Targa Resources Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 16 speakers on the call.

Operator

Good day, and welcome to the Targa Resources Corporation's 2nd Quarter 2024 Earnings Webcast and Presentation. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Sanjay Lad, Vice President, Finance and Investor Relations. The floor is yours, sir.

Speaker 1

Thanks, Sherry. Good morning, and welcome to the Q2 2024 earnings call for Targa Resources Corp. The Q2 earnings release along with the Q2 earnings supplement presentation for Targa that accompany our call are available on our website at targaresources dotcom in the Investors section. In addition, an updated investor presentation has also been posted to our website. Statements made during this call that might include Targa's 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, President, Finance and Administration. Additionally, the following senior management team members will be available for Q and Pat McDonough, President, Gathering and Processing Scott Pryor, President, Logistics and Transportation Bobby Muraro, Chief Commercial Officer and Will Byers, Chief Financial Officer. With that, I'll now turn the call over to Matt.

Speaker 2

Thanks, Anjay, and good morning to everyone. We had another record quarter across multiple fronts. But before we get into all the good things happening here at Targa, I would like to first recognize all our employees impacted by Hurricane Beryl. We prepared for the storm, weathered the storm and performed across a difficult period to safely keep volumes flowing, providing best in class service when many of our employees were also managing without power and had damage to their homes. The hard work and dedication demonstrated during the storm is really something to be proud of.

Speaker 2

So I'd like to say thank you to the Targa team for all the extra effort. The storms reduced our volumes for only a short period, so we expect the impact on the Q3 to be minimal as there was no material damage to any of our assets. I would also like to welcome Will Byers, Targa's new Chief Financial Officer to our call this morning. Will officially joined us on July 22 and we're excited to have him as part of the Targa team. Will adds a lot of depth to our organization given his 20 plus years of midstream finance experience including serving in CFO roles over the last 10 years.

Speaker 2

As part of Jen's continued development, she has now transitioned into the role of President, Finance and Administration and will continue to increase her role and responsibilities. Turning now to our Q2 results. It was another strong quarter of performance across our organization, which sets us up well for the balance of this year and beyond. Record volumes in the Permian drove record NGL transportation and fractionation volumes downstream and record quarterly adjusted EBITDA. We brought our Train 9 fractionator in Mont Belvieu and our Roadrunner II plant in Permian, Delaware online, on time, on budget and given increasing volumes across our systems, they were both very much needed.

Speaker 2

We also executed on a quarterly record $355,000,000 of share repurchases, which is reflective of our performance and strong conviction and outlook for our business going forward. We also just announced our participation in a joint venture supporting the next natural gas pipeline in the Permian Basin. We provided a meaningful volume commitment to support the project and this provides for a 17.5 percent ownership interest in the Blackcomb pipeline. Blackcomb will be a 42 inches pipeline transporting gas from the Permian to South Texas. The pipeline is expected to be project financed, so Targa's capital investment should be less than $200,000,000 Now let's talk a little more about our Permian position and the good things happening there.

Speaker 2

Activity in the Permian remains very strong, supporting our view of continued long term growth from the basin. Our Permian volumes during the Q2 increased about 275,000,000 cubic feet per day over the Q1, which is a full plant. And year over year, our volumes in the Permian are up more than 600,000,000 cubic feet per day. And currently our volumes in the Permian are up another 200,000,000 cubic feet per day compared to the 2nd quarter. We expected strong growth from our Permian assets, but the growth we have seen this year has exceeded our expectations.

Speaker 2

We now expect low double digit percentage volume growth this year, which sets us up well for meaningful growth in 2025 and beyond. This higher growth rate is driving incremental EBITDA and requiring additional growth capital investment. These volumes are core to our business and we benefit across the integrated NGL value chain driving higher margins into our downstream business and generating strong ROIC. Given higher than anticipated Permian volumes and an outlook for continued strong activity across our Midland and Delaware footprints, we announced our next two plants in the Permian, 1 in the Midland Basin and another in the Delaware Basin. Some spending for these plants was included in the forecast we provided back in February, but the timing and cadence of spending has accelerated.

Speaker 2

To support our higher volume and higher EBITDA profile, we are updating our estimate for growth capital spending for 2024 to approximately $2,700,000,000 This increase or the increase in growth capital spend from our previously provided range is attributable to the acceleration of timing of plants in the Permian, incremental field capital, compression and gathering lines, the acceleration of downstream infrastructure connections and other opportunities like spending on an enhancing residue gas takeaway. Similarly, we expect stronger than previously estimated Permian volume growth next year and are updating our 25 estimate for capital spending to $1,700,000,000 driven by a similar acceleration of plant and field capital and our investment in Blackcomb. We included a bridge on Slide 5 in our Q2 earnings supplement presentation for our updated estimates for 2024 2025 growth capital. The strength of our first half twenty twenty four performance and continued strong outlook going forward driven largely by higher Permian volumes and higher volumes through our integrated system means the updated midpoint estimate for our full year 2024 adjusted EBITDA is $4,000,000,000 which is a $200,000,000 or 5% increase from our previous estimate. We now expect higher adjusted EBITDA in 2025 and a similar free cash flow estimate to when we compared our outlook to when we provided our outlook in February, with 2025 representing an important inflection for our company as our meaningful free cash flow generation positions us to continue to return an increasing amount of capital to our shareholders while further strengthening our investment grade balance sheet.

Speaker 2

We believe that we are uniquely positioned for the short, medium and long term as an already strong outlook for Permian Basin volume growth from best in class producers continues to get stronger, which benefits our entire integrated value chain. Our contract structures support us continuing to invest on behalf of our producers benefiting from cash flow stability and lower commodity price environments and upside as prices rise. And we are delivering record financial performance despite a weak commodity price backdrop. Before I turn the call over to Jen to discuss our Q2 results in more detail, I'd 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 2nd quarter with a record $984,000,000 a 2% increase over the Q1. For the Q2, our natural gas inlet volumes in the Permian averaged a record 5,700,000,000 cubic feet per day. Our NGL pipeline transportation volumes averaged a record 784,000 barrels per day.

Speaker 3

Our fractionation volumes averaged a record 902,000 barrels per day at our Mont Belvieu complex and our LPG export loadings average 12,000,000 barrels per month. Let's talk about our operational results in more detail. Starting in the Permian, our reported 2nd quarter inlet volumes increased 5% when compared to the Q1. In Permian Midland, our system is running near capacity and our new Greenwood II plant is expected to be highly utilized when it comes online in the Q4 of 2024. Our next Midland plant Pembroke II will be much needed and remains on track to begin operations in the Q4 of 2025.

Speaker 3

As Matt mentioned, today we announced that we are moving forward with our latest Midland plant, East Pembroke, which is expected to begin operations in the Q3 of 2026. In Permian, Delaware, activity and volumes across our footprint are also strong. Our Roadrunner II plant commenced operations in late May and was fully utilized after startup. We are accelerating the timing of our next Delaware plant, Full Move, which is now expected to come online in the Q1 of 2025 and is also expected to come online highly utilized. Today, we announced that we are moving forward with our latest Delaware plant, Bull Moose II, which is expected to begin operations in the Q1 of 2026.

Speaker 3

Shifting to our Logistics and Transportation segment, construction on our DAYTONA NGL pipeline expansion has been going well and we believe that we may be able to bring the pipeline fully online earlier than estimated. Our Train 9 fractionator in Mont Belvieu came online full in May and we are currently starting operations at our Gulf Coast fractionator joint venture and we expect our portion of the capacity to be highly utilized at startup. Construction on our Train 10 and Train 11 fractionators in Mont Belvieu continues and our fracs are expected to be much needed when they come online given our outlook for increasing Permian volume growth and resulting NGL volume growth to Mont Belvieu. Train 10 is now expected to begin operations late in Q4 of this year and Train 11 is expected to begin operations in the Q3 of 2026. In our LPG export business at Galena Park, our 2nd quarter volumes were impacted by a required 10 year inspection that reduced our loading capability in the second half of June through late July.

Speaker 3

We continue to benefit from nighttime transits and fully expect that to be a permanent benefit going forward. We remain on track to complete our expansion, which will increase our loading capacity and incremental 650,000 barrels per month in the second half of twenty twenty five. The strength of our performance in the second quarter with the backdrop of negative Waha gas prices and low NGL prices demonstrates that by investing in opportunities backed by fee based and fee floor contracts, we are able to successfully invest across cycles to continue to support the infrastructure needs of our customers. We have largely removed exposure to downside commodity prices from our enterprise wide risk profile and given the strength of our outlook also recently added hedges to further increase our cash flow stability. As described previously, 90% of our margin is fee based or supported by C4 contracts.

Speaker 3

The remaining 10% is exposed to commodity prices. Of that remaining 10% of exposure, we have now hedged approximately 90% of volumes across commodities through 2026. As commodity prices move higher, we will benefit from that upside through our fee floor contracts. Turning to the balance sheet. At quarter end, we had $1,600,000,000 of available liquidity and our consolidated net leverage ratio was 3.6x, well within our long term leverage ratio target range of 3 to 4 times.

Speaker 3

During the Q2, we repaid the $500,000,000 balance on our term loan and the term loan is no longer outstanding. 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, and we are delivering on those priorities. Our outperformance is leading to deleveraging faster than we previously forecasted, creating incremental capacity to enhance our return of capital. Supported by the strength of our business outlook, we repurchased a record $355,000,000 of common shares in the 2nd quarter at a weighted average price of $118.91 This week, our Board of Directors also authorized a new $1,000,000,000 common share repurchase authorization and we continue to return capital to our shareholders through opportunistic repurchases.

Speaker 3

We are continuing to model the ability over time to return 40 to 50% of adjusted cash flow from operations to equity holders and believe that is a useful framework for thinking about Targa's return of capital proposition. Our talented Targa team continues to execute on our strategic priorities across the organization and safely operate our assets to deliver the energy that enhances our everyday lives. And I would like to echo Matt's thank you to all of our employees. And with that, I will turn the call back over to Sandler.

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. Sherry, would you please open the line for Q and A?

Operator

Thank you.

Speaker 4

Just wanted to touch on the guidance raise here a little bit, especially the free cash flow inflection. And just wanted to understand that a little bit better whether that is absolute dollars or rate of change or just any other, I guess, way you could bracket what that means?

Speaker 2

Yes. Hey, Jeremy. Yes, we raised our guidance for this year. It's really under pinned by the strength in the volume that we've seen not only so far this year, but also just our expectations for the back half of the year and then leading into 2025. Producers just really continue to have high levels of activity across our system and we've received numerous I think, kind of revisions to the short and medium term outlook from our producers across our system.

Speaker 2

So that let us feel really good about the EBITDA this year and positioned us well going into 2025 and strong activity in 2025. So when you look at our overall EBITDA growth that we expect coupled with the CapEx moving from $1,400,000,000 to $1,700,000,000 we see a similar really similar dollar amount of free cash flow to what we saw when we gave kind of the original outlook back in February of

Speaker 5

this year.

Speaker 4

Got it. That's helpful. Thank you for that. And then, looking across, it seems like the implied GPM across the processing fleet stepped up quite nicely in 2Q. Just wondering how much of that was tied to better ethane extraction economics in the quarter?

Speaker 4

How sustainable is the volume uplift in downstream? Just trying to understand that better, particularly, I guess, with Daytona tracking well, it seems?

Speaker 2

Yes. I don't think we've seen anything really fundamentally different from We had higher recoveries in the Q2 relative to the Q1 is what drove the higher recovered GPM. I think the underlying volumes are similar. Pat, any?

Speaker 6

No, they are. I mean, we had some periods of ethane rejection in the Q1 that coupled with some weather issues at times and we've been in full recovery during the Q2.

Speaker 3

Very tight gas market in the Permian in the second quarter. And so that's another reason that you saw our recoveries improve.

Speaker 4

Got it. And just the last part with Daytona, if that's tracking early, any impact there, I guess?

Speaker 7

Yes, Jeremy, this is Scott. The construction on DAYTONA has gone very well. When you enter into construction of a long haul pipeline of this size and of this distance, you would anticipate once you get into construction phase that you might have delays relative to weather or just in general construction delays. But for us quarter in and quarter out, we've seen improvements. The Targa team has done an excellent job installing that pipe.

Speaker 7

And I would not be surprised if it actually comes online sometime during this quarter, Q3 of this year. So very pleased with the timeline.

Speaker 4

Got it. That's very helpful. I'll leave it there. Thanks.

Speaker 2

Okay. Thanks, Jeremy.

Operator

Thank you. One moment for our next question. And that will come from the line of Spiro Dounis with Citi. Your line is open.

Speaker 8

Thanks, operator. Good morning, everybody. First part is just a 2 part question on volume growth. I think as we headed into the year, the messaging from you all was that maybe Targa would start to sort of reflect base in growth kind of more broadly, but it seems like you're sort of back in that mode or you're growing at accelerated pace. Maybe once you just touch on the dynamics there, what's going on in your system that's driving that accelerated growth versus the base and average, how long does that last?

Speaker 8

And then as we think beyond the near term, maybe just thinking around cadence between the next frac and maybe even pipeline expansion here if this keeps up?

Speaker 2

Yes, sure. I'll start and then Pat you can hop in. I mean, we've over the last several years have really outperformed the basin and have our team has done a really good job at servicing our existing customers, but also having commercial success really across the Delaware and the Midland. We also have our assets. We have a wide area that we cover.

Speaker 2

We are in the best spots of the Midland and we're in the best spots and most active spots in the Delaware as well. So I think we benefit from that. We've seen this year continued strong activity from producers, but we've also seen revisions from our producers of the forecast they've given us and the level of volumes that they're expecting to come across our system for 2024 2025. I'd say this year we've seen more positive revisions than we have in other years. So we've just benefited more from that.

Speaker 2

I think it just goes to Targa's overall positioning and strong producer activity.

Speaker 9

Matt, anything to add to that?

Speaker 6

I think the key components there, Matt, are exactly what you said. Large footprint, fungible system underpinned by millions of acres of dedication on both the Delaware and Midland side of the basin, and that's with producers that are committed to growing the Permian Basin production outlook. So when I look at the Midland system, it's pretty easy, right? We've been there for a long time. We've had that system.

Speaker 6

It is on the core of the core of the best rock in the basin. And then with the Lucid acquisition we did a couple of years ago now, that allowed us to get that same type of position in the Delaware Basin where we are in the core of the core, covering the best rock, a great group of producers, again, underpinned by multimillion acre dedications with producers again that are committed to developing and growing their production in the Permian. And I think the one thing we left out in all of that is we continue to have commercial success. We've had a lot of commercial success early in the Midland Basin and recently in the Delaware Basin that is additive to that footprint that we've already had in place for a good period of time.

Speaker 8

Got it. And as you think about the cadence for that next frac or even pipe load expansion, is that still kind of far enough out or does that seem like that's accelerating too?

Speaker 7

Spiro, this is Scott again. I'll first start on the pipeline side of things. Certainly with Daytona coming online likely during this quarter that gives us a lot of operational leverage as it relates to the volumes coming out of the West from the Permian along those two lines. So we've got the Grand Prix line, the original West line, we've got Daytona and with a lot of operational leverage with that. Then that ties into our trunk line that feeds into Mount Belvieu where we've got some operational leverage as well.

Speaker 7

So we feel really good about where we are positioned there. I will say that with the cadence of the plants that Pat and his team have been successful at executing on and we look at the volume growth that we have. We've actually done some third party contracts out there. Given the number

Speaker 5

of announcements you've seen on

Speaker 7

Y grade pipelines coming out of the Permian, we feel as though there's a little bit of overcapacity and we're in a position at reasonable prices to do a term contract with the volume growth that we see on that. The likelihood is, again, with additional capacity that's out there, we'll look for some additional contracts with that we can do. Again, as long as the prices are reasonable, it will allow us to push out the next expansion that we might have to have on our pipeline system and defer capital further out. So that puts us in a good position. As we look at frac side, certainly we benefited in the Q2 of this year with Train 9 coming online during the month of May.

Speaker 7

We had some strong volumes across our fractionation footprint. We saw a little bit of impact in the Q1 because of some maintenance that we had scheduled, but the Q2 ran very well. Train 9 came online basically full from day 1. And then when we look out into the Q3, we'll have GCF coming online. Our equity share of that will likely be full.

Speaker 7

And then later this year, Train 10 will come online. Not much benefit we expect at this point from Train 10, but it is nice to see that we have moved the timeline of that in service date from the Q1 of 2025 to the latter part of this year and we'll see that come online and give us benefit. When you think about the timing of the plants from our GMP footprint, all the announcement that we had previously made as well as the ones this morning, a mid-twenty 26 timeframe for Train 11 fits us very well in order to catch those volumes as well. So, great position on the transportation side, both leveraging our current capacity as well as overcapacity, if you will, from a midstream perspective as well as how we sit on the fractionation front.

Speaker 8

Great. That's helpful color. One just quick follow-up on Blackcomb. So pretty small capital investment out of the gate. But I know in the past, you've never really looked at residue gas pipelines as kind of core to your portfolio.

Speaker 8

So curious at some point, does this become a monetization candidate or too early for now?

Speaker 2

Yes. We just announced it this morning. So I think we will always look to do what's in the best interest of the shareholders, whether it's holding a minority interest or monetizing it. But I'd just say we're really excited to partner with Whitewater and the other partners on this. It's much needed for the industry, much needed for the basin.

Speaker 2

And so we were excited to put a commitment on there and push this past FID and get going on this.

Speaker 8

Great. I'll leave it there. Thanks for the color everyone.

Speaker 2

Okay. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Theresa Chen with Barclays. Your line is open.

Speaker 10

Good morning. On the underlying growth across your system, Matt, to your comment about low double digit inlet volume growth in 2024. Can you just give us more color on your view quantitatively for 2025 inlet? And what are some of the puts and takes that underlie that view based on your discussions with the producer customers?

Speaker 2

Yes. I'd say, for 2024, we feel strong. We talked about low double digit growth. We haven't given an exact number for where we see 25. We continue to get updated producer forecasts.

Speaker 2

We've had some commercial success here recently as well. So as we go into the fall, we'll put all that together and say what does that look like for 2025. I think what you're hearing from us today is it's trending higher. I think we feel better about it being stronger than our what our 2025 expectations would have been earlier this year. And so I think we feel good we're going have strong growth in 2025.

Speaker 2

What exactly that looks like, we'll continue to develop that and we'll likely provide that outlook for you sometime in February.

Speaker 10

Understood. And was there anything particular that drove lower quarter over quarter OpEx on a unit basis despite higher volumes in L and T?

Speaker 2

In L and T, I think what we saw was you saw a lot of volume increase through our frac and through Grand Prix. So we were waiting eagerly for Train 9 to come on. And so you saw a really large increase. We're up kind of diverse comparative periods over 100,000 barrels a day. So we saw the volume number increase significantly.

Speaker 2

Prior to

Speaker 3

Train 9 coming online as we essentially got ready for it. Prior to Train 9 coming online as we essentially got ready for it. So then when we get the volume associated with the asset essentially being full when it does come online That may be one of the reasons that the unit margins improved in the Q2.

Speaker 7

And I would also say Teresa that when I alluded to the fact that we had some maintenance issues during the Q1, those are behind us now. Again, the Q2 ran very, very well. And to Matt's point, we had over 110,000 barrels a day of incremental frac runoff during the Q2.

Speaker 10

Thank you.

Speaker 1

Okay. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Michael Blum with Wells Fargo. Your line is open.

Speaker 11

Thanks. Good morning, everyone. Wondering if there are any details on Blackcomb you could provide like percent contracted, what the return profile might look like? And would you expect there to be some project level financing for the project?

Speaker 5

Michael, this is Bobby. I think we disclosed what we're going to disclose in the press release last night and then our earnings this morning. But when we think about getting gas takeaway out of the basin, we're excited to get this done and bringing Targa's volumes to the table. It got it across the line to go FID obviously last night and get supply for takeaway in out of the Permian for 2026 done and launched. I think we'll defer to Whitewater on how much they share over time, but I think at FID returns and the returns as it fills up, I think it's going to be a great deal for Targa and all the partners that are investing in it.

Speaker 11

Okay, understood. And then, I wanted to ask about capital spending really beyond 2025, so call it 2026 and beyond. You have that slide in prior presentations that shows a typical run rate CapEx year at growth CapEx year at 1,700,000,000 dollars So I'm just wondering given the acceleration here you've seen in volumes, is that still the right way to look at the long term cadence for growth CapEx?

Speaker 3

We believe it is, Michael. The $1,700,000,000 multiyear outlook that we put out earlier this year is really predicated on a high single digit Permian growth scenario. So as we said this morning, to the extent that we see an acceleration of volume growth beyond that in 2026 and beyond that could change that growth profile. And then the other element that we've pointed to since we put that slide out is that our downstream capital spending is lumpier generally than our discrete projects on the gathering and processing side. To the extent that we need to add fractionation or in particular transportation that can change the complexion of how that outlook plays out for a given individual year.

Speaker 3

But I think over a multiyear horizon, it still very much holds again largely dependent on what the assumption is for underlying Permian growth volumes.

Speaker 11

Got it. Thank you.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of John McKay with Goldman Sachs. Your line is open.

Speaker 12

Hey, good morning, everyone. Thanks for the time and congrats to Jen and Will. I wanted to go back to something we've asked about a couple of times here, but maybe just about a finer point on it. When we're seeing this Permian these Permian growth expectations continue to move up, I guess I'd just be curious if we could tease a little more out of that. Is it, hey, these customers are actually expecting to bring in more rigs and crews back half of the year?

Speaker 12

Is it, hey, actually productivity gains are a lot higher than we've expected? Is it all on the GOR side? Anything there you can kind of break out for

Speaker 1

us would be helpful.

Speaker 6

Yes. What I would say is no, we're not expecting an increase in rigs. What we're seeing is greater efficiencies and with some of the recent combinations of companies that you've seen more efficient use of combined acreage positions. So they are getting higher productivity. They are able to drill an equivalent number of wells with a lower rig count.

Speaker 6

GOR is certainly a factor, but in the big scheme of things, it's not as big a factor. Obviously, we've seen it increase and continue to increase, but the continuing increase is a lot lower than what it was over the past, say, 3 to 5 years. So it's really activity of the producer group that is on the target acreage, their commitment to drilling in the Permian and their achieved frankly, they're achieved efficiencies. And again, it goes back to our commercial success adding to the footprint we already have.

Speaker 12

That's really clear. Appreciate that. Maybe just shifting to return of capital, buyback number great. I guess I'd just be curious to your guys' latest thoughts on the buyback versus the dividend given the recent run-in the stock? Thanks.

Speaker 3

I'd say that there's really no change to how we're thinking about capital allocation, John. Foundational to everything that we're doing is a strong balance sheet. And as we've articulated this morning, we see our balance sheet getting stronger through the end of this year and into next year and that's creating a lot of flexibility for us. We were very active in the Q2. We have an opportunistic share repurchase program.

Speaker 3

You'll continue to see us be opportunistic, which will create some variability quarter to quarter. But the underlying premise is that we believe that our outlook is only strengthening over the short, medium and long term and we have a lot of conviction in where the company is today and where the company is headed. And part of how we will continue to return capital to shareholders is really through both a combination of likely meaningful increases in our annual dividends per share as well as continued opportunistic share repurchases.

Speaker 11

Thanks for the time. Okay.

Speaker 1

Thanks, John.

Operator

Thank you. One moment for our next question. And that will come from the line of Manav Gupta with UBS. Your line is open.

Speaker 13

Hi, guys. A quick question. I think few quarters back you had indicated that some of the growth projects you have could deliver incremental EBITDA of $300,000,000 or so. How has that guidance changed as some of the new projects are coming in? And how should we think about these incremental growth projects delivering EBITDA over 2025 and 26?

Speaker 2

Sure. Yes. We indicated kind of our investment multiple going forward about 5.5 times call it 5 to 6 times EBITDA. I think you've seen our track record over the last several years. The EBITDA multiple has even been perhaps a little bit stronger than that.

Speaker 2

We're investing in the same kind of projects that have delivered return strong returns for us over the last several years. It's investing in our Gathering and Processing business and then expanding our downstream NGL infrastructure to accommodate those volumes. So we're really sticking to our core business. We expect the returns to be very good. But 5.5% is kind of what we indicated would be a pretty good base case, what we think we can do.

Speaker 2

I hope we can beat that. But if we do 5.5%, it will be a really good return profile for us.

Speaker 13

Thank you. I'll turn it over.

Speaker 1

Okay. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Keith Stanley with Wolfe Research. Your line is open.

Speaker 14

Hi, good morning. First, I wanted to start with a follow-up just on 2025 CapEx. Are you baking in any NGL pipeline spend in there? Or you're comfortable 3rd party contracts are giving you enough visibility that you don't need to invest in more pipeline capacity yet next year?

Speaker 2

Yes. Hey, Keith. You're correct. Yes, for 2025 with Daytona coming on back half of this year, we should have sufficient transport through 2025 and some period beyond Daytona coupled with the 3rd party transportation that we've already executed and we're working on more. So we're really talking about when and if we may need to do another NGL pipe and how it impacts 26, 27, 28 capital.

Speaker 2

But for 2025, our expectation is we don't have any meaningful transportation capital in that number.

Speaker 14

Great. Thanks. Second question, with volumes coming in a lot higher than expected, is it fair to think you're offloading a lot more to 3rd parties this year than normal? And then when we think about growth into 2025 and new assets coming online, should we expect some additional financial tailwinds just from bringing volumes back onto your system in 2025 that maybe you're offloading this year?

Speaker 2

Yes. No, good question. We're all looking around who's going to answer this. Everyone's raising their hand. So I'll start and then yes, when you think about offload, it really is dependent on the piece of the business.

Speaker 2

Is it gathering or processing, transportation, frac? I'd say as our volumes have really exceeded our expectations there are periods of times where we do offload on the GMP side. But with the flexibility we have with our plants mostly we handle that amongst ourselves and we'll actually handle some offloads from third parties on the GMP side. As you look through the downstream the transportation and frac as our NGL volumes have grown significantly, we have connectivity to basically every other pipe in the Permian going to Bellevue. So we have those existing connections from our plants, from legacy plants, from acquired plants.

Speaker 2

So we have a lot of flexibility to move volumes. So we'll look to optimize that for what's the cheapest cost transport while we're bringing DAYTONA up. So there are some volumes that we're moving on other pipes that we'll be able to go on DAYTONA kind of day 1 as soon as that comes up. And then same on the fractionation side. We have Train 9, GCF and Train 10 all coming online this year.

Speaker 2

If you kind of look back at our volumes, the frac has not grown as much as some of our other volumes and that's because we're managing third party fractionation there as well. So you saw a big step up this quarter with Train 9 coming on. That is kind of bringing some of those volumes back on to our system. I'd expect more of that to happen in the Q3 and Q4.

Speaker 1

Thank you. Okay. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Sunil Sibal with Seaport Global. Your line is open.

Speaker 9

Hi, good morning everybody. And first of all, congratulations to Jen and Bill for their new roles. So I wanted to start off on your CapEx program. So could you remind us what's the current best estimate on building a new 275 plant and filling it up?

Speaker 2

I would say on average, our plants are around $200,000,000 on the G and P side of things for a new 275 plant. Some have been a little bit cheaper. Some have been a little bit more depending on what kind of compression you're doing, some of the other bells and whistles. Sour. Sweet sour, but it's around $200,000,000 for the plants we have announced.

Speaker 9

And then similar amount to fill it up in terms of gathering systems, etcetera?

Speaker 2

How much field capital? Well, that's also one where it varies from year to year. How much pipeline compression you're going to need? Is it more high pressure? Is it more low pressure?

Speaker 2

So you can see more variability on that. So there are times we're also ordering more compression. We're trying to build some inventory up because we see strong growth in the next year. So that has moved around quite a bit. I don't know.

Speaker 2

Pat any other color you want to give? No.

Speaker 6

I think you described it. I mean, there's a lot of variability there. It depends on if producers drill behind existing batteries, where they drill, how many new batteries we're connecting, high pressure, low pressure, all those things sweet, sour. There's just a ton of it and you're right. With lead times and plants, that capital kind of gets kind of mothballed together and it's there's not a real finite number that I'd be comfortable getting.

Speaker 2

And we haven't really seen, I'd say, a material change. It varies from year to year, but we haven't seen a trend of getting more expensive or less expensive really. It's been operating within a band that we've seen year in, year out.

Speaker 9

Understood. And thanks for the bridge that you provided on the CapEx program. I just had one clarification on the other category. It seems like you're indicating carbon capture is also

Speaker 13

put in

Speaker 9

the other category. Could you indicate what kind of capital you spent so far on carbon capture? And when can we expect to see returns on that?

Speaker 3

We're not going to break it out separately, Sunil. What we have said is that we expect to be in position to potentially benefit from 45Q credits later this year. We have a number of projects that we're commercializing in the Permian Basin that's very much core to what we do and what we are good at. So it's small enough that it doesn't make sense for us to break it out separately, but I'd say the returns are commensurate with what we're seeing across the rest of our investment opportunities across the portfolio.

Speaker 9

Okay. Thanks for that.

Speaker 1

Okay. Thank you. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Tristan Richardson with Scotiabank. Your line is open.

Speaker 15

Hey, good morning, guys. Maybe just a quick one on Blackcomb. Is it wrong that your equity stake has some correlation with the capacity you expect to have in the pipe? And then maybe just thinking about your capacity portfolio in general with the growth you're seeing exiting 2024 and looking into 2025?

Speaker 5

This is Bobby. Yes, as we build our portfolio of transport, we obviously market a ton of gas for our producers across the Permian Basin. And as we look at the portfolio of takeaway, we've talked about it before in type markets. We spend a lot of time to make sure that all the gas moves out of our plants. Some of

Speaker 15

that is long haul out

Speaker 5

of the basin like our Blackcomb deal. And but I tell you a majority of it is within basin and tailgate sales to people that have transport. So we manage that altogether. And then as we think about making sure there is egress from the basin on pipes, that's when we step out on things like this Blackcomb deal to make sure that a pipe gets built timely enough such that the basin doesn't have more material issues than it already has. So when I think about what we put on a pipe like Blackcomb, it is a very small subset of the amount of gas we market across the basin.

Speaker 5

So it's not a needle mover relative to the amount of gas we market. But it is part of the science we go through every year thinking out 1 year thinking out 2 years thinking out 3 years and how we're going to make sure all the gas moves through our plants so that the NGLs get out and our producers can produce their oil.

Speaker 15

Helpful, Bobby. And then, Jen, obviously, you said 2Q was a very tight gas market. I mean, curious, were B Floors a factor in 2Q or even said another way, target able to put up a very strong 2Q irrespective of where basis sits today versus when we see relief on the horizon hopefully by Q4?

Speaker 3

I think the second quarter supports why the fee floors are so important to us. When you think about the amount of capital that we spent in the quarter, now moving forward with 2 additional gas processing plants to support our producers with the backdrop of negative Waha prices and low NGL prices. Yes, you can assume that the flares that the feed floors were very much

Speaker 4

important to

Speaker 3

us in the Q2 and really have been in play for a substantial number of months over the last call it year and a half or so. And that again is really what's allowed us to invest through what is a low commodity price cycle right now and what is allowing us to continue to invest looking forward as well.

Speaker 15

That's great. Thank you guys very much. Appreciate it.

Speaker 1

Okay. Thank you. Thanks, Tristan.

Operator

Thank you. I would now like to turn the call back over to Mr. Sanjay Lad for any closing remarks.

Speaker 1

Thanks to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. The IR team will be available for any follow-up questions you may have. Have a great day.

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Earnings Conference Call
Targa Resources Q2 2024
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