This Energy Stock Rocketed More Than 100% in 2024. Does It Have the Fuel to Continue Rallying in 2025?

Shares of Targa Resources (NYSE: TRGP) were blistering hot in 2024. The midstream company was up more than 105% heading into the final trading days of the year. Add in its dividend, and the total return was even higher. That absolutely crushed the S&P 500, which had a very strong year by delivering a total return of almost 30%.

Here's a look at what fueled the energy stock's rally this year, and whether it has the power to continue producing market-crushing returns in 2025.

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A record-breaking year

Targa Resources had a very strong year in 2024. The pipeline company delivered a record $1.1 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the third quarter. The midstream company handled record volumes during the period across its Permian, natural gas liquids (NGL) transportation, and fractionation assets (fractionators separate NGLs into pure streams of ethane, propane, butane, and other products).

One factor fueling its record earnings and volumes was the recent completion of several organic expansion projects. The company completed the Daytona NGL Pipeline expansion in the third quarter. It also started up the new 120,000-barrel-per-day Train 9 fractionator in Texas in the first quarter, and completed its new Wildcat II natural gas processing plant in the fourth quarter of 2023.

The company's strong showing has it on track to deliver adjusted EBITDA above the top end of its $3.95 billion to $4.05 billion range in 2024. That suggests around 15% growth compared to 2023's record of $3.5 billion, which was 22% above 2022's level. It's much faster than the roughly 8% growth rate the company initially expected this year.

Targa's growing earnings have allowed it to return more cash to shareholders this year. It boosted its dividend by 50% and repurchased $646.7 million of its shares through Q3.

Meanwhile, the company's growing earnings have helped lower its leverage ratio, which is now in the lower half of its 3.0 to 4.0 times target range. As a result, the company received credit rating upgrades in August, pushing it another notch into investment-grade territory. That's reducing its borrowing costs while enabling it to get better terms from lenders.

Hitting an inflection point in 2025

Targa Resources has been investing heavily in expanding its midstream network in response to strong demand from its producing customers. The company currently has several additional expansion projects on track to enter commercial service over the next two years. It has six more natural gas processing plants under construction that should enter commercial service through Q3 2026. It also has another NGL fractionator under construction (Q3 2026 in-service date) and an expansion of its Galena Park terminal (second half of 2025). On top of that, it invested in a joint venture building a new natural gas pipeline, which should enter service in the second half of 2026.

However, while the company has several expansion projects underway, its capital spending should moderate in 2025. It expected growth capital spending of $2.7 billion in 2024, higher than its initial range ($2.3 billion to $2.5 billion) due to higher-than-anticipated volume growth on its Permian system. The company currently anticipates that capital spending will be around $1.7 billion next year. While that's an increase from its initial expectations of $1.4 billion, it represents a roughly $1 billion decline from 2024's level.

That lower capital spending level will free up significant cash. Meanwhile, its expansion projects will further increase its cash flow. These catalysts will give the midstream company more money to return to investors.

That gave Targa the confidence to boost its dividend by another 33% for 2025, which will raise its dividend yield to 2.2% from its current level of 1.7%. Meanwhile, the company has about $1.1 billion remaining on its current share repurchase authorization.

The fuel to continue rallying

Targa Resources has a lot of momentum heading into 2025. The midstream company should continue growing at a solid pace. Meanwhile, its free cash flow should surge, with capital spending on track to decline. That will give it even more money to return to investors.

These factors could give the pipeline company the fuel to continue rallying in 2025, especially considering that its valuation is right in line with its peers in the midstream sector, even after its epic rally in 2025. While its shares probably won't see a repeat of 2024's surge, Targa could still produce strong returns in the coming year.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.