This Energy Company's Shares Soared Over 100% in 2024. Is There Sufficient Power to Propel Further Gains in 2025?
Targa Resources' (TRGP -0.30%) shares were sizzling hot in 2024. The midstream company observed a staggering increase of over 105%, paving the way for the final trading days of the year. Including the dividend, the total return was even more impressive. This outperformed the S&P 500 significantly, which had a remarkable year with a total return of nearly 30%.
Let's explore the elements behind this impressive performance of the energy stock, and whether it holds the potential for continuing its market-dominating streak in 2025.
An exceptional year
Targa Resources experienced no shortage of accomplishments in 2024. The pipeline company recorded a historic $1.1 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the third quarter. During this period, the midstream firm handled record volumes across its Permian, natural gas liquids (NGL) transportation, and fractionation assets (fractionators separate NGLs into pure streams of ethane, propane, butane, and other products).
One of the key factors contributing to its record earnings and volumes was the completion of several organic expansion projects. These included the Daytona NGL Pipeline expansion in the third quarter, the commissioning of the 120,000-barrel-per-day Train 9 fractionator in Texas during the first quarter, and the completion of the Wildcat II natural gas processing plant in the fourth quarter of 2023.
These successes have put Targa on a trajectory to deliver adjusted EBITDA that surpasses the upper range of its $3.95 billion to $4.05 billion forecast for 2024. This represents approximately 15% growth compared to 2023's record of $3.5 billion, which was an impressive 22% rise compared to 2022's levels. The company's impressive earnings growth far exceeded the 8% growth rate it had initially projected for this year.
Targa's expanding earnings have enabled it to return more cash to its shareholders this year. It has increased its dividend by 50% and repurchased $646.7 million worth of shares before the third quarter concludes.
Meanwhile, Targa's growing earnings have played a crucial role in reducing its financial leverage. Currently, its leverage ratio falls within the lower half of its 3.0 to 4.0 times target range. As a result, it has undergone credit rating upgrades in August, taking another step into the investment-grade category. This coupling with lower borrowing costs and better lending terms is proving to be an advantageous move for the company.
Facing a turning point in 2025
Targa Resources has invested heavily in expanding its midstream network to meet the demands from its production customers. It currently has multiple expansion projects scheduled for commercial operation within the next two years. These include six additional natural gas processing plants expected to enter service by Q3 2026. It also has a new NGL fractionator under construction, with a target in-service date in Q3 2026, and an expansion of its Galena Park terminal scheduled for the second half of 2025. In addition, it is participating in a joint venture building a new natural gas pipeline, which should become operational in the second half of 2026.
While Targa has several expansion projects underway, its capital expenditure is expected to moderate in 2025. It anticipates investment in growth projects of $2.7 billion in 2024, higher than its initial range of $2.3 billion to $2.5 billion due to higher-than-expected volume growth in its Permian system. For 2025, the company estimates that capital spending will be around $1.7 billion. Although this represents an increase from its initial expectations of $1.4 billion, it represents a substantial reduction compared to 2024's level.
This lower capital expenditure will free up substantial cash, while its expansion projects will further boost its cash flow. These catalysts will provide the company with additional resources to share back with investors.
This confidence has encouraged Targa to hike its dividend by a further 33% for 2025, raising its dividend yield to 2.2% from its current level of 1.7%. The company still has approximately $1.1 billion remaining on its current share repurchase authorization.
The foundation for further gains
Targa Resources has picked up an impressive amount of momentum as it approaches 2025. The midstream company should continue to witness robust growth while its free cash flow is projected to surge, considering that capex is expected to decline in 2025. This will give it even more funds to share with its investors.
These components could very well serve as the fuel for Targa's continued ascent in 2025. Given that its valuation is in line with its peers in the midstream sector following its notable rally in 2024, a repeat of 2024's surge is unlikely. However, Targa may still have the potential to generate strong returns in the coming year.
Investors looking to capitalize on Targa Resources' continued success in 2025 might consider channeling their money into this promising midstream company. The company's announcement of a 33% dividend increase for the upcoming year and the expectation of lower capital expenditures, combined with ongoing expansion projects, could result in increased cash flow and further investment returns.
In light of its strong financial position, Targa Resources' financial leverage ratio is now within the lower half of its target range, boding well for potential credit rating improvements and reduced borrowing costs in the future. This improved financial position will empower Targa to allocate more of its resources towards shareholder returns, providing an appealing investment opportunity for finance enthusiasts interested in the energy sector.
