Please ensure Javascript is enabled for purposes of website accessibility

Shares of Targa Resources Continued to Slide in December, Dropping 19%

By Tyler Crowe - Updated Apr 15, 2019 at 7:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Because Targa has more exposure to commodity prices than most pipeline and processing companies, its stock got hit harder than most of its peers.

What happened

Shares of oil and gas pipeline and processing company Targa Resources (TRGP -0.02%) declined 19.3% in December, according to S&P Global Market Intelligence. This recent slide is on top of the prior month's slide, which also coincided with a significant drop in oil prices.

Check out the latest Targa Resources earnings call transcript.

So what

Typically, companies in the pipeline, processing, and logistics portion of the oil and gas business structure their business in a way such that they are mostly insulated from commodity prices. This typically means fee-based revenue contracts with their customers, which sometimes even include things like minimum volume commitments. Contracts and business structures like this make revenue and cash flow relatively predictable and allow these businesses to return large amounts of cash to their investors through dividends -- or, in master limited partnership parlance, distributions. (Targa isn't a master limited partnership, but its business shares a lot of traits with MLPs.)

Natural gas processing plant.

Image source: Getty Images.

Targa is a little different in that its revenue for its natural gas processing business comes much more from percentage-of-profit contracts. As of its most recent investor presentation, about one-third of the company's revenue comes from these percentage-of-profit contracts. This means that Targa is much more exposed to commodity prices than other companies in the business. Most of Targa's peers get 80% or more of their revenue from fixed-fee contracts.

Now what

Targa is slowly moving more and more of its business toward fixed-fee contracts by investing in other parts of oil and gas logistics such as long-haul pipelines. It spent about $2.4 billion in 2018 and expects to spend around $4.2 billion to complete its current slate of projects. That is a lot of cash for a $9 billion company, and it will likely need higher oil and gas prices to help cover its generous payout and some of its spending. If not, management may find it hard to gather the funds to complete this ambitious spending plan.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Targa Resources Corp. Stock Quote
Targa Resources Corp.
$58.14 (-0.02%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.