In a little over two years, Targa Resources (NYSE:TRGP) (NYSE: NGLS-PA) went from a company that didn't have a whole lot of growth projects to one that arguably has too many projects at the moment. Its current slate of capital spending is massive and it has been putting a bit of a strain on the company's ability to pay its shareholders a generous dividend.
This past quarter, though, many of Targa's projects became revenue-generating assets, and it made a big difference on the bottom line. Is it enough to save the company's high-yield dividend? Let's take a look at its most recent results to see what's going on at Targa Resources.
By the numbers
|Metric||Q3 2018||Q2 2018||Q3 2017|
|Revenue||$2.98 billion||$2.44 billion||$2.13 billion|
|Adjusted EBITDA||$358.0 million||$326.0 million||$276.5 million|
|Net income attributable to common shareholders||($54.0 million)||$79.0 million||($197.0 million)|
|Distributable cash flow||$287.2 million||$225.1 million||$186.6 million|
Targa's payout has looked shaky at best in recent quarters, as distributable cash flow wasn't enough to cover dividends on both its common and preferred units. Whenever this happens, investors are going to immediately question the sustainability of the dividend over the long haul. This past quarter, though, the company was able to cover its dividend obligations thanks to several new assets going live. So far in 2018, the company has added 710 million cubic feet per day of natural gas processing capacity as well as natural gas liquids fractionation and exports in its downstream segment.
Combined, these new projects lifted Targa's dividend coverage ratio to 1.04, or 1.24 if you include one-time payments from some of its equity and joint venture partners. Management now believes that its full-year divided coverage ratio will be above 1 thanks to these additional assets.
What management had to say
On Targa's conference call, CEO Joe Bob Perkins remarked on the company's progress during the quarter and highlighted some of the recent growth projects that have gone live since the end of the second quarter:
For the third quarter, Targa achieved its best operational and financial quarter in our history, positioning us to exceed the top end of our previously disclosed full-year 2018 financial guidance and more importantly, providing positive momentum for 2019 and beyond. It's been a busy couple of months at Targa since our last call. During that short time, we successfully brought online our 200 million cubic per day Johnson Plant in the Midland Basin. The Johnson Plant was highly utilized at start-up. We continued start-up activities at our crude and condensate splitter at Channelview. We are now in hot start-up. We closed on a $160 million asset sale of some of our petroleum logistics business. We raised about $200 million from the issuance of common equity under our [at the market] program, and we recently began start-up of our 150 million cubic feet per day Hickory Hills Plant in the SouthOK system.
Growth comes at a cost
There's no denying that Targa Resources' growth pipeline looks impressive, and much of it will start operations within a year, which should deliver large gains for the bottom line. Management now estimates that it will exceed the top end of its 2018 EBITDA guidance and it raised guidance for 2019-2021. To do that, though, the company plans to spend a lot of money -- about $2.4 billion in 2018 and $4.2 billion for 2019 through 2020 -- and that doesn't include major capital projects under consideration like its Whistler Pipeline.
The challenge for Targa spending all that money is that it has to issue a lot of new shares to finance it. So far this year, the company has issued about $572 million in common stock, sold assets, and is now contemplating selling minority interests in several other assets to monetize them and pay for growth. Deteriorating one's asset base and issuing stock that currently yields 7.2% is a high cost of capital to pay, and it will likely mute the per-share gains that investors will get from this development plan.
If Targa can pull through this period of high spending and not compromise its future payout with too many new shares, then this stock could be interesting. However, a company that has to rely so heavily on external capital raises and isn't funding a portion of its spending with retained operating cash flow will always be suspect. It's probably best to wait and see what happens with this growth program before taking any action with this stock.