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This High-Yield Stock Could Bounce Back Big-Time in 2019 (and That's Only the Beginning)

By Matthew DiLallo – Updated Apr 22, 2019 at 11:45AM

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After a roller-coaster ride in 2018, this high-yield stock could be a big winner in the coming years.

Last year was a volatile one for investors in Targa Resources (TRGP 0.30%). The midstream company's stock initially surged 15% thanks to higher oil prices, but a late-year sell-off in crude sent shares down 25% for the year. As a result, Targa's dividend yield now stands at an eye-catching 8.4%. 

That oil-inspired plunge is one of many reasons Targa Resources looks like an intriguing rebound candidate in 2019.

A dollar bill folded as an arrow that goes down but then back up again.

Image source: Getty Images.

Several catalysts on the horizon

Shares of Targa Resources have already bounced back 20% since the start of 2019 thanks to an improvement in oil prices from their bottom at the end of last year. That's because about a third of the company's earnings come from commodity-based activities. So, when oil prices rise, it tends to take Targa's cash flow and stock price with it. Consequently, shares could continue rebounding in 2019 if oil keeps going up.

However, even if oil prices don't improve any further, Targa's earnings should expand significantly in 2019. That's because the company has several fee-based expansion projects under construction that should provide a big boost to cash flow when they come on line later this year. Two of the biggest are long-haul pipelines. The company is developing the Grand Prix NGL Pipeline, which it expects to finish during the second quarter. It's also s a partner on the Gulf Coast Express natural gas pipeline, which should start generating cash flow in October.

On top of those two needle-moving pipelines, Targa has a couple of fee-based natural gas processing plants slated to start up in 2019. It should finish the Little Missouri 4 plant in the Bakken during the second quarter and the Falcon Plant in the Permian Basin by year-end. Meanwhile, the company should start up its sixth fractionation train -- which converts raw NGLs into higher-value products like propane and ethane -- early in the second quarter.

These expansion projects, as well as those finished during 2018, position Targa Resources to grow earnings from an expected $1.325 billion in 2018 up to an anticipated  $1.6 billion in 2019, which is a more than 20% increase.

American dollars growing out of the ground.

Image source: Getty Images.

Even more growth coming down the pipeline

Targa's earnings should continue growing at a healthy rate beyond this year because it has several additional expansions underway. It has another fee-based processing plant in the Permian that should come on line during the second quarter of 2020 as well as two more fractionation trains. Those expansions, when combined with projects finished over the past year and others on the way, position Targa to grow earnings up to $2.3 billion by 2021.

In the meantime, the company has several other expansion opportunities in the works that could enable it to continue growing at a high rate beyond 2021. For starters, Targa is working with several other energy companies to develop the Whistler Pipeline, which like Gulf Coast Express, would move natural gas from the Permian Basin to the Gulf Coast. This project could be in service as early as the end of 2020 if the partners secure enough shippers to justify the investment. Targa could also expand Grand Prix as well as several of its other assets in addition to building more processing plants to support the continued growth of its customers. 

On top of that, Targa secured some of the funding to build its current slate expansions through a creative joint venture with a private equity fund. The company has the option to buy out this joint venture in phases in the coming years. Those acquisitions of additional interests in the assets it's building will enable Targa to collect more of their cash flow, which would provide a further boost to its earnings.

The fuel to go even higher

With several needle-moving expansion projects coming on line this year, Targa Resources anticipates that its earnings will jump more than 20% from what was already expected to be a record year for the company. That uptick in profitability should propel the stock higher, especially if oil prices keep improving. Meanwhile, there's plenty of growth further ahead for this midstream company since it has several expansions still to come, which could eventually give it the fuel to start increasing its high-yielding dividend once again. Add those factors to its lower stock price after last year's sell-off, and it's an increasingly intriguing option for investors who are looking for big-time upside potential. 

Check out the latest Targa Resources earnings call transcript.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Targa Resources Stock Quote
Targa Resources
$69.86 (0.30%) $0.21

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