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Finance

Which Pipeline Transportation Stock is a Better Buy?

Antero Midstream Corporation (AM) and Targa Resources Corp. (TRGP) are two of the largest owners and operators of midstream energy assets. AM operates natural gas gathering pipelines, compression stations, processing plants, and treatment assets in the Marcellus Shale and Utica Shale basins. TRGP is engaged in gathering, compressing, treating, processing, transporting, and selling natural gas in the Gulf Coast area.

Most companies that operate pipeline infrastructure for the oil-and-gas industry have rebounded from the depths of the coronavirus pandemic this year. Despite the major setback,  pipeline players have emerged stronger and are now generating stable revenues from their long-term contracts with shippers.

AM and TRGP have been among the frontrunners in the industry and  have successfully increased their production volumes to record levels. Since natural gas will be one key to the transition to clean energy in the coming decades, because  it complements the growth of renewable energy, we think these two companies are well positioned to witness solid growth in the coming months.

Both stocks have generated decent returns over the past six months. While AM returned 53.3% over this period, TRGP gained 39.1%. In terms of one-month performance, AM is the clear winner with 10.2% gains versus TRGP’s 6.6% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

On December 17, AM announced that it plans to offer $500 million in senior unsecured notes in a private placement. The company intends to use a portion of the offering’s proceeds to redeem $350 million of its 5.125% senior notes due 2022, with the remaining proceeds repaying  borrowings under its credit facility.

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On November 6, the company announced the pricing of a $550 million offering of senior notes by its wholly owned subsidiary Antero Midstream Partners LP. AM expects to use the net proceeds to repay a portion of outstanding borrowings under its credit facility.

In late November, Targa Resources Partners LP, a subsidiary of TRGP, announced the redemption of $125 million of its outstanding 9.00% Series A fixed-to-floating rate cumulative redeemable perpetual preferred units. This redemption will help the company to simplify its capital structure and identify opportunities to generate additional free cash flow.

Recent Financial Results

In the third quarter ended September 30, 2020, AM’s gathering and compression revenue surged 8.3% year-over-year to $190.21 million, primarily due to record production. The company’s EPS has grown 138.6% year-over-year to $0.22, while its adjusted EBITDA has risen  5% from the year-ago value to $229 million.

AM’s gathering and processing volumes increased 13% and 43%, respectively, from the prior-year quarter. And its free cash flow has grown 587% year-over-year to $158 million over this period.

TRGP’s revenue has increased 11% year-over-year to $2.12 billion for the third quarter ended September 30, 2020. The company’s sales  have risen 15% from their year-ago value. Its adjusted EBITDA has  grown 20% from the prior-year quarter to $419.10 million, while its cash flow has risen 28% year-over-year to $294.70 million over this period.

Past and Expected Financial Performance

AM’s revenue and total assets have grown at a CAGR of 166% and 541.1%, respectively, over the past three  years. The company’s EBIT grew at a CAGR of 197% over this period.

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Analysts expect the company’s revenue to increase 15.4% in the current year. AM’s EPS is expected to grow 169% in the current quarter, and 495.7% next year.

TRGP’s revenue and total assets have grown  at a CAGR of 0.2% and 4.7% over the past three years. The CAGR of the company’s EBIT has been 71%.

Analysts expect the company’s revenue to decrease 10.5% in the current year. TRGP’s EPS is expected to grow 143.5% in the current quarter, and 111.9% next year.

Here AM is in an advantageous position.

Profitability      

TRGP’s trailing-12-month revenue is 8.08 times AM’s .  But AM is more profitable, with a gross profit margin of 81.7% versus TRGP’s 38.1%.

Moreover, AM’s EBITDA margin of 72.2% compares favorably with TRGP’s 26%.

Valuation

In terms of trailing-12-month P/E, TRGP is currently trading at 12.84x, 75.4% more expensive than AM, which is currently trading at 7.32x. Though TRGP is less expensive in terms of trailing-12-month Price/Sales (0.73x versus 3.70x), its trailing-12-month Price to Book of 2.12x is 44.2% higher than AM’s 1.47x.

Thus, AM is the more affordable stock here.

POWR Ratings

AM is rated “Buy” in our proprietary POWR Ratings system, while TRGP is rated “Neutral.”  Here are how the four components of overall POWR Rating are graded for AM and TRGP:

AM has an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade, and a “D” for Industry Rank. In the 56-stock MLPs – Oil & Gas industry, it is ranked #6.

TRGP has a “C” for Trade Grade and Peer Grade, and a “D” for Buy & Hold Grade and Industry Rank. It is ranked #14  of 56 stocks in the same industry.

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The Winner

Both AM and TRGP are good investment bets considering their market dominance and continued expansion. However, AM appears to be a better buy because it is a cheaper and more profitable investment option for riding the industry’s rebound.

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AM shares were trading at $7.89 per share on Wednesday afternoon, up $0.21 (+2.73%). Year-to-date, AM has gained 30.61%, versus a 17.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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