What: Shares of Targa Resources Corp (NYSE:TRGP) are up more than 15% as of 11:30 a.m. EST following the announcement that it had completed the acquisition of its subsidiary MLP Targa Resources Partners.
So What: Like a few other companies in the pipeline space, Targa is eliminating its limited parter-general partner corporate structure. The idea behind the deal is that, by eliminating components of the structure, such as incentive distribution rights to the general partner, it will be able to lower its cost of capital for financing new growth projects.
For the owners of the limited partner shares, the deal is a bit of a short-term stinker that will hopefully pay off later down the road. The discounted share price they received as part of the deal, with no cash consideration for the tax implications of the deal for its unit holders, wasn't the most welcome news. However, now that the deal is done, investors can focus more on the longer-term implications of being a single company, which should have some clear benefits.
Now What: Targa Resources will report its earnings on February 25th, so we will get to see what the company's financial performance looks like on a combined basis. Based on some of the initial numbers, results will be a bit weak. Beyond that, the important things investors should watch for is whether Targa can move more of its contracts to a fixed-fee structure, and hopefully ones with minimum volume commitments that will take some of the guessing game out of each quarter. If it can stabilize its cash flow by doing this, it should help repair the less-than-ideal financial situation the company finds itself in today.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
Lackluster Earnings Mean These 2 Cheap High-Yield Stocks Probably Can't Grow Their Dividends Right Now
Investors will need to be content with their 8%-plus yields, since growth remains elusive.
Targa Resources Mashes on the Growth Accelerator Again in the Second Quarter
Management just gave the go-ahead for the most important piece of infrastructure for its future.
How Sustainable Is Targa Resources Corp.'s 8% Dividend?
Investors who bet on the sustainability of this high yield are taking quite the gamble.