Was Targa Resource Corp.'s 20% Decline in September an Overreaction by the Market?

By Tyler CroweFool.com

What: Shares of TargaResourcesCorp. declined more than 20% in the month of September even though its operating subsidiary,Targa Resource Partners , only declined 3.8% in the month. The largest culprit for the company's decline can be attributed to weakness across the MLP space.

So what: When you consider that the Alerian MLP Index for the month of September declined close to 14%, then a 3% decline in Targa Resource Partners' share prices looks pretty good in comparison. Some of the larger issues from last month were signs that oil and gas production in the U.S. were starting to decline.

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If significant declines were to happen, it would have two likely impacts on Targa's business: 1) lower pipeline volumes could reduce pipeline volumes, and companies that don't have minimum volume commitments for their pipes could see a decline, and 2) lower natural gas production could increase prices. This is important to Targa because a large component of its business is in natural gas processing under percentage-of-proceeds contracts. These types of contracts tend to do better in higher price environments. All in all, these two effects will offset each other to a certain degree.

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Now what: With shares of the parent company declining more than 20% in a month while its subsidiary MLP only declines 3.8%, it sure makes an investor wonder if buying shares in the parent company are a good idea today. In September, Targa Resources Partners issued about $600 million in long-term notes due in 2024 at an interest rate of 6.75%. Not the best rate for an MLP we have seen as of late, but not a bad one, either. This suggests that the underlying assets of the company still look solid and the balance sheet still isn't compromised with too much debt.

The one thing to keep an eye on with Targa -- both the partnership and the parent company -- is its distribution coverage. The company has been cutting it pretty close as of late, with its distributable cash flow just barely keeping up with its payout. Unless there are some upticks in cash flow to the company in the coming quarters, those plans for 4-5% distribution growth will start to come into question and could make shares of Targa decline even further.

The article Was Targa Resource Corp.'s 20% Decline in September an Overreaction by the Market? originally appeared on Fool.com.

Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool.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.

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