Targa Update on Big News

04/07/2014 5:40 pm EST

Focus: MLPS

Jim Jubak

Founder and Editor, JubakPicks.com

Investors in MLPs need to know which of these dividend generating vehicles have enough new projects in store, in order to keep distributions coming, and MoneyShow's Jim Jubak believes this one does, so he's updating his target price, as of today, April 7.

Not that nothing else matters-the price of natural gas and natural gas liquids is important-but my theory is that, at the moment, in the current cheap money environment, the crucial thing that investors in energy MLPs (master limited partnerships) need to know is whether one of these dividend generating machines has enough new projects to keep distributions to investors climbing.

Since master limited partnerships, by law, must distribute all of their income to investors, the way one of these companies grows is by raising money in the financial markets and then investing it in new pipelines, distribution hubs, refineries, processing facilities, and the like. With money so cheap right now-thank you Ben Bernanke and Janet Yellen-it's easy for a master limited partnership to profit from the spread between the cost of borrowing money and the returns that projects produce. The hard part right now-after so much money has gone into master limited partnerships to be put to work in the US energy boom-is finding enough good projects to keep the cycle going.

From that perspective, the March 31 update from Targa Resources Partners (NGLS) was extremely good news. The MLP announced that, because of an increase in exports of liquid petroleum gas, first quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) would be 60% higher than in the first quarter of 2013.

Liquid petroleum gas isn't the same as liquefied natural gas. LPG is made from natural gas liquids and it is largely made up of propane and butane rather than the methane of natural gas. Exports of liquid petroleum gas fall under a completely different regulatory scheme than exports of liquefied natural gas. The United States became a net exporter of liquid petroleum gas for the first time ever in 2012, and exports are projected to grow until the United States becomes the world's top exporter sometime around 2020. The biggest market is Asia where it's used both for heating, and increasingly, as the feedstock for chemical production.

All those exports to Asia mean a lot of opportunity for investment in new infrastructure.

Which, along with that increase in EBITDA, was the big news from Targa on March 31. Targa's liquid petroleum gas export capacity climbed to 3.5 to 4 million barrels a month by the end of 2013 and the company projects that it will reach 5.5 to 6 million barrels by then end of 2014.

In addition to the $650 million in previously projected capital spending to reach that goal, Targa will add another $50 million in capital spending in 2014 to build a plant to split liquids into butane, propane, and other components. (Total cost for the splitter will be $115 million with the splitter to go into service in 2016/2017.) The company also said it will build a new processing plant in the Bakken shale gas region.

Targa is a member of both, my Jubak's Picks portfolio, and my Dividend Income portfolio. (The master limited partnership paid a 4.94% dividend as of closing price on April 4.)

As of April 7, I'm raising my target price on Targa to $60 a unit in both the Picks and Dividend Income portfolios. (Traditionally I haven't put target prices on picks in the Dividend Income portfolio, but I've have decided to add them gradually as I update these picks.)

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own units of Targa Resources Partners as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund's holdings almost totally to cash.

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