should see increased traffic for Targa’s pipeline and natural gas processing in 2014. By 2Q14, NGLS expects the cryogenic processing plant of High Plains with 200 million cubic feet per day capacity to come online. The plant will facilitate the gathering and compression needs for SAOU to meet increasing production and continued producer activity on the eastern side of the Permian Basin. The SAOU plant caters to Wolfberry and Bone Springs plays in the Permian Basin. The company invested $225 million for the entire project. In addition, a 35-mile pipeline connecting Sand Hills and High Plains is also expected to be complete in June, 2014.

The acquisition of Badlands assets in December, 2012, gave NGLS access to Williston Basin crude oil pipeline and terminal system and its natural gas gathering and processing operations. NGLS expects significant increase in crude oil and gas volume from the Badland assets. Currently, NGLS has 30 thousand barrels of operational crude oil storage under construction at New Town and 25 thousand barrels of operational crude oil storage under construction at Stanley, Badlands.

Long-term contracts ensure steady cash flows for NGLS

NGLS looks to reap the benefits of stable cash flows from NGL sales and exports though short-term and long-term contract through 2015. Joe Parkins, the chief executive officer (or CEO) of NGLS, commented in the conference call of 1Q14, “We continue to benefit from significant demand for long term and short-term contracts at Galena Park. For the remainder of 2014, we have an average of 4.2 million barrels of exports per month contracted. That 4.2 million barrels of exports includes both short-term and long-term contracts. Looking forward for 2015, we have the similar amount already contracted under just our longer-term arrangements. Some of those longer-term arrangements extend as long as 2020. And obviously as we complete our expansion projects, our export capabilities for next year are even greater than this year, providing potential volume upside.”

Targa Resources Partners L.P. (NGLS) is a master limited partnership (or MLP) operating in the midstream energy space. Targa Resources Corp. (TRGP) is the general partner of NGLS. NGLS is a component of the Alerian MLP ETF (AMLP) and the Yorkville High Income Infrastructure MLP ETF (YMLI). Energy Transfer Equity L.P. (ETE), through its subsidiaries, provides diversified energy-related services. ETE is a component of First Trust North American Energy Infrastructure Fund (EMLP).

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