Targa Resources (TRGP 0.38%) had to make several hard decisions when the energy market went haywire last year. The midstream company cut its capital spending plan three times while slashing its dividend by 91%. Those moves allowed it to conserve cash to shore up its balance sheet amid lower oil and gas prices. 

While painful at the time, Targa's decisions enabled it to stay afloat, buying time while it waited for the energy market to recovery. That's now paying big dividends as market conditions have improved significantly this year. This turnaround was apparent in the company's recent second-quarter report.

A person in a hard hat looking through an empty pipeline.

Image source: Getty Images.

Drilling down into Targa Resources' second-quarter results

Targa Resources generated $460 million of adjusted EBITDA during the second quarter. That's 31% ahead of the year-ago level. The company benefited from improved results in its gathering and processing (G&P) and logistics and transportation (L&T) segments. 

G&P earnings grew thanks to higher volumes in all three of its operating regions. Volumes in the Permian Basin and central region rebounded following winter storms during the first quarter. Meanwhile, higher producer activity due to improved market conditions drove higher volumes in the Permian Basin and Badlands region. 

Earnings from the company's L&T businesses also benefited from the rebound following winter storms in the first quarter. The company saw record volumes on its Grand Prix Pipeline and strong LPG export volumes.

A look at what's ahead for Targa Resources

Targa Resources' strong showing in the second quarter, along with continued improvement in commodity prices, has given it the confidence to increase its full-year guidance once again. The midstream company now expects to generate between $1.9 billion and $2 billion of adjusted EBITDA this year. That would put its results 19% ahead of 2020's total at the midpoint.

The company also continues to anticipate investing $350 million to $450 million on capital projects this year. That's despite the decision to move forward with constructing the new Legacy natural gas processing plant in the Permian Basin. The company expects to invest $70 million into the project this year, which it should finish by the fourth quarter of 2022.

With earnings rising faster than expected, the company is now on track to get its debt-to-EBITDA ratio down to 3.5 by year-end. That's right in the middle of its 3.0 to 4.0 target range and a significant improvement from 2020's level of 4.7.

Targa expects to be in the position to return additional capital to its investors next year, even after the planned repurchase of its partner's interest in their DevCo joint venture. On its second-quarter conference call, Targa noted several ways it could return capital to investors, including additional dividends, share repurchases, repayment of preferred equity, and continuing to reduce debt.

Do these positives make Targa a buy?

Shares of Targa have already bounced back from last year's challenges. They've rallied more than 60% this year and almost 120% over the previous 12 months. So they're not quite the bargain they once were. At the current share price, Targa trades at about 10 times its 2021 EBITDA, assuming it hits the high-end of its forecast. While that's not expensive, it's not a screaming bargain either since others in the midstream sector are trading at even cheaper prices. As a result, Targa isn't overly appealing to value investors.

Meanwhile, with a dividend yield below 1%, Targa won't excite income investors, especially when many others in the energy sector offer much more attractive dividends.

Finally, while the company is growing its earnings at a brisk rate this year, it likely won't sustain that pace in the future. That's because demand for oil and gas is nearing a plateau as renewables gain market share.

That leaves investors with no clear catalyst to buy shares of Targa. While the stock price could continue rallying in the near term if oil and gas prices keep rising, the longer-term outlook isn't quite as bright. Targa therefore isn't an appealing buy these days, even if it's heading in the right direction.