Is Targa Resources’ Cash Flow Stable?
Targa Resources (TRGP) expects 79% of its 2016 operating income to be fee-based. The remaining 21% is expected to come from POP (percent-of-proceeds) contracts. In POP contracts, an MLP gathers and processes natural gas on behalf of producer customers. It sells the residue gas and NGLs (natural gas liquids) produced from processing. The company remits a previously agreed percentage of the proceeds to the producer and retains the rest. So, the prices of natural gas and NGLs impact the revenue of MLPs that hold such contracts.
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Fee-based margins are generally more stable because they aren’t impacted directly by commodity prices.
Targa Resources diversified from a predominantly gathering and processing company to a company with significant downstream operations. In 3Q16, downstream operations contributed 44% to the company’s operating income.
Targa Resources’ gathering and processing operations also diversified to more than ten shales or resource plays from only one at the time of its initial public offering in 2007.
The diversification generates more stability in Targa Resources’ cash flows.