What Will Drive Targa Resources’ 4Q16 Earnings Growth?



Two operating segments

Targa Resources’ (TRGP) operations are divided into two operating segments—Gathering and Processing and Logistics and Marketing. The Gathering and Processing segment contributes ~54%, while the Logistics and Marketing segment contributes the remaining 46% of the company’s operating income. Growth in Permian Basin volumes might contribute to the segment’s earnings in 4Q16.

The above graph shows Targa Resources’ segmental operating income over the last seven quarters.

Targa Resources’ Gathering and Processing segment generated an increase of 6% YoY (year-over-year) in the operating margin in 3Q16. The growth was primarily due to higher NGL prices. However, it was offset by lower inlet volumes and lower condensate prices.

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Logistics and Marketing segment

The Logistics and Marketing segment’s operating margin fell 23% YoY in 3Q16. It was partly due to the realization of contract renegotiation fees related to Targa Resources’ crude and condensate splitter project in 2015 and a lower LPG (liquefied petroleum gas) export margin in 3Q16.

As we discussed in the previous part, Targa Resources recorded significantly high LPG export volumes in October, offsetting the drop experienced in 3Q16. Higher volumes should boost the segment’s 4Q16 earnings. The receipt of first annual payment related to its crude and condensate splitter should also contribute to the segment’s earnings growth in 4Q16.

Targa Resources’ Logistics and Marketing division focuses on storage, transportation, distribution, and marketing of NGLs and petroleum products. It also delivers these products to end users such as petrochemical and refining companies. The Logistics and Marketing operations are generally connected to and supplied in part by Targa’s Gathering and Processing segment. The segment’s operations are primarily located in Mont Belvieu, Galena Park, Lake Charles, and Tacoma.

Lower commodity prices had a negative impact on Kinder Morgan’s (KMI) CO2 segment in 4Q16. To learn more, read Natural Gas Pipelines, CO2 Segments Hurt KMI’s 4Q16 Performance.


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