Why Targa Resources’ segment operating margins changed in 1Q14

Targa Resources’ Field Gathering and Processing segment

The segment gathers and processes natural gas from the highly productive areas of the Permian Basin in West Texas and Southeast New Mexico, the Fort Worth Basin (including the Barnett Shale in North Texas and the Williston Basin in North Dakota). The segment consists of approximately 11,300 miles of natural gas pipelines and includes ten owned and operated processing plants. In 2013, the company 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 NGLs. The segment’s operations consist of Sand Hills, Versado, SAOU, North Texas, and the Badlands. The company plans to expand the capacity to 1.34 billion cubic feet per day by the end of 2014. In the Permian Basin, the SAOU, Sand Hills, and Versado facilities operate at the oiler portion, which also produces gas and NGLs as by-product of oil. The company’s North Texas assets are located in the oiler portion of the Barnett Shale, where drilling activity remains active.

In 1Q14, the operating margin of this segment increased by 19.4% to $94.1 million from the $78.8 million recorded in 4Q13. The improvement in the result was bought about by higher commodity sales prices and increased throughput volumes. The increase in plant inlet volumes was driven by system expansions and by increased drilling activity at the associated shales.

Coastal Gathering and Processing

The assets of these segments are located in the onshore and near-offshore region of the Louisiana Gulf Coast, which access natural gas from these regions. Through its strategic location, NGLS has access to the Henry Hub, the largest natural gas hub in the U.S., and the gas distribution market in Louisiana. The facilities of this segment are LOU (Louisiana Operating Unit), VESCO, and Other Coastal Straddles. In 2013, the company processed an average of 1,330.1 million cubic feet per day of plant natural gas inlet and produced an average of 44.9 thousand barrels per day of NGLs. Some of the pipelines in this segment collect natural gas from multiple offshore gathering systems and pipelines throughout the Gulf of Mexico. While the well head volumes of this segment have been on a decline, the company expects to see a turnaround due to increased activity at Wilcox. Wilcox is an onshore wellhead gas region at the LOU.

In 1Q14, the operating margin at the Coastal Gathering and Processing segment increased by 7.8% to $4.3 million from the $5.5 million recorded in the previous quarter. The improvement in results was largely attributable to the higher NGL sales prices and short-term availability of higher average NGL volume per unit of natural gas at LOU. The increase was partially offset by a drop in plant inlet volumes and the impact of severe cold weather.

Logistics Assets

This segment predominantly engages in NGL-related services like transporting, storing, and fractionating mixed NGLs, storing, terminaling, and transporting finished NGLs, exporting liquefied petroleum gas (or LPG), and storing refined petroleum products and crude oil. The assets are primarily located at Mont Belvieu and Galena Park in Texas and Louisiana.

The operating margin at the Logistics Assets segment decreased by 6.5% in 1Q14 over 4Q13. During the last quarter of 2014, fractionation and LPG export activity shot up due to increased fractionation fees and higher volumes resulting from the CBF Train 4 project. In September 2013, LPG export activity was put in place. Although volumes didn’t decrease in 1Q14 compared to the previous quarter, the operating margin took a hit from higher operating expenses due to the impact of higher fuel prices. A severely cold winter in the U.S. negatively affected propane supply, which negatively affected the performance of this segment.

Marketing and Distribution

The segment has wide geographic reach to serve various customer bases in a number of states, including Texas, Louisiana, Arizona, Nevada, California, Florida, Alabama, Mississippi, Tennessee, Kentucky, New Jersey, and Washington. The activities of this segment consist of NGL distribution and marketing, wholesale marketing, refinery services, commercial transportation, natural gas marketing, and terminal facilities.

Operating margin at the segment increased significantly by ~35% to $64.6 million in 1Q14 from $47.9 million in 4Q13, due to higher LPG export activity and higher NGL marketing and wholesale margins related to a more favorable market environment.

Targa Resources Partners LP (NGLS) is a master limited partnership operating in the midstream energy space. Targa Resources Corp. (TRGP) is the general partner of NGLS. Other major companies operating in this sector whose earnings investors should follow include Kinder Morgan Energy Partners LP (KMP), MarkWest Energy Partners LP (MWE), and Targa Resources Corp. (TRGP). NGLS is also part of Alerian MLP ETF (AMLP) and the Yorkville High Income Infrastructure MLP ETF (YMLI).