Wachovia on NGLS
Targa Resources Partners, L.P. NGLS: Q1 Operating Results Exceed Forecast--Lowering 2009E EPU
• Key Takeaways. Q1 adjusted EBITDA exceeded our forecast as volumes were better than expected. NGLS maintained its quarterly distribution, which was in line with our estimate. Targa is currently evaluating potential acquisitions, joint ventures, and greenfield opportunities in the Marcellus, Haynesville, and Eagleford Shales. A transaction could be consummated at either the GP (i.e. Targa Resources Inc.--TRI), MLP, or at both companies, depending upon the cash flow characteristics of the project/asset. In the meantime, NGLS has what we view as a secure 19.2% yield that is supported by its hedge portfolio. The partnership also has ample liquidity to fuel growth via a dropdown from TRI if the shale play opportunities do not materialize.
• Q1 Operating Results Exceed Forecast. Q1 adjusted EBITDA of $46MM exceeded our estimate of $41MM, but was below $53MM a year ago. The variance from our estimate relates primarily to higher natural gas processing and NGL sales
volumes. Q1 adjusted EPU was $0.31 versus our estimate of $0.20, consensus of $0.25, and $0.50 in Q1 2008. To note reported EPU was a loss of $0.09, which includes an $18.5MM noncash mark-to-market loss on derivatives.
• Quarterly Distribution Maintained. NGLS maintained its quarterly distribution of $0.5175 per unit ($2.07 annualized), which was in line with our estimate. Q1 DCF per unit of $0.67 (versus our estimate of $0.50) provided a distribution coverage ratio of almost 1.3x (excess cash of $7MM). Given the current environment, we continue to expect the partnership to maintain its current quarterly distribution in 2009.
• Adjusting Estimates. We are lowering our 2009 EPU estimate to $0.63 from $0.91 to reflect a noncash mark-to-market loss on derivatives; however, we are increasing our DCF per unit estimate to $2.21 from $2.13 to reflect Q1 DCF results. There is no change to our 2010 EPU and DCF per unit estimates of $0.82 and $2.16, respectively.
Valuation Range: $17 to $19
Our valuation range is based on a blend of (1) our two-stage distribution discount model, which assumes a required rate of return of 12.0% and a long-term growth rate of 2.5%, and (2) a price-to-distributable cash flow multiple of about 7.5x our 2009 estimate. Risks to the units trading below our valuation range include a slower-thanforecasted rate of dropdown acquisitions, a decline in commodity prices, and rising interest rates.
NGLS has visible long-term distribution growth potential predicated on its ability to acquire assets from its sponsor, Targa Inc., one of the largest gatherers and processors in the United States. Near-term, the partnership should be able to sustain the distribution assuming commodity prices remain around $40/Bbl for oil, $4.00/Mcf for natural gas and $0.57/gal for NGLs. Given NGLS' relatively stable yield, investors are paid to wait until commodity prices, capital markets and the economic environment improves. Approximately 80% of NGLS' distribution is tax deferred.
Thanks, Sooner. Although I graduated from KU, I have a daughter attending OU.
It seems to me that NGLS is sort of outside looking in at the major shale plays, particularly Marcellus and Haynesville. They seem to be trying to get something going whereas WPZ and MWE are already there. Also looks like DPM is in good position having assets in East Texas, which could expand to serve Fayetville and Haynesville shale plays. I just don't see NGLS having any game in the tremendous growth we're going to see in the best shale plays, am I wrong in your learned opinion?
KU always seems to beat OU in basketball; OU wins football - some things never change. At least your daughter has seen the light (joke); of course there is much respect for KU in Norman.
MWE and WMB (the GP of WPZ) have good positions in the Marcellus. The play will take many years to generate meaningful benefits to owners, but both MWE and WMB are very well established to benefit if the Marcellus is as hoped by geology.
MWE does not have the liquidity to fully take advantage of the opportunity, but there is enough potential and MWE's unit price is low enough that MWE is probably a good investment. I do not own any MWE currently.
WMB recently acquired a position in the Marcellus. I hope (please note this is only an expectation and hope) WMB drops down its Marcellus play to WPZ in 2010 or 2011. This is far from assured, but it seems logical to me for WMB to recover their initial investment and retain the IDR's when the field becomes cash flow positive. We shall see. WPZ is a good investment even without the Marcellus potential, but a GREAT investment if the drop down occurs as hoped.
I am not familiar with the gatherers and processors for this play. However, ETP and BWP are very well positioned to take the NG to market from the Haynesville and Fayetteville.
Perhaps another poster can add color on gatherers and processors for the Haynesville.
humblebap - thanks for the kind words.
In addition to being an MLP investor, I am a fan of college sports. I graduated from OU in 1974 and both of my children graduated from OU also. I pull for all Big 12 teams and I make a point to not boo any college athlete. However, my son asks "Dad, does that non booing apply even to Texas?"; I respond, yes, even Texas.
The Red River Rivalry is great because both schools and athletic departments are outstanding.
Boomer Sooner in October!!!
"who are you?" -
I am an individual investor with small business interests in Oklahoma City and Anchorage. Previously, I had a 30 year professional career working in public accounting, and for independent E & P, and contract drilling/oilfield service companies.
Currently, my primary public investments are MLP's - EPD, ETP, MMP, PAA, NS, KMR, BWP, WPZ, CPNO, PVR and NGLS. I own the MLP units for the income (the distributions spend nicely at the grocery store); I generally own an MLP for many years with minimal trading; my ownership in NGLS is my newest investment.
Who are you?
"where did you get this report"
I copied this report from a reliable (as considered by me) poster on the MLP Investor Village Board. I consider most posters on Investor Village to be serious and helpful.
Of course, no one can predict the future; certainly not me.