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No matter what the source, energy demand is expected to be on a steady upward trajectory in the years to come. According to this McKinsey report, by 2050, global electricity demand is projected to shoot up to between 52K and 71K terawatt-hours (TWh), sharply higher than 25K TWh in 2023. By the end of this decade, the artificial intelligence (AI) boom will raise data center power demand by 160%, according to Goldman Sachs.

Given these secular trends favoring energy demand, it's no wonder that some of the most widely followed investors in the market are buying energy stocks. Not only do many energy stocks pay a steady dividend yield, but they can also offer some protection for portfolios during times of global crisis or periods of high inflation.

All of that said, here's one natural gas company that has a strong presence in the asset-rich Permian Basin, pays a quarterly dividend, and has a top rating from Wall Street analysts.

About Targa Resources

Founded in 2005, Houston-based Targa Resources (TRGP) is a midstream natural gas company. They primarily focus on gathering, transporting, processing, and storing natural gas liquids (NGLs) and natural gas (NGQ24). Their presence spans from the Permian Basin to the Gulf Coast, making Targa one of the largest infrastructure companies delivering natural gas and NGLs in the United States. It currently commands a market cap of $28.55 billion.

TRGP stock has rallied 50.4% on a YTD basis, and it offers a dividend yield of 2.33%. Although this is lower than the sector median of 3.75%, its reasonable payout ratio of 45.9% leaves room to grow its dividends in the future. In fact, for Q1, Targa raised its quarterly dividend by an impressive 50% to $0.75 per share.

Now, let's have a closer look at what makes Targa a “Strong Buy” at current levels.

TRGP's Strong Balance Sheet

The financial performance of energy stocks is generally tied to the vagaries of energy prices, but midstream companies have the benefit of being “once removed” from that volatility. True to form, Targa has been able to manage its balance sheet quite well, backed by a strong operational showing in the latest quarter.

The company reported revenues of $4.56 billion in Q1, reflecting a yearly growth of 1%, and coming in above the consensus estimate. EPS jumped to $1.23 from $0.03 in the prior year, missing the consensus estimate of $1.31.

However, production in the company's core Permian Basin reserves rose in the quarter. Plant Natural Gas inlet marked an increase of 11% from the previous year to 5,395 million cubic feet per day (MMcf/d), while NGL production notched 7% growth in the same period to 699.8 million barrels per day (MBbl/d).

Additionally, in Q1, the company generated net cash from operating activities of $876.4 million and closed the quarter with a cash balance of $109.9 million.

Strong Outlook & Strategic Advantages

Targa management remains bullish about its prospects in 2024 and 2025. On the Q4earnings call CFO Jennifer Kneale said, “We believe that there will continue to be strong growth in Permian volumes on our system going forward, which is going to drive incremental volumes through our downstream assets, requiring continued investments, which will continue to be at attractive returns, particularly given our efforts around adding fees and fee floors.”

Notably, in May, the company announced its new 275 MMcf/d Pembrook II plant in Permian Midland, and it remains on track to complete the Greenwood II plant in Permian Midland.

In addition to its new gas processing plants, Targa is fortifying its position in the NGL market with a multi-pronged approach. Their new Daytona NGL pipeline is expected to be operational by the end of 2024, coinciding with the launch of additional gas processing plants. They're also expanding their fractionation capacity and LPG export capabilities. This initial phase of the Daytona pipeline boasts a significant capacity of 400,000 barrels per day of NGLs, greatly enhancing Targa's overall NGL infrastructure.

Additionally, a key operational advantage for TRGP lies in its extensive network of existing processing plants. These plants offer a layer of protection against fluctuating commodity prices, thanks to their percent-of-proceeds and percent-of-liquids agreements. This unique structure helps to buffer against the full brunt of the commodity cycle's ups and downs.

Analysts Rate TRGP Stock a Strong Buy

Overall, analysts have deemed TRGP stock a “Strong Buy.” The shares have outpaced their mean price target of $128.72, but the high target price of $147 denotes an upside potential of about 12% from current levels.

Recently, brokerage firm Argus initiated coverage of the stock with a “Buy” rating and a target price of $140. Analyst John Staszak remains bullish about Targa's “operations in nearly every segment of the midstream sector of the oil and gas industry, as well as its geographic diversity, with many of its assets focused on some of the most productive U.S. oil and gas formations and connected with important natural gas liquids facilities.”

Overall, out of 18 analysts covering the stock, 16 have a “Strong Buy” rating and 2 have a “Moderate Buy” rating.

On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.