What happened

Shares of Targa Resources (NYSE:TRGP) jumped 11.8% in December, according to data provided by S&P Global Market Intelligence. The energy company benefited from higher oil prices as well as the upcoming uptick in its cash flow from recently completed expansion projects.

So what

Crude oil rallied about 11% last month. While oil prices don't typically have much direct impact on the cash flows of most midstream companies, that's not the case with Targa Resources. That's because about 25% of its earnings are supplied by percent-of-proceeds contracts and other similar agreements based on commodity prices. For comparison sake, most peers like to keep their direct exposure to commodity prices to less than 20% of the total. But Targa's higher exposure, which is a headwind when prices fall, benefits it when they improve. As such, crude's rally in December should fuel higher commodity-based earnings for the company.  

Pipelines at an oil storage terminal.

Image source: Getty Images.

The other catalyst for Targa's stock last month was the recent completion of several fee-based pipeline projects. The company has invested more than $4 billion over the past two years into a variety of midstream projects, including the Grand Prix and Gulf Coast Express pipelines, which both started up during the second half of 2019. Because of that, Targa expects to hit an inflection point in 2020 as cash flow should surge while capital spending is on track to decline. That should enhance the sustainability of the company's 8.7%-yielding dividend, potentially giving it the fuel to start increasing its payout again this year.

Now what

Targa's expansion program has it on track to grow its earnings from an estimated $1.5 billion last year to as much as $2 billion in 2020, with further upside in 2021 thanks to the recent and upcoming completion of several fee-based expansion projects. That growth should improve the company's financial metrics, bolstering the sustainability of its dividend. Add that to the upside from higher oil prices on its assets that are not fee-based, and Targa Resources could produce even stronger total returns in the coming months.

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