MLPs: Targa Resources Partners LP Goes From Target to Hunter

Earlier this summer Targa Resources Corp and its MLP, Targa Resources Partners LP   were thought to be acquisition targets. Bloomberg reported that Energy Transfer Partners had targeted Targa, but the deal never materialized. Today, we see Targa going from target to hunter as it has acquired both Atlas Pipeline Partners L.P. and Atlas Energy L.P. . Let's drill down to see what this deal means for investors.

Understanding the deal
This is a pretty complex deal, so we'll break it into bite-sized pieces. First, Targa Resources Partners is acquiring Atlas Pipeline Partners for a total of $5.8 billion, which includes $1.8 billion in debt. Atlas Pipeline Partners' investors will receive 0.5846 units of Targa Resources Partners and a one-time cash payment of $1.26. This is a deal of one MLP acquiring another MLP.

The next part of the deal is where it gets a little complex. Targa Resources, which is the general partner of Targa Resources Partners, is acquiring Atlas Energy, which is the general partner of Atlas Pipeline Partners. However, Atlas Energy owns some non-midstream assets, which it will be spinning off prior to being acquired by Targa Resources. So, after that spinoff is complete we have one general partner acquiring another general partner. This deal, likewise, will be a cash and stock deal. All that complexity aside there's really two basic reasons why Targa Resources is making this deal. 

Greater scale where it matters
The deal to acquire Atlas is first and foremost about growing Targa's scale. In the following asset map we see that Targa is acquiring assets in the Midcontinent and Texas to pair with its assets in Texas and the Gulf Coast.

Source: Targa Resources Corp Investor Presentation. 

However, the most important area where Targa Resources is growing its scale is in the Midland Basin of Texas where its assets match up really well with Atlas' assets. This is key because the rig count in the Permian Basin is the largest in the U.S., which is noted in the chart at the bottom of that map. Given that the deal will make Targa Resources Partners the second largest processor in the Permian Basin, the company will be in an even better position to profit from future growth opportunities because it has such a large asset footprint in the basin to build upon.

Source: Targa Resources Corp Investor Presentation.

With more than 75 billion barrels of recoverable oil and gas resources in the Permian Basin this really is a great spot to have a large asset footprint. Producers see this play offering decades of production growth opportunities. Because of that, this deal really is about making sure Targa Resources Partners is in the best position to capture these new growth opportunities.

Building an income machine
While growing its scale in the Permian Basin is what drove this deal, the big benefit of that scale is income growth. Targa Resource Partners now estimates it will be able to grow its distribution to unit holders by 11%-13% next year thanks to this deal. That's up from the previous estimate of 7%-9% growth.

Meanwhile, Targa Resources' investors will see their dividend jump 35% next year, which is up from the more than 25% growth that it previously estimated. On top of strong growth next year both companies believe the deal will yield future income growth to investors as the Atlas Pipeline assets will add new opportunities in the Mississippi Lime and Eagle Ford shale that Targa didn't have before.

Investor takeaway
Targa Resources quickly went from an MLP acquisition target to one of the largest, most diversified MLPs on the market. After the deal closes Targa will be a $23 billion behemoth that will have plenty of additional growth opportunities across four of the top five shale basins. Not only that but the company has interesting export capabilities along the Gulf Coast as well as offering investors soaring income. Add it all up and Targa Resources is becoming a compelling MLP option for investors.

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