TRGP’s correlation with crude oil prices
Targa Resources’ (TRGP) stock price is affected by crude oil prices. The correlation between TRGP’s stock price and the near-month WTI (West Texas Intermediate) crude oil futures price over the last one year was 0.54. This indicates a medium positive correlation between the two. TRGP’s correlation with crude oil prices is the same as that of the Alerian MLP ETF’s (AMLP) correlation during the same period.
As discussed previously, TRGP’s percent-of-proceeds contracts expose it to commodity price fluctuations. The above graph shows movements in TRGP’s stock price, WTI, and natural gas prices.
Correlation with natural gas
Targa Resources’ stock price had a much lower correlation of 0.09 with natural gas prices over the last one year. AMLP had a correlation of 0.11 with natural gas over the same period. So, TRGP’s stock price going forward is likely to be impacted more by movements in crude oil prices than natural gas prices.
Outlook for Targa
After consolidation with Targa Resources Partners, Targa seems set to benefit from its improved credit profile, coverage ratio, lowered cost of capital, and simplified structure. TRGP’s growth is expected to be driven by the level of producer activity in the basins where its assets are located and by the level of demand for its storage and transport services.
The company believes that its assets cannot be easily duplicated, as they are strategically located in attractive and active basins and are near key markets and logistics centers. According to the company, acquisitions will also continue to be a focus of its growth strategy.
The increased contribution of fee-based income will help stabilize TRGP’s cash flows. However, the company’s higher leverage remains a concern.
Targa’s relatively higher yields, lower valuation compared to peers, and high institutional interest makes the stock attractive.