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Pair of Targa ventures could help slow Permian pipeline overbuild


According to Market Intelligence, December 2022


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Pair of Targa ventures could help slow Permian pipeline overbuild

Targa Resources Corp.'s new Permian Basin joint ventures could help the booming shale play avoid a pipeline capacity glut by consolidating potential midstream projects, analysts said.

On Oct. 4, Targa announced that it sold a 25% interest in its proposed Grand Prix NGL pipeline to funds managed by Blackstone Energy Partners and revealed that it signed a letter of intent with Kinder Morgan Inc. and DCP Midstream LP to develop the 1.9-Bcf/d Gulf Coast Express natural gas line.

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"We view the deals as a positive from an industry perspective as these [joint ventures] help to prevent the overbuilding that occurred in the past 'hot' basins such as the Eagle Ford and Haynesville," CreditSights analysts wrote in an Oct. 5 note to clients.

The transactions also garnered a positive reaction on Wall Street, with Targa shares rising 3% on Oct. 5 to close the day's trading session at $48.27.

Targa in May announced plans for the Grand Prix pipeline, which would send NGLs from the Permian and Targa's North Texas system to its fractionation and storage complex at the Mont Belvieu hub. With an initial capacity of about 300,000 barrels per day, expandable to 550,000 bbl/d, the project was projected to cost about $1.3 billion and to begin commercial service in the second quarter of 2019.

In addition to buying a stake in the pipeline, Blackstone Energy's EagleClaw Midstream Ventures LLC signed an agreement with Targa to commit "significant" volumes to the Grand Prix project. That agreement will give Targa an edge even though EagleClaw was a surprise choice, according to Guggenheim Securities' Matthew Phillips.

"This accounts for something like 25% or 30% of the capacity of Grand Prix. ... It probably gives them an advantage in actually getting this project done versus their competitors," he noted in an interview. "We did expect a [joint venture] on grand Prix, but EagleClaw as a [joint venture] partner was a bit surprising. I think everyone thought it was going to be [Enterprise Products Partners LP]."

While Grand Prix is the latest [joint venture] to be formed as West Texas' Permian Basin faces a liquids pipeline overbuild, Phillips said it will not be the last.

"You probably need up to 800,000 barrels per day of increased takeaway over the next five years, and there's been 1.2 million barrels announced, so I think it's inevitable that either some of these projects will be canceled or consolidated," he said.

Targa, which focuses on gathering and processing, is also throwing its hat into the gas transportation ring with a 25% ownership stake in the Kinder Morgan-led Gulf Coast Express project from the Waha Hub area in West Texas to the Agua Dulce Hub near Corpus Christi. While none of the project partners have disclosed the pipeline's cost, Barclays estimated it to be around $2.4 billion.

Analysts at Tudor Pickering Holt & Co. wrote in an Oct. 5 note to clients that Targa's entry into the joint venture should increase the megaproject's odds of reaching a final investment decision. The security of take-or-pay contracts, meanwhile, should benefit Targa's cash flow.

"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," S&P Global Ratings analyst Michael Grande said in a recent interview.