This Ultrahigh-Yield Stock Is Starting to Stomp on the Accelerator

Targa Resources (TRGP 1.02%) is one of the few energy stocks that has managed to maintain its high-yielding dividend amid all the volatility in the oil and gas markets. What makes its ability to continue paying its dividend -- which currently yields 9% -- all the more impressive is that it has done so while investing billions into expanding its midstream footprint.

That growth-focused spending finally started paying off during the third quarter as Targa's earnings soared. That trend should continue in the coming quarters as the company realizes the full benefits of all the expansion projects it's bringing online, so Targa's sky-high dividend is on a slightly better foundation.

Drilling down into Targa Resources' third-quarter results

Data source: Targa Resources. EBITDA = earnings before interest, taxes, depreciation, and amortization.

Targa Resources' earnings and cash flow soared versus the second quarter, thanks in large part to recently completed expansion projects. The company started operations on its Grand Prix NGL (natural gas liquids) pipeline in early August, transporting an average of 132,000 barrels per day (BPD) for the quarter, including 230,000 BPD in September, about half of its current capacity. Meanwhile, volumes in its Badlands area (Bakken shale) jumped 31% from the second quarter, due to the partial benefit from a recently completed natural-gas processing plant in the region. The company also benefited from higher volumes in the Permian Basin due to production growth there.

These positives more than offset the lost income from the sale of a stake in Targa's Badlands gathering and processing business earlier this year. The company used those proceeds to help finance some of its expansion projects, as well as to shore up its balance sheet.

Image source: Getty Images.

A look at what's coming down the pipeline at Targa Resources

Targa Resources remains on track to invest $2.4 billion into expansion projects this year. That spending has enabled the company and its partners to bring several projects online. In addition to Grand Prix and the new gas processing plant in the Badlands, Targa recently started up three other gas processing plants in the Permian Basin, another NGL processing facility, and a large-scale gas pipeline out of the Permian. These projects, several of which came online during the third quarter, should drive significant growth in the fourth quarter, and throughout 2020.

The company expects to spend another $1.2 billion to $1.3 billion on expansion projects next year, most of which will go toward finishing projects it had under construction in 2020. Those include two more gas plants in the Permian, another two NGL processing plants, and an expansion of its LPG (liquefied petroleum gas) export terminal. The company, however, is evaluating whether to build more gas plants in the Permian as well as another NGL plant. If it moves forward with these projects, then growth spending will likely be at the high end of its range.

Targa Resources is also evaluating additional asset sales to help finance the construction of those expansions. Among the businesses it's potentially looking to sell are its oil gathering and storage operations in the Permian Basin.

Starting to hit the gas

Targa Resources is in the process of putting $4 billion of expansion projects into service, which is starting to boost its bottom line. That trend should become even more pronounced during the fourth quarter as it benefits from the ramp-up of the projects it recently completed.

Adding in the projects it expects to finish next year, Targa Resources' earnings appear poised to grow at an accelerated rate through at least 2021. That should significantly improve its dividend payout ratio, which would make Targa a much more appealing option for income-seeking investors to consider.