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Targa to Buy MLP, Executives Go on Defensive

Executives with Targa Resources Corp. (TRGP) were on the defensive with analysts Tuesday after the company announced it would fold its master limited partnership (MLP), Targa Resources Partners LP (NGLS), in an all-stock deal valued at $6.67 billion.

Under the terms of the deal, the parent company will swap 0.62 common shares of TRGP for each unit of NGLS that it does not already own. The total price tag is an 18% premium over the partnership's closing unit price of $36.09 on Monday.

The deal has been approved by both boards and it has passed the muster of the conflicts committee, but it still requires approval by TRGP shareholders and NGLS unitholders. After the transaction closes, which is expected to occur in 1Q2016, all outstanding units of NGLS would be owned by TRGP and no longer publicly traded.

"With the consolidation, we are a stronger Targa, better positioned for both lower commodity price environments and for better price recovery commodity price environments," CEO Joe Bob Perkins said during an earnings call to discuss the third quarter on Tuesday.

But analysts questioned the timing of the announcement, less than one month after NGLS announced that it had priced an underwritten public offering of 4.4 million units at a price of $25/unit. During the question and answer session, Perkins conceded that "based on what you've seen publicly" the decision looked like it had not been planned for a long time.

"The strategic alternative assessment has been going on well before that announcement," Perkins said. "Please, out there -- don't interpret that something has changed from the time we were doing those financings. The defensive nature of this is related to trying to manage what we look like in a 'lower-for-longer' [price environment]. This is a stronger Targa in lower-for-longer.

"We're not planning on lower-for-longer, but we want to be ready and positioned for it. This move positions us for that type of price scenario, just as it positions us well for improvements in the higher price, better recovery price scenario."

NGLS stock opened at $32.75/share on the New York Stock Exchange (NYSE) on Tuesday, but by 9:50 a.m., as news of the acquisition broke, the stock plummeted 6.8% to $30.51. The stock recovered some of its loss as the day progressed, but closed Tuesday at $30.30 for a loss of 7.4%. It fell further, to $29.76, in Wednesday morning trading.

TRGP's stock on the NYSE also took a hit Tuesday, opening at $54.00 but falling 3.2% to $52.27 at 9:50 a.m. The parent company's stock closed at $50.88 for a loss of 5.7%. The stock continued to slide on Wednesday morning to $50.70.

"We have a rule, as we're doing these calls, that no one looks at the market ticker," Perkins said. "We're giving a call based on nine months of performance, and we're making a strategic move for Targa for the long-term.

"I don't know what the near-term market reaction is missing, but I hope that the long-term market reaction is focused on the long-term -- a stronger Targa for multiple various price environments that will perform better than standing alone."

According to a 10-K filing by TRGP on Tuesday, last month NGLS announced a cash distribution for 3Q2015 of $0.825/unit, which will be paid on Nov. 13. The total distribution paid will be $200.4 million, with $139 million to the partnership's third-party limited partners and $61.4 million to TRGP for its units, incentive distribution rights (IDR) and its 2% general partner interest.

Pat Rau, NGI director of strategy and research, said NGLS was well into the maximum IDR split.

"That greatly increased the cost of capital at the MLP, which is one reason why other companies have been buying their MLPs," Rau said Tuesday. "Further complicating that, Targa is getting to be so big it's going to be all the more difficult to grow their distributions. There is a risk that they're going to have to overpay for assets just to continue to grow."

NGLS's gathering and processing (G&P) segment reported a 175% increase in plant natural gas inlet volumes, which rose from 0.95 Bcf/d in 3Q2014 to 2.62 Bcf/d in 3Q2015. Gross natural gas liquid (NGL) production also increased, by 122%, between the two quarters, from 109,200 b/d to 242,000 b/d. Crude oil gathering rose 9.8%, from 99,200 b/d to 108,900 b/d.

But averaged realized prices collapsed. According to G&P, the segment saw a 34.7% decline in natural gas prices, from $3.80/MMBtu in 3Q2014 to $2.48/MMBtu in 3Q2015. NGL prices fell 58.7% between the two quarters (from 75 cents/gal to 31 cents/gal), as did condensate prices, falling 53% (from $85.08/bbl to $39.96/bbl).

Capital expenditures (capex) at NGLS are expected to total $700-800 million for 2015, with $270 million devoted to projects within its downstream segment and $430-550 million to G&P. Most of the downstream allocation, $230 million, will go to the Train 5 expansion (100,000 b/d) of the Cedar Bayou Fractionator at Mont Belvieu, TX, expected to be completed in mid-2016.

Meanwhile, the G&P earmark includes $125-200 million for its Badlands Expansion Program in North Dakota and $75-120 million for expansion programs in the Permian Basin.

NGLS said it expects to complete the 200 MMcf/d Buffalo processing plant in West Texas -- a former project of Atlas Energy LP, parts of which were acquired by TRGP earlier this year (see Daily GPIFeb. 13Oct. 13, 2014) -- during the first half of 2016. The Buffalo plant will provide additional processing capacity across the Midland Basin.

Also on the drawing board, NGLS's new joint venture (JV) with Sanchez Energy Corp. to build a 200 MMcf/d processing plant in La Salle County, TX, and approximately 45 miles of gathering lines to serve Sanchez's Catarina asset in the Eagle Ford Shale (see Shale DailyOct. 5). The facility, which would be expandable to 260 MMcf/d, is expected to be in service in 2017.

NGLS said that based on announced projects, it expects capex to total approximately $600 million in 2016. The company said it has more than $4 billion in projects under development, with near-term growth projects under development, both downstream and in G&P, ranging from $400 million to $1.1 billion.

Targa connected its West Texas (WestTX) and SAOU systems in the Permian Basin during the third quarter. WestTX includes more than 3,800 miles of gathering lines serving five processing plants (collectively 655 MMcf/d of processing capacity), while SAOU includes about 1,750 miles of gathering lines serving four plants (369 MMcf/d).

Net income attributed to NGLS totaled $48.5 million (2 cents/unit) in 3Q2015, a 62.2% decline from 3Q2014, when net income attributed to the partnership totaled $128.3 million and unit holders earned 78 cents/unit.

TRGP reported $12.7 million (23 cents/share) of net income available to common shareholders in 3Q2015. By comparison, the parent company reported $30.7 million (73 cents/share) of net income to shareholders during the preceding third quarter.

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