Houston-based Targa Resources Corp. announced Tuesday that it agreed to sell 45 percent of North Dakota unit Targa Badlands to funds managed by GSO Capital Partners and Blackstone Tactical Opportunities for $1.6 billion in cash.
Analysts said the sale came much sooner than anticipated and that the $3.6 billion valuation came in much higher than expectations, which ranged from $2.6 billion to $3 billion. Targa plans to use the proceeds to cut debt and fund capital needs.
Vinson & Elkins counseled Targa with a team led by partner Christopher Collins in Houston with assistance from senior associate Jeannie Poland and associate Bo Shi.
Also advising were partners Darin Schultz, counsel Ryan Hunsaker, Larry Pechacek and Dan Spelkin and associates Alex Cross, Brittany Smith and Jordan Fossee. Partners James Meyer and Ryan Carney and associates Brian Russell and Neil Clausen provided tax advice.
Akin Gump Strauss Hauer & Feld assisted Blackstone, including partners Tom McCaffrey, Andy Lehman and Rob Shearer in Houston. Bob Baker of RW Baker Consulting in Houston also represented GSO/Blackstone on legal matters.
Baker started the firm in 2013 after stints as general counsel of Rosetta Resources and El Paso Corp. Paul Chung is general counsel of Targa, which he joined when the company formed in 2005. Before that he was general counsel at Coral Energy, worked in the legal departments at Shell Oil and Tejas and was in private practice at V&E.
Evercore’s Rob Pacha provided financial advice to Targa. Citi bankers Tim Kisling and Claudio Sauer did so for Blackstone and the bank provided financing. GSO Capital and Blackstone are jointly acquiring the stake while Targa maintains operational control and governance rights.
Analysts at Tudor, Pickering, Holt said the ultimate multiple will approximate 11 times as natural gas and crude oil volumes ramp up. They expect the company to use $500 million of the proceeds for debt reduction and the rest to satisfy most of its equity funding needs this year for its $2 billion to $2.1 billion capital program.
“[The] transaction alleviates financing overhang and refocuses [the] market on asset quality and cash flow ramp,” they said. Jefferies analyst Christopher Sighinolfi noted that Badlands will pay a MQD, or minimum quarterly distribution, to its owners based on their initial investments and Blackstone’s capital contributions will have a liquidation preference if Badlands is sold.
The analyst said that Targa bought the assets in 2012 for $950 million and has spent $1 billion since then to expand them – “underscoring the attractiveness of the sale price,” he said – and that they are some of the most profitable assets in the company’s gathering and processing portfolio.
Sighinolfi said the Targa transaction and Dominion’s sale of its Blue Racer interests to First Reserve in November highlight the wide gap between public midstream company valuations and private market transactions for discrete assets.
“We are further impressed by the price as the deal involves a non-operated position in an oil-focused basin dominated by OKE [Oneok Inc.], theoretically limiting the pool of potential buyers,” he added.
The assets and operations are in the Bakken and Three Forks Shale plays of the Williston Basin. They include 480 miles of crude oil gathering pipelines, 125,000 barrels of operational crude oil storage, 260 miles of natural gas gathering pipelines and the Little Missouri natural gas processing plant, which has a gross processing capacity of 90 million cubic feet per day.
Badlands also owns a 50 percent interest in the Little Missouri 4 plant that it expects to complete in the second quarter.
“Our joint venture with Blackstone will support us in continued growth while providing best in class service to our customers in the Bakken,” Targa CEO Joe Bob Perkins said in a statement.
Michael Zawadzki, senior managing director and co-head of energy at GSO, said that given Badlands’ extensive asset footprint across the core of the highly prolific Williston Basin, he believes it is well positioned for continued growth.
The transaction has to clear regulators but is expected to close in the second quarter.