Targa reports strong quarter, stays coy about merger potential

After high-level talks with a potential buyer fell through last month, Houston natural gas pipeline operator Targa Resources will continue to evaluate possible deals, its top officials said Friday — without revealing if any are in the works.

When asked about the company’s position on potential mergers and acquisitions, CEO Joe Bob Perkins said Targa Resources is always interested in acquiring other assets and entities but remains disciplined and won’t be “frustrated by others sometimes paying too much.”

Targa was reportedly in  talks earlier this year with rival Energy Transfer Equity about a $15 billion merger.  Targa confirmed the talks were high-level and preliminary, and that discussions had been terminated, but declined to reveal more information.

Credit Suisse analysts in June said Targa is a prime candidate for a buyout by a number of competitors, most likely Houston-based pipeline giant Kinder Morgan, which the analysts said would provide the best match for the company’s pipeline assets.

With its geographically diverse footprint, assets in the right areas, good vertical integration and capabilities to export  propane, butane and stabilized condensate,  Targa Resources is an attractive grab, said Darren Horowitz, energy analyst for Raymond James.

While Horowitz said he expects Targa would be interested in exploring deals, the management team historically has been strategic about how it allocates capital, and he expects the company to operate with the same care going forward.

Perkins said that while the company has a financial responsibility to consider good offers, any deal has to be weighed against the potential to improve long-term value. If there are any deals on the table, Perkins didn’t reveal them.

In reporting  second-quarter financial results on Friday, Targa and its affiliated master limited partnership, Targa Resources Partners, announced  that Rene R. Joyce, founding CEO and executive chairman, and Roy E. Johnson, executive vice president, plan to retire Dec. 31.

Joyce will continue to serve as director and James Whalen, who has been adviser to the chairman and CEO,  will assume the role of executive chairman Jan. 1.

In answer to an analyst’s question, the executives said the top-level retirements were unrelated to the failed merger talks with Energy Transfer.

“There’s nothing linking Roy and I leaving with the Energy Transfer situation,” Joyce said. “Unfortunately, it’s just a function of age.”

With Joyce on the board, the company intends to manage the same way it has since its inception, Perkins said.

Targa Resources Partners reported a strong second quarter, with profits tripling thanks to significantly higher oil and gas throughput. It also continues to capitalize on its robust liquefied petroleum gas export business.

Net income attributable to Targa Resources Partners grew to $108.8 million, or 64 cents per unit, during the three-month period ending June 30. That up from $26.3 million, or 1 cent per unit, during the same period a year earlier.

Distributable cash flow, which analysts consider a better financial measure for master limited partnerships — tax advantaged corporate structures that distribute most of their profit to unit-holders —  increased to $175.3 million, well above Wall Street’s projections of $138 million, Horowitz said.

Targa Resources units rose 28 cents to $67.16 in New York Stock Exchange trading Friday.

Parent company Targa Resources  reported second-quarter net income of $26.4 million, 63 cents per share, compared with $15 million, 36 cents per share,  for the second quarter 2013.

Its shares rose $1.96 to $129.46

The Targa entities own 11,300 miles of natural gas pipelines as well as gathering, processing and treating assets in West and North Texas, New Mexico and Louisiana and propane storage units and truck terminals in Houston and Louisiana.