Targa Resources Corp. disclosed the sale of its 25% equity interest in the Gulf Coast Express Pipeline to an undisclosed company on Feb. 3 for $857 million.

The divestiture was viewed as an increasing likelihood by the market, according to to analysts with Tudor, Pickering, Holt & Co. (TPH), given completion of Targa’s “DevCo” buy-in last month and management commentary highlighting the asset as a potential sale candidate. Still, TPH said the price tag for the 2 Bcf/d natural gas pipeline exceeded expectations and should accelerate the simplification of Targa’s capital structure.

“The transaction price comes in well ahead of the previously rumored ~$750 million and reduces the net DevCo outlay to just $68 million (TPHe <1.0x EBITDA multiple) for the remaining Grand Prix and Frac 6 interests,” TPH analysts wrote in a Feb. 4 research note.

The Gulf Coast Express Pipeline, which began operating in September 2019, transports natural gas from the Permian Basin to outside Corpus Christi on the Texas Gulf Coast.

Targa’s stake in Gulf Coast Express, alongside a 20% interest in the Grand Prix NGL Pipeline and 100% interest in the Train 6 fractionator in Mont Belvieu, Texas, was previously part of a development company joint venture (DevCo JV) formed in 2018. On Jan. 10, Targa repurchased its interests in the DevCO JV from investment firm Stonepeak Partners LP for approximately $925 million.

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The DevCo buy-in materially reduced Targa’s annual cash outflows, according to TPH, while further simplifying the capital stack, with a credit upgrade to its investment-grade likely as the year progresses. 

“Though TRGP remains a consensus long among dedicated Energy funds, an investment-grade upgrade may pave the way for potential S&P 500 inclusion as TRGP has recently met the market cap requirement which would likely expand the pool of potential investors,” the TPH analysts wrote.

Targa expects to receive the full proceeds from the sale of its Gulf Coast Express stake in the second quarter following a customary call right period in favor of the other members of the pipeline. Other owners of the Gulf Coast Express include Kinder Morgan Inc., Altus Midstream and DCP Midstream.

TPH analysts estimate Targa’s pro forma excess free cash flow is likely to exceed $900 million as proceeds from the sale combine with the accelerated retirement of the company’s Series A Preferred to offset lost Gulf Coast Express cash flow, according to the firm’s research note.

J.P. Morgan is serving as Targa’s financial adviser and Vinson & Elkins LLP is Targa’s legal counsel on the Gulf Coast Express transaction.