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Permian gas megaproject expected to move forward after Targa joins pipe venture

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Permian gas megaproject expected to move forward after Targa joins pipe venture

The addition of Targa Resources Corp. to Kinder Morgan Inc. and DCP Midstream LP's plans to jointly develop a nearly 2 Bcf/d Permian-to-Gulf Coast pipeline project increases the odds of the potential megaproject reaching a final investment decision, analysts said Oct. 5.

Targa, which operates a premier gathering and processing system in the Permian, brings additional gas supply security to the venture and benefits by securing its own cashflow through participation, the analysts said.

Kinder Morgan originally proposed the Gulf Coast Express project with DCP as a 430-mile, 42-inch pipeline from the Waha Hub area in West Texas to the Agua Dulce Hub near Corpus Christi, with a capacity of 1.7 Bcf/d. With Targa's entry into the joint venture, Gulf Coast Express is now proposed to have 1.92-Bcf/d capacity and also include a 50-mile lateral into the Midland Basin.

Targa and DCP are set to contribute "significant" volumes to the line from their operations in the Permian, and the lateral will include compression to serve processing plants owned by Targa and Pioneer Natural Resources Company, a leading producer in the basin.

"[Targa] and [DCP's] total in-basin processing capacity of 2+ Bcf/d supports longer-term volume assurance for the [Kinder Morgan] pipe, securing it positive in KMI's FID lineup," analysts at Tudor Pickering Holt & Co. wrote in an Oct. 5 note to clients.

Neither Kinder Morgan nor its partners disclosed the pipeline's cost, but Barclays analysts on Oct. 5 estimated it to be around $2.4 billion.

Because Targa is primarily a gathering and processing company, Guggenheim Securities' Matthew Phillips noted he was surprised by their inclusion. "It's a bit out of their wheelhouse because they traditionally haven't done large regulated gas pipelines ... so it's not something we expected from Targa," he told S&P Global Market Intelligence.

S&P Global Ratings analyst Michael Grande, on the other hand, explained that the Gulf Coast Express pipeline is an attractive project for Targa because it would guarantee cash flow from long-term contracts. "That de-risks Targa's cash flow profile to a certain extent because their gathering and processing operations are mainly fee-based, but they still have volume risks across a lot of their assets," he said in an interview.

Reciept and delivery points for the project cover a who's who in the midstream business. In addition to sourcing gas from Kinder Morgan Texas Pipeline and El Paso Natural Gas Co. LLC systems, the line has a planned interconnection with Energy Transfer Partners LP's Trans-Pecos Pipeline. Deliveries of gas into the Agua Dulce area would include points on Kinder Morgan Texas' existing Gulf Coast network, Kinder Morgan-owned intrastate lines, Enbridge Inc. 2.6 Bcf/d border-crossing Valley Crossing Pipeline LLC, the NET Mexico header and other systems.

Kinder Morgan has been using joint ventures on existing projects to pay off billions of dollars in debt, while bringing on partners for new projects to limit capital spending. It has sold stakes in its 7,600-mile Southern Natural Gas Co. LLC pipeline system, the Utopia pipeline project and the subsidiary developing the Elba Island LNG project in Georgia.

"The Utopia JV shows that we can originate high-value midstream projects that are valued by investors," President and CEO Steven Kean said during a July 2016 conference call. "I can assure you we will continue on this flight path as we work to maintain and strengthen our balance sheet."

Kinder Morgan would own 50% of the Gulf Coast Express pipeline, while Targa and DCP would each own 25%.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.