Targa Resources (TRGP -0.02%) took its investors on quite a ride last year. After hugging the flatline for the beginning of 2018, shares started heating up along with the weather and were up more than 15% by early October. However, it was all downhill from there as the midstream company's stock plunged the rest of the way, losing 25.6% of its value in 2018, according to data provided by S&P Global Market Intelligence. Here's a look back at what caused all of that volatility.
The first nine months of 2018 were excellent for Targa Resources. In fact, the third quarter was the strongest in the company's history, as earnings and cash flow rose sharply due to higher oil prices and recently completed growth projects. The overall improvement in the oil market enabled Targa to secure several new expansions throughout the first part of 2018 as well as lock up much of the funding it needed to build these projects by signing joint ventures with other midstream companies and private equity funds. As a result, the company was well positioned to "exceed our full year 2018 financial guidance [while] providing Targa with positive momentum heading into 2019," according to comments by CEO Joe Bob Perkins in the third-quarter earnings release.
However, shares of Targa would go on to plunge double-digits in both November and December due to the sell-off in the oil market. Overall, crude oil plummeted 40% from its peak in October, falling 19% for the year after the Trump administration allowed most of Iran's key customers to continue buying its oil even after it reimposed sanctions on the country.
That sell-off in the oil market hit Targa Resources harder than most midstream companies. That's because the company gets about a third of its earnings from commodity-based activities, whereas most rivals like to keep that number below 10%. While this enables Targa to make more money during periods of higher commodity prices, a decline will weigh on earnings.
Targa Resources' outsized exposure to commodity prices makes its stock much more volatile, which was certainly the case last year. That's why the company is building more fee-based assets to help reduce its overall exposure. It currently has a large backlog of these projects under way that should enter service over the next year. As that happens, it will make the company and its 8.3%-yielding dividend a more appealing option for income-seeking investors to consider.
Check out the latest Targa Resources earnings call transcript.