Targa Resources Corp. TRGP has had a remarkable run this year, with its share price jumping 75.9% year to date, which is an impressive feat compared with the broader oil and energy sector managing only a 2.9% gain. Even within its sub-industry, which has gained 40.6%, TRGP has performed remarkably. With the S&P 500 rising 19.7%, it’s clear that TRGP is booming while many others are lagging behind. This raises an important question for investors: Should they take a leap and ride this wave or hold for a better opportunity?

YTD Price Comparison

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Targa has emerged as a powerhouse in the energy infrastructure sector. Based in Houston, TX, this leading provider of integrated midstream services is known for its expertise in gathering, compressing, treating, processing and selling natural gas. What truly sets Targa apart is its strategic position in Mont Belvieu, TX, the world’s largest natural gas liquids (NGL) hub, where it boasts a gross fractionation capacity of approximately 938,000 barrels per day. 

Additionally, TRGP operates state-of-the-art LPG export facilities at its Galena Park Marine Terminal, seamlessly connected to Mont Belvieu. The company’s robust presence in the Permian Basin, a hotbed of America’s energy production, is further strengthened by TRGP’s Grand Prix NGL pipeline, which transports gathered and processed volumes to its fractionation and export facilities. With two main business segments — Gathering and Processing, and Logistics and Transportation — Targa is well-equipped to handle the changing energy market.

In simple terms, the company makes money by charging fees for transporting, processing and storing natural gas, NGLs and crude oil.

So, what’s fueling Targa’s rise? Let’s delve into the key drivers behind its impressive year-to-date performance and explore whether this momentum is likely to continue or not.

Reasons to Buy Targa Stock

Strong Permian Growth: Targa is experiencing notable growth in the Permian Basin, with natural gas inlet volumes increasing more than 600 million cubic feet per day in second-quarter 2024 compared with the prior-year quarter’s level. Anticipated growth continues into 2025. The company is expanding its capacity with new processing plants like Bull Moose II and East Pembrook, set to launch in 2026. This strategic expansion positions TRGP to meet rising production demands and supports long-term cash flow and revenue growth, making it an attractive prospect for investors.

Steady Fee-Based Revenues: Approximately 90% of Targa’s revenues are fee-based or supported by fee floor contracts. This helps protect the company’s cash flows during periods of commodity price volatility. Additionally, Targa has hedged 90% of its commodity price exposure through 2026, further reducing downside risks. This fee-based revenue model offers stability, making Targa a more predictable investment in volatile market conditions. Investors can expect reliable cash flows and dividends, even during periods of low commodity prices.

Impressive Shareholder Returns: Targa repurchased $355.1 million worth of common stock in second-quarter 2024 and announced an additional $1 billion share repurchase program. Additionally, a quarterly dividend of 75 cents per share provides consistent income to its shareholders.

Image Source: Targa Resources

The combination of dividends and stock buybacks makes Targa attractive for income-focused investors, while the new buyback program indicates management’s confidence in its long-term performance.

Momentum From Share Price Growth: Targa’s remarkable increase in its stock price signals strong investor interest driven by solid operational and financial performance. This upsurge reflects market confidence, suggesting that this could continue if the company maintains its growth trajectory. For momentum-focused investors, this presents a prime opportunity to leverage Targa’s expanding market presence. Currently, the company carries a Momentum Score of A.

Diversified Operations and Financial Flexibility: Targa’s integrated system, including its natural gas gathering and NGL transportation assets, continues to benefit from strong operational efficiency. The company's ability to capture value from multiple parts of the midstream chain enhances its overall stability. TRGP reported record adjusted EBITDA of $984.3 million for second-quarter 2024, with expectations for full-year adjusted EBITDA between $3.95 billion to $4.05 billion. This strong financial performance underpins Targa's ability to generate consistent returns.

Reasons to Wait Before Buying TRGP Share:

High Capital Expenditure and Debt: TRGP is projecting a substantial capital expenditure (“CapEx”) of $2.7 billion for 2024, largely driven by growth in the Permian Basin and the accelerated development of projects such as the Blackcomb Pipeline. However, as of June 30, 2024, the company’s total debt is more than $13.5 billion, resulting in a debt-to-capitalization ratio of 75.7%. While these investments could foster long-term growth, the significant debt burden and high CapEx may constrain short-term cash flow, potentially deterring risk-averse investors.

Commodity Price Exposure and Economic Uncertainty: An economic slowdown or weaker global energy demand could hurt Targa’s volumes, especially given its reliance on export markets, potentially stalling growth. Investors may hold on to the stock until there’s more clarity on economic conditions. While Targa's revenues are largely fee-based, it still faces risks from commodity price fluctuations. Lower natural gas and NGL prices could impact profitability, making investors cautious despite hedging efforts.

Valuation and Share Growth Raise Concerns: Targa’s current EV/EBITDA of 13.29 is significantly higher than the sector average of 3.12 and suggesting a possible overvaluation. This raises questions about the sustainability of its current valuation, especially if future earnings fall short of expectations, which could lead to a sharp correction. Additionally, the stock’s 76% year-to-date gain indicates that much of its growth may have been factored into the current price. Valuation-sensitive investors may want to wait for a potential pullback or market correction before buying.

Execution Risk on Large Projects: Targa’s numerous ongoing expansion projects in the Permian and Mont Belvieu, along with the Daytona NGL pipeline, carry execution risks, including potential delays and cost overruns. If these projects don’t stay on budget or schedule, this will negatively impact returns. Investors concerned with project risk might choose to wait and monitor the successful completion of these projects before investing. Execution delays could hinder near-term cash flow and earnings growth.

Volatility Alert: Targa exhibits notable volatility for a midstream company, which may not be ideal for investors seeking stability. With a beta of 2.26, Targa's stock price fluctuates significantly more than the broader market, indicating the potential for substantial day-to-day price swings. Investors who are not comfortable with this level of volatility, might want to consider other investment options.

Final Thoughts for TRGP Stock

TRGP presents an appealing investment opportunity, with a 76% year-to-date share price increase, outpacing the energy sector and the S&P 500. Its strong position in the Permian Basin and upcoming processing capacity expansions suggest continued growth. The company’s 90% fee-based revenue model and solid cash flow, along with shareholder returns, enhance its attractiveness.

However, risks such as high debt, significant expected CapEx for 2024 and energy price fluctuations warrant caution. TRGP's elevated EV/EBITDA ratio raises concerns about valuation sustainability. Instead of rushing to add TRGP, carrying a Zacks Rank #3 (Hold), to portfolios, it may be prudent to wait for a more opportune entry point.

Key Picks

Investors interested in the energy sector might look at some better-ranked stocks like TechnipFMC plc FTI, Vaalco Energy, Inc. EGY and Core Laboratories Inc. CLB, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TechnipFMC is valued at $11.66 billion. In the past year, its shares have risen 29.3%. FTI is a leading manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry.

Houston, TX-based Vaalco Energy is valued at $608.97 million. The oil and gas exploration and production company currently pays a dividend of 25 cents per share, or 4.26%, on an annual basis. EGY is an independent energy company principally engaged in the acquisition, exploration, development and production of crude oil and natural gas.

Core Laboratories is valued at $871.64 million. The company currently pays a dividend of 4 cents per share, or 0.22%, on an annual basis. Netherlands-based CLB is an oilfield services company, operating in more than 50 countries. The firm deals with providing reservoir management and production enhancement services to oil and gas companies.

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