Targa Digs More Holes Than One

11/28/2012 4:00 am EST

Focus: MLPS

Jim Jubak

Founder and Editor, JubakPicks.com

A lowball price on a secondary offering dragged the MLP down, but the fundamentals are extremely solid, so this is the right time to buy, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

In my November 23 post on buying income assets in what increasingly looks like a bubble, I suggested opportunistically looking for income-producing assets that had been sold down at the moment for no good reason.

From that point of view, I suggested units of Targa Resources Partners (NGLS), which took a pounding from $42.83 on November 6 to $35.96 on November 16 on news that the company would price a secondary stock offering at just $36 a unit.

It’s typical for secondaries to get priced below the current market in order to attract new money. But in this case, the pricing seems to have been aggressively low, and that took down Targa. After all, if you can buy the secondary at $36, why pay $42 for units on the market?

What makes this drop a very interesting opportunity is that the capital raised is going to finance an acquisition that takes this pipeline master limited partnership (MLP) into North Dakota’s Bakken Shale formation. (For more on this fast-growing oil region, see my recent post.)

Targa is buying Saddle Butte Pipeline’s crude pipelines and natural gas gathering and processing operations in the Williston Basin for $950 million. The growth potential here is very solid—not only is oil and gas production climbing in North Dakota, but the region is underserved by pipelines, with 74% of North Dakota crude traveling by (more expensive) truck.

For Targa, which already operates in the Barnett and Wolf Camp areas in Texas’s Permian Basin and in Louisiana’s Tuscaloosa play, this is an initial foothold in the Bakken oil shale geology.

The deal also gives Targa its first oil pipelines, which increases the diversification of a company that had been hooked to natural gas and natural gas liquids. That’s important diversification given a developing oversupply of natural gas liquids and the continuing oversupply of natural gas.

The deal also increases the percentage of fee-based assets—important for reducing the volatility in volume-based pricing—from the current 35% to an estimated 55% after the deal.

The acquisition will be slightly dilutive to cash flow in 2013—about 21 cents—but should start adding to cash flow in 2014. EBITDA (earnings before interest, taxes, depreciation, and amortization) is forecast to increase by 27% in 2013 from 2012, and by 30.3% in 2014. Distributions per unit are projected to increase by 10% in 2013 and 10% in 2014.
The MLP current pays a yield of 7.24%. My 12-month target price for the units is $44. The closing price on November 26 was $36.66. I added Targa to my Jubak’s Picks portfolio on Friday, November 23.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own units of Targa Resources Partners as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

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