Targa Resources Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 16 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Targa Resource Corp. 3rd Quarter 2023 Earnings Capital Presentation. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

1 1 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sanjay Lad, Vice President of Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Britney. Good morning and welcome to the Q3 2023 earnings call for Targa Resources Corp. 3rd quarter earnings release along with the 3rd quarter earnings supplement presentation for Targa Resources that accompany our call are available on our website at targaresources.com in the Investors section. In addition, an updated investor presentation has been posted to our website. Statements made during this call that might include Targa Resources' expectations or predictions should be considered forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

Speaker 1

Actual results could differ materially from those projected in forward looking statements. For a discussion of factors that could cause actual results to differ, please refer to our latest SEC filings. Our speakers for the call today will be Matt Molloy, Chief Executive Officer and Jen Kneale, Chief Financial Officer. Additionally, the following senior management team members will be available for the Q and A session. Pat McDonough, President, Gathering and Processing Scott Pryor, President, Logistics and Transportation and Bobby Mararo, Chief Commercial Officer.

Speaker 1

And with that, I'll now turn the call over to Mats.

Speaker 2

Thanks, Anjay, and good morning. We are very proud of the efforts of our employees across the Q3. While battling an extended stretch of hot weather, we continued to operate at a high level demonstrated by record NGL pipeline transportation volumes, 6% higher sequential adjusted EBITDA and completion of our expansion at our LPG export facility in Galena Park, increasing our propane loading capacity by an incremental 1,000,000 barrels per month. We also continue to return an increasing amount of capital to our shareholders in the quarter with $132,000,000 of common share repurchases. Since the end of the 3rd quarter, momentum continues across our organization highlighted by commencement of operations of our new Greenwood plant in Permian Midland ahead of schedule and on budget.

Speaker 2

The expected rebound in our Permian volumes with current reported inlet about 100 50,000,000 cubic feet per day higher than our Q3 average, publishing our annual sustainability report demonstrating our continued progress across ESG as an operator of critical natural gas and NGL infrastructure, receiving a 2 notch upgrade in our ESG rating from MSCI to AA and the announcement today that we expect to recommend to our Board an increase to the 2024 annual common dividend to $3 per share, a 50% increase over the 2023 dividend level. The strength of our operational and financial outlook has resulted in consistent questions from investors and potential investors around how Targa will return additional capital to shareholders going forward, which is why we wanted to provide some clarity today around our expectations for our 2024 common dividend and our current thoughts around our term of capital framework. We believe that we offer a unique value proposition for investors given the strength of our outlook for annual increases in adjusted EBITDA reflective of an excellent integrated asset footprint that will continue to provide high return organic investment opportunities, increasing fee based margin and cash flow stability from our continued progress around fee floor contracts in our G and P business, a strong credit and ESG ratings profile demonstrating our commitment to a stable balance sheet and sustainable operations continued opportunistic share repurchases, further reducing our share count a competitive common dividend with an expectation of meaningful best in class annual growth looking forward and an outlook of significantly increasing free cash flow as some of our large fractionation and NGL transportation projects come online in 2024 and early 2025.

Speaker 2

Our return of capital strategy is informed by a lot of internal and external information, including leverage and balance sheet flexibility, along with our positioning relative to our midstream peers, S and P Energy and broader S and P 500. Across our base scenarios, we are modeling the ability to return 40% to 50% of adjusted cash flow from operations to equity holders. This is not a target or bright line as we place a high priority on flexibility, but it is a framework that we believe can be helpful in thinking through our return of capital our return of capital proposition going forward. Let's now discuss our operations in more detail. Starting in the Permian, high activity levels continue across our dedicated acreage despite lower than expected 3rd quarter volumes, largely driven by the extended periods of heat across New Mexico and Texas.

Speaker 2

We also had about 200,000,000 cubic feet per day of lower margin high pressure volumes move off our system in the Delaware Basin. Our Permian Midland volumes increased 2% sequentially and was offset by reduced Permian Delaware volumes resulting in flat Permian inlet volumes. Through the 1st three quarters of this year, average reported inlet volumes across our system have increased over 300,000,000 cubic feet per day in comparison to average 4th quarter 2022. Our Permian volumes are currently operating at about 150,000,000 cubic feet per day higher than our 3rd quarter average as the growth we expected to see a bit earlier in the year is now materializing in the 4th quarter. In Permian Midland, our new 2.75 $5,000,000 a day Greenwood plant commenced operations in October and is quickly ramping up.

Speaker 2

A big thank you to our engineering and operations teams for bringing Greenwood online safely ahead of schedule and on budget despite challenging operating conditions this past summer. Our next plant in the Midland, Greenwood II remains on track to begin operations in the Q4 of 2024 and is expected to be much needed when it comes online. In Permian Delaware, activity and volumes across our footprint are also running strong. Our Wildcat II and Roadrunner 2 plants remain on track to begin operations in the 1st and second quarters of 'twenty four respectively and both plants are expected to be much needed at startup. In our central region and the Badlands, our combined natural gas volumes increased 2% sequentially and our systems are performing well.

Speaker 2

Shifting to our Logistics and Transportation segment. Targa's NGL pipeline transportation volumes were a record 660,000 barrels per day and fractionation volumes remain strong averaging 793,000 barrels per day during the Q3. Our Grand Prix NGL pipeline deliveries into Mont Belvieu increased 6% sequentially as we benefited from higher third party supply volumes. Our fractionation complex in Mont Belvieu continues to operate near capacity. The restart of GCF will provide much needed capacity when it is fully restarted late in Q1 of 2024 and we continue to expect our Train 9 fractionator to be highly utilized when it amends its operations during the Q2 of 2024.

Speaker 2

Our Train 10 fractionator is also expected to be much needed given the anticipated growth in our GMP business and corresponding plant additions and remains on track for the Q1 of 2025. In our LPG export business at Galena Park, Our loadings increased 15% sequentially due to improved market conditions. We loaded an average of 10,700,000 barrels per month of LPGs during the Q3, even though our loading capability was reduced for part of the quarter due to a previously disclosed required 10 year inspection. Our low cost expansion project to increase our propane loading capabilities by an incremental 1,000,000 barrels per month of capacity was completed at the end of the Q3 and we expect our loadings to ramp during the Q4 providing strong momentum for 2024. We are excited about the long term outlook at Targa and remain focused on continuing to execute on our strategic priorities.

Speaker 2

Before I turn the call over to Jen to discuss our Q3 results in more detail, I would like to extend a thank you to the Targa team for their continued focus on safety and execution while continuing to provide best in class service and reliability to our customers.

Speaker 3

Thanks, Matt. Good morning, everyone. Targa's reported quarterly adjusted EBITDA for the Q3 was $840,000,000 a 6% increase over the 2nd quarter. Sequential increase was attributable to higher system volumes across our integrated NGL businesses, higher commodity prices, partially offset by higher operating and G and A expenses. With 3 quarters of the year completed, we are tracking towards the lower end of our 20 3 adjusted EBITDA range of $3,500,000,000 to $3,700,000,000 but believe that our performance through a lower commodity price environment and a tough operating environment relative to our guidance assumptions is reflective of the significant progress that we have made adding fee floors to our GMP business, our successful hedging program and the resiliency of our operations.

Speaker 3

For a good part of this year, we have benefited from margin associated with fee floor contracts as natural gas and NGL prices were below fee floor levels. We believe that 2023 provides an example of the financial durability of our business in a lower commodity price environment and the benefits of the fee floor structure where we retain upside if commodity prices move higher. We are well hedged across all commodities for the balance of the year and continue to add hedges for 2024 and beyond. Through 3 quarters, we have spent approximately $1,600,000,000 on growth capital projects and our current estimates for balance of year spending lead us towards the higher end of our $2,000,000,000 to $2,200,000,000 range. Our net maintenance capital spending is tracking a little bit higher than initial expectations and our current estimate for 2023 is approximately $200,000,000 At the end of the Q3, we had $1,800,000,000 of available liquidity and our pro form a net leverage ratio is approximately 3.7 times, well within our long term leverage ratio target range of 3 to 4 times.

Speaker 3

Shifting to capital allocation, our priorities remain the same, which are to maintain a strong investment grade balance sheet, to continue to invest in high returning integrated projects and to return an increasing amount of capital to our shareholders across cycles. Our major projects in progress are core to our business. 4 new Permian gas processing plants, Train 9 and Train 10 fractionators and our DAYTONA NGL pipeline. And while we continue to project 2024 growth capital spend to to approximate spending levels similar to 2023, spending in 2025 is expected to be meaningfully lower as we will have completed the lumpier expansions in our downstream business. As Matt described, underpinned by the strength of our business outlook for 2024 and beyond, We plan to recommend to our Board a 50% increase to the 2024 annual common dividend to $3 per share and we expect to be able to grow the annual common dividend meaningfully thereafter.

Speaker 3

We also expect to remain in position to continue to execute opportunistically under our common share repurchase program. During the Q3, we repurchased $132,000,000 of common shares at a weighted average price of 83 point $0.38 and have repurchased $333,000,000 year to date through September. We had about $811,000,000 remaining under our $1,000,000,000 share repurchase program at the end of the Q3. We remain excited about the long term outlook at Targa. Our talented team continues to execute on our strategic priorities and safely operate our assets to deliver the energy that enhances our everyday lives.

Speaker 3

And with that, I will turn the call back over to Sanjay.

Speaker 1

Thanks, Jen. For the Q and A session, we kindly ask that you limit to one question and one follow-up and reenter the lineup if you have additional questions. Brittney, would you please open the line for Q and A?

Operator

To ask a question. Session. All right. Our first question comes from the line of Theresa Chen with Barclays. Your line is now open.

Speaker 4

Good morning. Thank you for taking my questions. It's great to see a very strong dividend increase and your new capital return framework, really a capital accountability framework, if anything. Can you talk about your view of dividend growth within all this. How did you arrive at the 50% increase over 2023?

Speaker 4

Is there a yield you would like to achieve? And how do you generally plan to balance dividend growth with share repurchases within that new 50% cash from ops framework while maintaining a healthy balance sheet.

Speaker 3

Good morning, Theresa. This is Jen. As we said in our scripted remarks, The most consistent question that we've gotten from investors and especially potential investors is related to how we intend to return capital to our investors. And we believe that we've got a really strong story there when we think about where we are today and where we are going forward. Clearly this morning, you can see that we've got significant conviction in the underlying strength of our business as evidenced by our continued activity under our share repurchase program.

Speaker 3

Our return to capital strategy begins with numerous multiyear scenarios and hopefully it's becoming more evident that increasing GMP fees and fee floors are really positioning us to be able to invest in the business to support the activities of our upstream producers despite a lower Waha and NGL environment, So as we look out across multiple years, we've got the flexibility to return an increasing amount of our adjusted cash flow from operations to shareholders. And that's where we're saying that we think we're in position over multi years to return call it 40% to 50% of CFFO. It's not a bright line as we certainly continue to balance and really prioritize balance sheet strength and flexibility. But I do think it's part of how we're thinking about the world and it's important for us to provide a little bit more transparency around how Targa and our Board of Directors look at the dividend. Beyond that, we start to look at our peers, broader S and P Energy and S and P 500 and how they're returning capital and then Targa's relative positioning across all of that.

Speaker 3

And all of that is really at the end of the day informing a return on capital strategy that we believe can maximize shareholder value. We've been very transparent since we instituted the program in October of 2020 that we want to have an opportunistic share repurchase program. And hopefully we are demonstrating a track record of activity when given that opportunity. As we look forward and move Through time, we'll have to see what the opportunities present themselves in the market and that will ultimately balance the approach to dividends and repurchases. But I think this is an important indication that clearly we are in position to return more capital to shareholders and can do that through a stable and meaningfully growing dividend and then also can continue to supplement that with opportunistic repurchases.

Speaker 3

It continues to be that all of the above approach that I think you're really seeing us execute on.

Speaker 4

Thank you. And on the topic of the continued volume growth, just with the recent announcements of upstream consolidation in the Permian, especially the news related to your Midland JV partner and anchor shipper. What do you think this all means for Targa in terms of volume growth trajectory and the duration of the resource underlying your acreage?

Speaker 2

Yes, sure. Hi, Theresa. This is Matt. With the announcements we've seen recently, I'd say consistent with the previous announcements, we have really good relationships with the parties involved in those transactions. So whether you're talking about Exxon or Chevron or others, we have good relationships and really growing relationships with them.

Speaker 2

We handle a lot of their volumes today. And as we think about it, at least in the short term, we have contracts in place with all those parties mentioned. So Those contracts are typically long term contracts. So, we'll just have to see how it plays out over time. We think the outlook for growth in the Permian Basin continues to be very strong.

Speaker 2

When you look at some of those parties mentioned, they have pretty robust growth outlooks. So I think over the longer term, I think we're optimistic on what it ultimately means for our underlying business. But we'll just have to kind of see how that plays out. I think it's going to play out over time.

Speaker 4

Thank you.

Speaker 2

Okay. Thank you.

Operator

All right. Thank you so much. All right. Our next question comes from the line of Michael Blum with Wells Fargo. Your line is now open.

Speaker 5

Thank you. Good morning, everyone. I wanted to just ask about your views now on the trajectory of Permian volume growth. Just want to understand that the Q3, would you say these were just really temporary operational issues? Are you seeing any real material change in producer activity which would drive a change in the slope of of future growth?

Speaker 2

Yes. Hey, Michael. Yes, good question. We're seeing strong growth From the Permian. So talking about Midland first and then on Delaware.

Speaker 2

Really the Midland volumes are tracking in line with our guidance that we gave at the beginning of the year. Continued strong growth. It's really on track and we've seen that even ramp here in the Q4. So it really kind of comes into the Delaware. We did have $200,000,000 a day kind of roll off in between Q2 and Q3 when you kind of look at the averages.

Speaker 2

Now that was we knew that was going to happen. So that was factored in to our guidance. But that just does illustrate we had underlying growth in the 3rd quarter, But just not quite enough to offset the $200,000,000 that was rolling off. We're seeing a lot of activity in the Delaware. We've got a lot of compression that we're adding.

Speaker 2

Frankly, it's coming in a little bit later than we had thought than we were going to have it in place at the beginning of the year. We've got $200,000,000 a day scheduled to come online between now year end. So it's just coming in a little bit later, but the volumes are there. We're frankly still a little bit behind in trying to catch up and be there to handle all the volumes. But the underlying outlook, I think we're very confident that Permian volumes are going to continue to grow both in the Midland side and on the Delaware side, not just for Q4, but as you look out 2024, 2025 and beyond.

Speaker 5

Great. No, that's perfect. And then that actually just ties into my second question, which is, As I'm sure you're aware, you and many others have announced NGL pipeline takeaway expansions. And so it's clearly getting pretty competitive. So just wondering how should we think about your contracted position in that market?

Speaker 5

You obviously had the 200 roll off This quarter, is there any other major roll offs to flag in the future? And just in general, how are you thinking about your contracted position?

Speaker 6

And specifically to the Grand Prix pipeline, Michael? Yes. Okay. This is Scott. Sorry, I just want to clarify.

Speaker 6

When we look at the quarter, the 3rd quarter, we had some volume improvements that came across in the quarter. Those were predominantly a third party volumes. Our upstream volumes, as Matt indicated, were relatively flat on the quarter, but we continue to see volume growth overall. As we look into 2024 and really in the Q4 and into 2024, we would expect those volumes to continue both from our upstream growth as well as some third party volumes that will roll onto us as contracts mature into their into the beginning. With the DAYTONA pipeline coming online in the Q4 of next year, we feel very comfortable with the timing of that relative to the volume growth that we will have.

Speaker 6

And we've seen a number of announcements in the marketplace obviously of late, But the operating leverage that we get with DAYTONA coming online for our Westlake, the operating leverage we have on our pipeline moving into Mount Bellevue gives us a lot of runway. That runway will allow us to basically evaluate what it looks like with our volume growth, Whether or not there's opportunities to move on other people's pipes as our volumes grow. So we've got a lot of time to evaluate what that looks like over time.

Speaker 7

Great. Thank you.

Speaker 2

Okay. Thanks, Michael.

Operator

All right. Thank you so much. Please stand by for our next question. Our next question comes from the line of Brian Reynolds with UBS. Your line is now open.

Speaker 2

Good morning, Brian. We can't hear anything. I don't know if Anyone else can.

Operator

Hello, Mr. Reynolds?

Speaker 2

Okay. Brittney, would you go ahead and move to the next?

Operator

Yes, we will.

Speaker 8

Question in

Speaker 1

the Q and A, please.

Operator

Okay. Our next line comes I mean, I'm sorry, our next question comes from the line of Bijra Donis with Citi. Your line is now open.

Speaker 8

Thanks, operator. Good morning, guys.

Speaker 2

Maybe just going back

Speaker 8

to NGL pipeline volumes quickly. As you guys know, it hit record levels this quarter, and now that some third party volumes are coming onto the system. There's still a lot of time before DAYTONA comes online. So I'm just curious between now and DAYTONA, any chance you guys could be offloading volumes or you feel like you're pretty secure on that front?

Speaker 6

This is Scott again. We feel comfortable. I would say that from time to time where we've seen maintenance on the pipeline or managing the startup of our pump stations along Grand Prix on the west side as well as on the south side. We have from time to time taken the availability of industry capacity where necessary to offload. But with the startup of pump stations, those getting fully energized that gives us a long runway going into 2024.

Speaker 6

We'll certainly evaluate what that looks like, but we feel comfortable that with the timing of the ramp up of the volumes, how we can facilitate offloads where it may be necessary, that we'll look forward to DAYTONA coming online in the Q4 of next

Speaker 2

year. Yes. And just to add to that too, of the $660,000,000 that we moved barrels per day, Most of that is from the Permian, but there's still a significant amount of that that is coming in from the north leg kind of from the north Texas Oklahoma segment. We can move, Call it up to when all the pump stations get on 6.50 ish, maybe low 600s in terms of barrels per day from the West Leg. So we still have some running room between now and when DAYTONA comes on.

Speaker 8

Okay, got you. Thanks, Matt. It's helpful color. And shifting gears a bit to LPG export, and it seems like a real bright spot once again with the arb open. Just wondering if you could just give a sense of what that looks like today for you guys, you're passing inspection now, you've got the new capacity online, I imagine that's going pretty well.

Speaker 6

Yes. Our volumes in the 3rd quarter certainly benefited from increased demand and improved spot opportunities. We were very pleased with the quarter to quarter volume improvement that we saw, despite obviously having to work around the planned outage for required inspections and the completion of our export expansion project. Now with that expansion project online, we are already seeing benefits of that And we'd expect to see that in and through the Q4. So our volumes in the Q4, we would expect them to be equal to or better than what we saw in the Q3 as the ARB opportunities have improved.

Speaker 6

1st and foremost, we're going to make sure that we're performing for our term contracts and taking advantage of spot opportunities that we can squeeze into our lineup relative to the schedule as we optimize around the facility. We are still learning, quite frankly what the full capabilities will be of this expansion and we will continue to look for ways to optimize in and around that moving forward through the Q4 and into 2024.

Speaker 8

Helpful color. I'll leave it there. Thanks, Tim.

Speaker 2

Okay. Thank you.

Operator

Thank you so much. Please stand by for another question. All right. Our next question comes from the line of Keith Stanley with Wolfe Research. Your line is now open.

Speaker 9

Hi, good morning. First, just

Speaker 5

hey, Matt.

Speaker 9

Just are any of the I want to make sure any of the constraint issues you saw in Q3 expected to have a sustained impact going forward? Or Do you view this as a one time event and we should see a good bounce back in Q4? I just want to make sure there's an expectation that This was kind of a one time thing and there's no lingering kind of issues that could pop up in future quarters.

Speaker 2

Yes. And I guess, are you referring to the just volumes in the G and P side on the Delaware or?

Speaker 9

Yes, that's right. Just G and P volumes and what you referred to in the quarter.

Speaker 2

Yes. I think part of it goes back to when we made the acquisition last year of Lucid, there was a lot of growth on the system and we were immediately offloading a lot of volumes

Operator

on the target. And frankly, we're just kind

Speaker 2

of behind out in the field, laying pipelines and getting compression, and it's about a year wait time to get more compression. So we were frankly just a little bit more behind than we wanted to be and those volumes are coming in a little bit later in the year. I don't want to make it sound like Come 30 days everything's fixed. We're adding a lot of compression, but we're going to be adding a lot of compression next year too. So we are trying to handle and resolve the pressure issues that we're seeing out in the Delaware out in the field.

Speaker 2

We're going to be adding a lot of compression not only in this quarter, but next quarter and throughout next year. So Part of that was exacerbated because of the heat and operational issues and upsets that we had. So we're really trying Address and kind of get ahead of where the producers are going. So, yes. So Pat, anything you want to add to

Speaker 10

Well, I think we show the level of confidence in what we think our volume is going to be. We've got 2 plants under construction in the process of Clearing a third plant site and we're not building because we don't think the volume growth is there. Certainly, Through the producer discussions that we have and what we're seeing getting done and as Matt alluded to, we're behind getting compression in place etcetera. Some of the producers lag a few weeks. There's equipment delays etcetera.

Speaker 10

So I would look at the 3rd quarter as anomaly. Certainly, When you walk into a winter, you don't know what weather expectations and what impact that has on production. But I think the key answer there is The underlying business is solid. The activity levels are high and we have a lot of confidence as indicated by what we're investing And the Delaware for future volume growth.

Speaker 9

That's helpful. 2nd, just want to clarify The capital return framework. So 40% to 50% of operating cash flow to equity holders, which could be buybacks and dividends. It sounds like the frameworks effectively allows the company to meet its growth objectives and still keep you in that leverage target of 3 to 4 times overall? I'm asking just because it seems it just feels like a pretty big step change.

Speaker 9

You have this 50% dividend hike and 40% to 50% would also imply A pretty big step up in buybacks as well. So just want to make sure I'm understanding that right.

Speaker 3

Keith, this is Jen. I think what we're capital as a percent of cash flow from operations here over the last 12 months, you'll see that we're lower than peers, lower than the S and P 500, lower than the S and P Energy average. And so part of this is indicating we've had really strong total return performance and believe that we will have strong total return performance going forward, Which is really based on the value proposition that we think we provide, significant EBITDA growth, continued ability to return in high return Organic growth capital projects and because of that and having a strong balance sheet, the ability to also return more capital to shareholders. So one of the big questions we get is, well, how much more and what does that look like and how are you thinking about it? And that's why we're really trying to articulate that this isn't a bright line and this isn't a we must.

Speaker 3

It's really just instructive as we look out over our multi year forecast across a number of different scenarios. That's one of the important elements or quantitative metrics that we are looking at. And I think as we think about a multiyear framework, so 24, 2025, 2025, 2026, 27, 20 8, 5 year planning horizon. We look across those multiple years and believe that it's reasonable to say that We will have the business that could support returning that much capital to shareholders. And ultimately, we've made one decision that we've announced today, which says this is our expectation that we'll recommend a $3 dividend to our Board for approval effective the Q1 of 2024 and then we'll continue to evaluate.

Speaker 3

Rate. But it is one of the important metrics that I think we are looking at to inform how we believe we can return capital over multiple years.

Speaker 1

Got it. Thank you.

Operator

Thank you.

Speaker 2

Thank you.

Operator

Thank you so much. One moment for our next question please. All right. Our next question comes from the line of Tristan Richardson with Scotiabank. Your line is now open.

Speaker 7

Hey, good morning guys. I may have missed it in the prepared remarks, but can you talk about any updates you're seeing broadly in the market on the gas solution side? Maybe how that market has evolved since you first planted a flag with your potential solution and then maybe any updates on commercial development of your specific project?

Speaker 11

Yes, this is Bobby. So what I'd tell you is the message around Apex and the effort on Apex And Residue Solutions for the Permian Basin does not change for Targa. Our priority is to make sure that solutions for the basin get built. We've talked about a solution needed in the 26 ish timeframe, which is Why we have been pushing Apex, and I'd say why we've been pushing Apex, it's really been a group of investment grade counterparties, Shippers and markets, that has driven the design of that. But what I'd tell you is some of the changes which are positive is There I think are multiple options that have started to come to fruition, maybe be too strong of a word, but opportunities for other solutions.

Speaker 11

And at the end of the day, Targa has one priority and that's to make sure that the gas gets out of the basin. So whether it ends up being Apex Or another pipe and whether we they need our help to back another pipe or not, that's where we'll be is to Make sure that pipe gets built or Apex gets built or something gets built for the 2026 timeframe. Again, if Apex goes, it will be because it's in a framework It works for us and works for the counterparties that are out there. But if Apex doesn't go, we stand ready to make sure another solution goes in 2026 And that the basin has that takeaway such that gas can continue to flow in our plants and NGLs down our integrated system.

Speaker 7

I appreciate that context, Bobby. And then I know we've just now gotten the export expansion online, but As we think about DAYTONA and 3rd party volumes coming into the frac, do you see the export market starting to tighten up? And then does your capacity today really allow for headroom assuming a reasonable utilization at Daytona once we've been ramping on the asset late into 'twenty four and into 'twenty five?

Speaker 6

Hey Tristan, this is Scott. Yes, I would say that today the market feels tight. We were very pleased with the timing of our most recent export expansion coming online because we are seeing benefits. And again, as I stated earlier, We will continue to look for ways to optimize around that capacity and better ways to facilitate movements across the dock. So we're very pleased with that being online.

Speaker 6

With that said, as we look to as we look at further expansions at our facility. We continuously explore opportunities in the form of small projects or debottlenecking projects at our Galena Park facility that will provide meaningful capacity improvements while being capital efficient. We are very fortunate to have an existing facility today that we have a lot of runway to add projects to that are very capital efficient that will provide us capabilities moving forward. So we'll continue to watch The volume growth in and through our system and we'll time those various projects accordingly. But again, we're very fortunate to already have an existing facility that we can kind of bolt on to very effectively.

Speaker 7

Appreciate it, Scott. Thank you guys and congrats on the capital allocation plan. Okay.

Operator

Thank you. All right. Thank you so much for that. Please stand by for our next question, everyone. All right.

Operator

Our next question comes from the line of Neil Mitra or Mitra, I apologize, with Bank of America. Your line is now open.

Speaker 12

Hey, good morning. Thanks for taking my questions. Matt, I think you alluded to 200,000,000 cubic feet rolling off in the New Mexico Delaware. I know there's another probably smaller contract roll off in 2024. Can you speak to the dynamics in that area just because it's so competitive?

Speaker 12

Are competitors Kind of undercutting you on price to try to win some acreage dedications or is Kind of the Red Hills complex just so big that some producers want to diversify away, and have a few players versus a very big concentrated player in the area?

Speaker 2

Yes, sure. No, good question. Let me just clarify. I think I did say roll off. It's It's really contracted volumes that we have coming to us that it was really contracted for it to move and we're not losing to 3rd Party midstream, that's not where that went.

Speaker 2

So Bobby, do you want to? Yes, this is Bobby. For clarity,

Speaker 11

a producer owned plant came online and that $200,000,000 a day moved to that producer on plant. And when that plant fills up, we get more gas. So it's part of our planning all along. And it's Contracts didn't change, contracts didn't expire, contracts didn't roll off, producer plant that takes no third party gas came online.

Speaker 2

Yes. And so and the reason we're highlighting the $200,000,000 is just because we were down $75,000,000 quarter to quarter. So there was an underlying $125,000,000 of growth from the quarter is Kind of why we see strength. We see growth in that business. It was just contractual, yes, as Bobby said, it moved off the system.

Speaker 2

And frankly,

Speaker 10

we're backfilling high pressure, low margin gas with low pressure, higher margin gas, which is kind of what our bread and butter, Right.

Speaker 12

Yes. Perfect. And then maybe just a follow-up on potential Apex opportunities, could you maybe bookend the spend You would look at just in terms of 25 being a lower CapEx year than 24 and Kind of the maximum you would be willing to undertake in that investment for tax if needed, would you be the operator? Would you take a small equity interest? How would you go about looking about that to keep the capital down?

Speaker 2

Yes, sure. I'll let me kind of start here and then if others want to jump in. Yes. I think Apex or I'd say the next pipe out of the Permian is going to likely be a joint venture between either multiple midstreams, Midstream and Producers, so there will be a partial ownership. So if we participate in something, we could have an ownership interest in the JV Or we could move volumes on it and frankly not have an ownership interest if it gets a pipe done.

Speaker 2

So I'd say the book and the low end, we could be putting no capital into the next pipeline. I think we'd like to have our options open where we could have an ownership interest. We've seen that that creates value for Targa. GCX is a good example. We own 25%.

Speaker 2

We invested in it and then ultimately monetized it. So I think we're trying to be open to opportunities like that, that give us the ability to invest in that project and whether we end up holding it, whether we operate it, what percentage level, those are all discussions and it depends on which pipe ends up going, whether it is Apex or it is another pipe led by someone else. As Bobby said, our primary focus is getting a pipe built where our ownership is and what and how we would finance that. If we project finance it, it would be very little capital out the door, right? So we have all those options to us.

Speaker 2

I think as we look forward on our capital spend, as Jen has mentioned in the past is we see 24 being kind of in a similar area and we see 25 spending coming down. I think the trajectory of our capital should be kind of down once we get past 2024 and we'll look to kind of optimize how much spending and how that all works in that framework.

Speaker 12

Okay, perfect. Thank you for the answer.

Speaker 2

Okay. Thank you.

Operator

All right. Thank you so much. Please stand by for our next question. All right. Our next question comes from the line of Jeremy Tonet with JPMorgan Securities LLC.

Operator

Your line is now open.

Speaker 13

Hi, good morning.

Speaker 2

Hey, good morning, Jeremy. Hi, Jeremy.

Speaker 13

Hi. So with the caveat upfront granted you're not giving 2024 guidance You've talked about a number of moving pieces. You talked about I think some volume trends and maybe the LPG outlook, but just wondering if there's any other big moving pieces that we should Think about when we're shaping our 24 thoughts from where we sit and maybe just at a high level how you see Targa's EBITDA growth being able to trend organically from where you are, would Targa largely track kind of Permian growth trends in general or are there other kind of pieces to the puzzle we should think about?

Speaker 2

Yes. Hey, Jeremy, good question. As we look out into 2024, I think we're optimistic that not only 2024 is going to be have Good EBITDA growth at 25% and beyond. And it's really just kind of the timing, as you mentioned, what's that shaping going to look like. I think it does for us start in the Permian G and P business.

Speaker 2

What volumes are moving through both the Delaware and the Midland that's going to provide then more volumes into NGL transport fractionation and available for export. So I think it's kind of starts with what is overall Permian look like and I think we see a pretty strong outlook for 2024, 2025 and really 5 plus years, I'd say 5 to 10 years and even longer on the gas side. So I think short term it looks good and longer term it looks good. I'd say the only other things to think about is we do have a lot of fractionation coming on in 2024. We have GCF coming on at the end of the quarter.

Speaker 2

We will have Train 9 and then Train 10. So that's an outsized amount of fractionation relative to just kind of normal volume growth that we're seeing. We have the Export expansion just done. I think we're set up well for exports in 2024. But ultimately, it kind of comes back to Permian gathering and processing growth will be the primary driver.

Speaker 13

Got That makes sense there. And you talked about upstream consolidation earlier in the call and just want to shift the focus towards midstream. We have seen a bit of an uptick in consolidation in the industry. And just wondering from where Targa sits right now, do you feel comfortable with, I guess, how the business is right now or do you see how do you see Targa's role, I guess, in industry consolidation going forward at this point?

Speaker 2

Yes, sure. I'd say where I think we said is our internal business prospects look very good. We have a very good case just to continue to operate in our core business. Gathering and processing in the Permian, largest GMP footprint in the Permian Basin is going to afford us multiple years of growth. So I think we just sit in a very fortunate position to just focus on Targa.

Speaker 2

We're going to invest in G and P. We're going to invest in transport like we are with DAYTONA, invest in fractionation. We're bringing 3 fractionators on and continue to invest in export. In terms of us looking at bolt ons or tack ons, I think that's really kind of far down our capital priority list. I think we want to Execute on the organic growth projects we have in front of us and then distribute an increasing amount of that to our shareholders as Jen talked about in a 40% to 50% over time.

Speaker 2

It's not in any one exact year, but we see being able to do all of those things, Distribute 40% to 50%, lower our leverage, invest in our business. So I think we're focused on Targa right now and just executing our plan in front of us.

Speaker 13

Got it. Makes sense. That's helpful. I'll leave it there.

Speaker 2

Okay. Thank you.

Operator

All right. Thank you so much. One moment for our next question please. All right. Our next question comes from the line of Sunil Sibal with Seaport Global.

Operator

Your line is now open.

Speaker 14

Yes. Hi, good morning, everybody, and thanks for taking my question. So my first question related to some of the operational issues, etcetera, in the Q3 that you talked about. In addition to I think the weather and compression, some of the operators have also talked about higher CO2 concentration in the gas streams. I believe that's an issue Targa is pretty familiar with.

Speaker 14

So I was curious how do you handle that going forward? And also Does it kind of accelerate your CO2 sequestration solution?

Speaker 10

This This is Pat. CO2 wasn't really a major contributor to operational issues for us in the Q3. We have a lot of capabilities and are adding capabilities to handle CO2 and frankly H2S sour gas. We do see CO2 production growing in the Delaware Basin specifically. There are a lot of to do things at the wellhead that are capital inefficient and expensive for them to do.

Speaker 10

So as we move forward, We are putting infrastructure in place that allows us to handle handling high CO2 volumes, sequestering CO2, Dealing with sour gas H2S and other components. But as far as the operational issues, I mean, you hit it. It's weather, a little late on compression, residue gas pipeline issues, which is more felt in the Delaware, We don't quite have the system fungibility in the Delaware that we do in Midland. We're building that infrastructure as you can see from our capital spend. We've gotten a lot of benefit from integrating our Northern Delaware or Lucid system with our other 2 Delaware systems.

Speaker 10

But over time when we have issues on specific plant sites and or compressor sites, we'll have that fungibility where we can move gas around and keep production flowing. It's a little more exacerbated right now. And as we move forward, that will get better. So That's kind of where we're at right now and it looks better forward.

Speaker 15

And then this

Speaker 11

is Bobby. On the CO2 sequestration side, We've been pushing a bunch of projects forward. I think people have seen public filings relative to MRV plans that are already in place and wells that we Permit is out there and that continues to move forward. Those businesses are not predicated on an increasing amount of CO2 being in the stream. But to your point and or question, if the concentrations do come up over time, that would be additive to the CO2 business.

Speaker 11

We expect to start getting 45Q this coming year. And again, if over time composition starts to go up in the CO2 stream and we've already got those assets and wells and injection capability in place that'll Just up to 45Q credits and profitability of that business that we're putting together.

Speaker 14

Okay. Thanks for that. And then on the capital allocation front, thanks for providing that clarity. I was just curious now that you put some guardrails around that. Does that impact also your targeted returns on investments?

Speaker 14

I know previously we talked about 5 to 7x kind of multiples. Does that range change in any way with the card rails that you're putting around?

Speaker 3

I think that we have A lot of organic growth capital investment opportunity at high returns as we look out across our footprint. That's part of why the fee floor structure has been so important, allowing us to continue to invest to support our producers' activities even in lower and across lower commodity price environment. So as we look forward, I wouldn't say that anything that we've described today around return of capital is changing how we think about investments or investment opportunities. We've described it as a multiyear approach where we believe we can distribute call it 40% to 50% of cash flow from operations. But ultimately, we'll be assessing everything across the business, including balance sheet stability, organic growth opportunities, everything that is involved in a target forecast and then sensitivities of those forecasts to ultimately drive the return of capital decisions each year.

Speaker 3

But that's one of the ways that we're certainly thinking about it.

Speaker 14

Got it. Thanks for that.

Speaker 3

Okay. Thank you. Thanks Neil.

Operator

Thank you so much. Please stand by for our next question. All right. Our next question comes from the line of Neil Dingmann with Truist Securities. Your line is now open.

Speaker 15

Hey, guys. This is Jake Neibosh on for Neil. Thanks for the question. I just had one quick one here. Just strategically, I know given how all of these fee based Contracts have been ramping up for you guys over the past several years.

Speaker 15

Just at a high level, I'm just curious, do you feel now that you're in a good state as a percent of your Directs being fee based or should we expect a little bit more of a ramp going forward? Have you if

Speaker 14

you can quantify that, that would

Speaker 15

be great. But really just Just think of strategically where we at with that kind of transition here. Thank you.

Speaker 2

Yes. Sure. This is Matt and then Jen if you want to add on. Yes, we've made a lot of progress at adding or really having fee based growth in both our GMP business and our downstream business, but also putting in fee based floors and components into our G and P business as contracts come up. Yes, as you look at really through this year where we've had fee floors and those hybrid contracts, we are kind of at or below the floors.

Speaker 2

So as you think about just kind of earnings Power going forward, most of those are at or below. And so as we get some tailwind if we get some tailwinds from commodity prices that would just be upside. But on those For contracts, there's not a lot of downside from here. So we think we're in a good spot.

Speaker 3

And I'd just add that Our commercial team has done a great job of putting ourselves in position to continue to invest for producers by getting those fee floors in place. But ultimately if commodity prices are higher and our percentage of fee margin is going down from our gathering and processing business because commodity prices are higher, I think that will be a huge win for us and our shareholders and that's one of the reasons that we really like the fee floor structure. Ultimately, where we'd like to get having fee floors in really all of our gathering and processing contracts or have them be fee based because that combined with Our fee based downstream business just provides us with a lot more cash flow stability across commodity price environments. So ultimately that's sort of the direction that we're heading in and our teams have done a great job of pushing us towards that.

Speaker 15

Got it. Thank you. If I could just squeeze one more in and I

Speaker 14

know we've touched on A few times, but

Speaker 15

I just want to clarify something. So the compression issues that you guys have seen, it sounds like things have improved. But does that mean that because things have been delayed. And I know you guys mentioned you have a good amount coming in 2024 as well. Does that mean the delays pushed back the initial 2024 orders or should we just expect, I guess, more of an acceleration or just a little bit more in 20 24, given these delays here.

Speaker 15

Just trying to get clarification here.

Speaker 2

I mean, for the most part, those have been ordered. Part of it was Delivery delays. So I don't know that the CapEx, it shifts necessarily shifts all that much. We're just really constantly kind of buying compressors and adding to inventory. So there's some flex there, but it just does Take some time there.

Speaker 2

And then one thing to note too, as we're kind of waiting on those compression delays, we're Still coordinated for the most part with our producers such that we can capture the initial production from there. So we're working with them to make sure we're there for the IP and We're getting that production. So it's not really lost. It's just kind of deferred and pushed into other periods.

Speaker 15

Got it. Yes, that makes sense. Okay, that's it for me. Thank you, guys.

Speaker 2

Thank you.

Operator

Thank you so much. Please stand by for our next question. All right. Our final question comes from the line of Brian Reynolds with UBS. Your line is now open.

Speaker 1

Good morning, Brian. We can't hear you.

Speaker 8

Hello? Can you hear me?

Speaker 1

There Yes,

Speaker 2

there you are. We can hear you.

Speaker 8

Okay. Thank you. I'm sorry about that this morning. Just to follow-up on the Permian, At this point, it seems like Targa is not close to its potential full integration of GMP assets to NGL long haul at this point. So I know basically all the Midland volumes make it downstream on Target Integrated System.

Speaker 8

But could you talk about maybe even a process Delaware volumes that are not being processed that are not being transported on Targa's downstream? Is it like roughly 50% and kind of how should we think about those volumes rolling on to Target's long haul system in 2024, 2025 to kind of get to that 100% number?

Speaker 2

Yes, sure. I mean, I'd say we have a lot of our GMP business is pointing liquids into our I don't know that we ever get to 100%. That's not really a goal. There's going to be some amount of volumes that are going on 3rd party pipes. The vast majority on the Midland side move, but it's not 100% on the Midland side.

Speaker 2

And the Delaware, I'd say it's a majority, But because of some acquisitions and just legacy dedications on the other pipes, that's going to take time. But as we grow, I'd say a disproportionate amount of the growth is tied to Targa. And I think that's going to continue. So I think we have a majority out there. I see that number moving north just as you go as we go forward.

Speaker 2

But I think we're in a really strong position of capturing the majority of volumes across the Permian and moving those into the downstream assets.

Speaker 8

Great. Thanks. And as a follow-up, I know you talked about CapEx a little bit, but kind of curious if you could help sensitize us a little bit. If we think about G and P Capital, 3 processing plants and perhaps the need for frac 11 as we look ahead to 2025. How would that look to 2024?

Speaker 8

Is it 1.5, 1.7 or something like that? And Ultimately, ethane exports is very intriguing part of the business and NGL value chain at this point seems to be getting more competitive based on announced projects. Is there an opportunity for Targa to participate as we look to the middle end of the decade? Thanks.

Speaker 2

Yes. I think on CapEx, We've pointed to with DAYTONA and multiple fractionation trains, we see 24 being similar ish levels, which I'd characterize as kind of higher than a normal run rate levels because the downstream projects are a bit lumpier. That's why we have some confidence as we get into 'twenty five and beyond potentially having or in 'twenty five having it be lower and Maybe a more normalized rate thereafter. As you look at ethane There's a number of expansions and parties that do that. That is something we have talked about in the past.

Speaker 2

We have the capability to do that. Right now, what we're really focused on is increasing our connectivity to the domestic petchem market and flexibility To other, I'd say just other customers for ethane demand. I'd say that it's out there. We don't I wouldn't put that on the front of our list. It's something we are looking at right now, but that is on the potential That we kind of keep on the list.

Speaker 6

Yes. And I would just add, Matt, this is Scott that again, Matt alluded to the fact we are continuously improving our deliverability out of our system to the domestic petrochemical operators in and around Mont Belvieu and the surrounding areas. So That will be a primary focus as we see volume growth continue over the course of the next several years. And given The increase in ethane consumption with those petrochemical plants, we believe we'll get a large portion of that Just based upon our own upstream growth and into our assets.

Speaker 8

Great. Thanks. Appreciate all the color and enjoy the rest of your morning.

Speaker 2

Okay. Thank you. Thanks, Brian.

Operator

All right. Thank you so much for that. This concludes the question and answer session. I would now like to turn it back to Sanjay Ladd for closing remarks. Call.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Key Takeaways

  • Operational record: In Q3, Targa set record NGL pipeline volumes and achieved a 6% sequential adjusted EBITDA increase, supported by the completion of its Galena Park LPG export expansion adding 1 MM barrels/month of propane capacity.
  • Capital return boost: The company repurchased $132 M of common shares in Q3 and announced plans to recommend a 50% increase to the 2024 dividend to $3/share, while framing a target to return 40–50% of adjusted cash flow to equity holders.
  • Permian growth acceleration: Permian inlet volumes are now ~150 MMcf/d above Q3 averages, driven by the on-stream Greenwood gas plant ahead of schedule and on-budget, with additional Greenwood II, Wildcat II and Roadrunner II facilities set to start in 2024.
  • Downstream capacity builds: Mont Belvieu fractionation ran near capacity in Q3, with the GCF restart expected Q1 2024 and Train 9/Train 10 expansions on track for Q2 2024 and Q1 2025; LPG exports rose 15% sequentially post-inspection.
  • Financial resilience: Q3 adjusted EBITDA was $840 M and 2023 results are tracking at the low end of the $3.5–3.7 B guidance range, backed by ~$2 B of growth capex, ~$200 M of maintenance spend, $1.8 B of liquidity and a net leverage of ~3.7×.
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Earnings Conference Call
Targa Resources Q3 2023
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