Change of Earnings Forecast Strong Q2, Adjusting for Hedge Reset
We maintain 1-OW rating and $30 PT given Targa's strong and visible distribution growth prospect driven by asset drop downs by parent. We think NGLS can grow distribution at 4-year CAGR of 13%, assuming $600 MM/yr acquisition run rate and $40 MM organic spending/yr.
Summary Q2 EBITDA reached $55.5 MM vs our est of $51.4 MM, driven by favorable commodity prices, solid volume growth, partially offset by higher operating expenses. DCF reached $40.1 MM vs our est of $36.1 MM supported by lower interest expense partially offset by higher maintenance capex.
Mgmt re-set commodity hedges at a higher strike price up to 2010 to achieve greater cash flow stability at higher margin. Net cash flow benefit appears minimal given $87.4 MM re-hedge cost, financed through borrowing from credit facility.
NGLS announced Q2 distribution of $0.5125 or $2.05 annualized, which represents 23% increase QoQ and 52% increase YoY.
Our PT of $30 is based on 12 month distribution run rate of $2.16 (up from $1.77) and a target yield of 7.25% (up from 6%). An increase in distribution run rate offset by higher target yield due to capital market volatility.