Energy

Can Targa Resources Really Afford a $500 Million Buyback?

Paul Ausick

Published: October 5, 2020 10:16 am

Shares of energy midstream company Targa Resources Corp. (NYSE: TRGP) jumped by more than 6% in Monday’s premarket session following the company’s announcement of a $500 million share buyback program that becomes effective immediately. The company said the repurchases would be made on the open market, will depend on market conditions and may be halted at any time.

Targa also noted that it expects fiscal 2020 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to come in “at or around” the company’s own outlook of $1.5 billion to $1.65 billion. The company also expects 2020 capital spending (capex) to fall near the bottom of its projected range of $700 million to $800 million.

CEO Matt Meloy said that Targa’s expected performance and lower capex, “positions us to continue to execute on our strategy of reducing leverage over time.” Meloy also mentioned that the company’s “improving” financial flexibility allowed it to repurchase some senior debt earlier this year.

Targa dropped its quarterly dividend payment from $0.91 to $0.10 for the first quarter of this year. The March announcement sent the shares to their 52-week low. Shares had more than doubled by early June but dipped by about a third from then until last Friday. The impact of a $500 million buyback program on the share price will help but is likely to have a modest impact on the price over the next several months.

In August, Moody’s Investors Service said the company’s Ba1 (non-investment grade) corporate credit rating “reflects the company’s significant scale with high EBITDA generation despite the volatile commodity prices and the meaningful and growing proportion of fee-based margin contribution.” The dividend and capex cuts were noted a helping to reduce debt and “stabilize leverage metrics” despite Moody’s expectations for lower commodity prices and potentially weak industry conditions. Targa’s “material exposure to the gathering and processing business, elevated leverage from partial debt funding of growth projects related capex, volatility in commodity prices and volume risk temper the rating.”

Targa is implementing the buyback program despite a decidedly cool outlook for midstream companies and about $7.6 billion in long-term debt.

In the company’s favor are rising demand and prices for natural gas. Natural gas has popped back to $2.65 per million cubic feet, a price last seen in September of last year. Continued hot weather across many parts of the country has driven up demand for air conditioning. The downside to that is a rising demand for coal.

Later Monday morning, Targa shares were trading up 7.3% to $15.35, in a 52-week range of $3.66 to $42.13. The consensus price target on the stock is $24.53. With a quarterly dividend of $0.10, the yield is 2.8%.