Drop-down Acquisition Vehicle with Natural Gas Exposure
We view NGLS as a potential drop-down acquisition story, with a positive long-term outlook. In our opinion, the partnership possesses several fundamental strengths, which should support distribution growth of roughly 16.0+% for the next several years. These fundamental strengths include: 1) affiliation with Targa Resources, Inc. — a private company and a leading provider of midstream natural gas and NGL services in the U.S.; 2) strategically located assets in the Fort Worth Basin in north Texas — one of the most productive natural gas producing areas in North America; 3) high quality and efficient asset base — formerly of ConocoPhilips and Dynegy; 4) strong producer customer base — consisting of both major oil and gas companies, and independent producers; and 5) a comprehensive package of midstream assets, including gathering, compressing, treating, processing, and selling natural gas, as well as fractionating and selling natural gas liquids (NGLs) and NGL products. With the recent asset-drop downs from its sponsor (the San Angelo Operating Unit and the Louisiana Operating Unit purchased in 4Q07 for $705 million), organic growth projects currently underway, and additional potential asset drop-downs from its sponsor, we believe NGLS should enjoy above-average distribution growth over the next several years (we currently estimate a 16.0+% compound annual growth rate (CAGR) for 2008-10), thus impacting valuation positively over the next 12-months. As such, we continue to rate NGLS a Buy. Price appreciation to our new 12-month price target of $30 (from the August 11, 2008 closing price of $21.84), combined with a forecast distribution yield of 7.4%, translates into a 44.8% total return potential. Risks to story include, but are not limited to, the following: commodity price sensitivity, dependence on acquisitions for growth, dependence on Targa Resources, Inc. for acquisitions; obtaining new supplies of natural gas and natural gas liquids, and interest rates.