This year has been a tough one so far for anyone invested in Targa Resource Partners (NYSE:NGLS) or its general partner Targa Resources Corp (NYSE:TRGP). Both companies haven't even been able to maintain pace with the Alerian MLP Index, which itself is already down considerably this year thanks in part to lowered oil and gas prices.

NGLS Chart

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It's not that surprising that Targa hasn't been able to keep pace with its MLP peers, though, when you consider that a larger percentage of its revenue is generated from commodity prices than others in the space. So to help you understand what to expect when Targa reports earnings on August 4th, here's a quick primer.

A quick recap of last quarter
In the middle of last quarter, Targa Resources Corp completed the acquisition of Atlas Pipeline Partners. So when the quarter concluded we got a small glimpse of what the two companies will look like. Almost all of Atlas' assets involve the gathering and processing of natural gas and natural gas liquids -- NGLs -- in the Texas/Oklahoma region, and when those gathering volumes are fully integrated into Targa Resource Partners' operations for a full quarter it will increase natural gas and NGL capacity by 85% and 69%, respectively. For last quarter, though, Targa only booked 31 days of Atlas' operations as revenue of its own. 

Here's what Targa's operating segments looked like last quarter

Ngls Op Margin

Source: Targa Resource Partners/Targa Resource earnings release, author's chart

As expected, operating margins for its two gathering & processing units declined while its logistics segment saw strong results and marketing & distribution remained steady. The reasons for this are that its gathering & processing units don't all operate on fixed fee contracts, but rather a decent portion of its operating margin comes from what are known as percent of proceeds contracts. These types of contracts mean that earnings are affected more by commodity prices than fixed fees. 

On the other side of the business, though, Targa benefits from lower prices because its other two segments derive part of its operational margins from the export of natural gas liquids and liquid petroleum gas -- LPG. As prices for natural gas decrease, feedstock costs for this segment decrease and can increase sales volumes. Last quarter was a great example as LPG export volumes increased from last years volume of 116,000 barrels per day to 196,000 barrels per day. 

The one element that might set off alarm bells for investors is that last quarters distributable cash flow of $52.3 million didn't quite cover all of its distributions. Last quarters distribution coverage ratio came in at 0.89 times as incentive distribution rights to Targa Resources increased significantly last quarter. Perhaps this is much ado about nothing because this coming quarter will get to book all of the operating margin from the Atlas Pipeline deal, but another short quarter could put the company's distribution coverage ratio guidance of 1.0 times into question.

What Wall Street expects
Normally consensus estimates for companies are given as earnings per share. But Targa Resources Partners is a master limited partnership so earnings are not as important. So instead here are the consensus estimates for revenue and EBITDA as compiled by S&P Capital IQ

Revenue $2.084 billion
EBITDA $282 million 

Source: S&P Capital IQ

What to watch for
It's pretty simple, does the incorporation of Atlas' cash flow help to cover the cash shortfalls that we saw last quarter? Targa Resources has already granted a 4 year subsidy on its incentive distribution rights as part of the Atlas Pipeline deal. If the company's cash flow can't cover all its distribution obligations with the subsidies in tact, then when they are gone it could be an even bigger issue.

Another item to look at is the new projects that are coming online. About two-thirds of the total project spending going on at Targa today is going to be fee based contracts. but most of the gather and processing assets in that project backlog will be percent of proceeds assets like the ones in its existing gathering & processing units. This could make cash flow for these two segments more volatile over time, but hopefully the steady cash flows from the other segments will make up for it. 

What a Fool believes
Preferably, Targa would be looking to decrease its exposure to commodity priced services. However, its current capital spending plan gives the company a percentage of fee based and commodity priced based operating margins very much in line with its current contract structure. So this coming quarter we could see a slight improvement from last quarter since average natural gas and oil prices were slightly higher in the second quarter than in the first.

For those investors looking at Targa as a potential investment, it may be worth looking at this quarters results first to see if the incorporation of Atlas' assets over a full quarter help to make up for some of those cash shortfalls we saw in the first quarter. 

Tyler Crowe has no position in any stocks mentioned.

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