Targa Resources Corp. (NYSE:TRGP) Q3 2023 Earnings Call Transcript

Targa Resources Corp. (NYSE:TRGP) Q3 2023 Earnings Call Transcript November 2, 2023

Targa Resources Corp. misses on earnings expectations. Reported EPS is $0.97 EPS, expectations were $1.19.

Operator: Good day, and thank you for standing by. Welcome to the Targa Resource Corp. Third Quarter 2023 Earnings Webcast 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 Instructions]. 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. Please go ahead.

Sanjay Lad: Thanks, Whitney. Good morning and welcome to the Third Quarter 2023 Earnings Call for Targa Resources Corp. Third quarter earnings release, along with the third 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. 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 Meloy, Chief Executive Officer; and Jen Kneale, Chief Financial Officer. Additionally, the following senior management team members who will be available for the Q&A session, Pat McDonie, President, Gathering and Processing; Scott Pryor, President Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer. And with that, I’ll now turn the call over to Matt.

Matt Meloy: Thanks, Sanjay and good morning. We are very proud of the efforts of our employees across the third quarter. 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 one million barrels per month. We also continue to return an increasing amount of capital to our shareholders in the quarter with 132 million of common share repurchases. Since the end of the third quarter, positive momentum continues across our organization highlighted by the commencement of operations, of our new Greenwood plant in Permian Midland ahead of schedule and on budget.

The expected rebound in our Permian volumes with current reported inlet about 150 million cubic feet per day higher than our third quarter average, publishing our annual sustainability report, demonstrating our continued progress across ESG pillars as an operator of critical natural gas and NGL infrastructure, receiving a two-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 return 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&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.

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&P Energy and broader S&P 500. Across our base scenarios we are modelling the ability to return 40% to 50% of adjusted cash flow from operations to equity holders. This is not a target or a 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 third quarter volumes largely driven by the extended periods of heat across New Mexico and Texas.

We also had about 200 million 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 were offset by reduced Permian Delaware volumes resulting in flat Permian inlet volumes. Through the first three quarters of this year average reported inlet volumes across our system have increased over 300 million cubic feet per day in comparison to average fourth quarter 2022. Our Permian volumes are currently operating at about 150 million cubic feet per day higher than our third quarter average, as the growth we expected to see a bit earlier in the year is now materializing in the fourth quarter. In Permian Midland our new 275 million a day Greenwood plant commenced operations in October and is quickly ramping up, a big thank you to our engineering and operations team 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 fourth quarter 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 II plants remain on track to begin operations in the first and second quarters of 2024 respectively and both plants are expected to be much needed at start-up. In our Central region and the Badlands our combined Natural Gas volumes increased 2% sequentially and our systems are performing well. Shifting to our Logistics and Transportation segment Targa’s NGL pipeline transportation volumes were a record 660,000 barrels per day and fractionation volumes remained strong averaging 793,000 barrels per day during the third quarter.

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 the first quarter of 2024 and we continue to expect our Train nine fractionator to be highly utilized when it commences operations during the second quarter of 2024. Our Train 10 fractionator is also expected to be much needed given the anticipated growth in our G&P business and corresponding plant additions and remains on track for the first quarter 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 10.7 million barrels per month of LPGs during the third quarter 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 one million barrels per month of capacity was completed at the end of the third quarter and we expect our loadings to ramp during the fourth quarter 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. Before I turn the call over to Jen, to discuss our third quarter 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.

Jen Kneale: Thanks Matt. Good morning everyone. Targa’s reported quarterly adjusted EBITDA for the third quarter was $840 million a 6% increase over the second quarter. Sequential increase was attributable to higher system volumes across our integrated NGL businesses higher commodity prices partially offset by higher operating and G&A expenses. With three quarters of the year completed, we are tracking towards the lower end of our 2023 adjusted EBITDA range of $3.5 billion to $3.7 billion, 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 G&P business, our successful hedging program and the resiliency of our operations.

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 three quarters we have spent approximately $1.6 million on growth capital projects and our current estimates for balance of year spending lead us towards the higher end of our $2 billion to $2.2 billion range. Our net maintenance capital spending is tracking a little bit higher than initial expectations and our current estimate for 2023 is approximately $200 million.

At the end of the third quarter, we had $1.8 billion of available liquidity and our pro forma net leverage ratio is approximately 3.7 times, well within our long-term leverage ratio target range of three to four times. 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. For 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 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. We also expect to remain in a position to continue to execute opportunistically under our common share repurchase program. During the third quarter, we repurchased $132 million of common shares at a weighted average price of $83.38 and have repurchased $333 million year-to-date through September. We had about $811 million remaining under our $1 billion share repurchase program at the end of the third quarter. 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.

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

Sanjay Lad: Thanks Jen. For the Q&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&A?

Operator: Yes, thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Theresa Chen with Barclays. Your line is now open.

See also 12 Stocks that Could Skyrocket According to Investment Newsletters and 12 Best Metal Stocks To Invest In.

Q&A Session

Theresa Chen: Good morning. Thank you for taking my questions. It’s great to see a very strong dividend increase in 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? Is there a yield you would like to achieve? And how you generally plan to balance dividend growth with share repurchases within that new 50% cash from ops framework while maintaining a healthy balance sheet?

Jen Kneale: 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. Our return on capital strategy begins with numerous multiyear scenarios, and hopefully it’s becoming more evident that increasing G&P 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 which are meaningful to us while also increasing our cash flow stability and resiliency across lower commodity price environments.

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&P Energy and S&P 500 and how they’re returning capital and then Targa’s relative positioning across all of that.

And all of that is really at the end of the day informing a return of 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 a 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.

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

Theresa Chen: 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?

Matt Meloy: Yes, sure. Hi Theresa, this is Matt. With the announcements we’ve seen recently, they are 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. 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. And 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. When you look at some of those parties mentioned they have pretty robust growth outlook.

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.

Theresa Chen: Thank you.

Matt Meloy: Okay. Thank you.

Operator: Thank you so much. One moment for our next question please. All right. Our next question comes from the line of Michael Blum with Wells Fargo. Your line is now open.

Michael Blum: Thank you. Good morning, everyone. I wanted to just ask about your views now on the trajectory of Permian volume growth. I just wanted to understand that the third quarter, 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 future growth?

Matt Meloy: Yes. Hey, Michael. Yes, good question. We’re seeing strong growth from the Permian. So talking about Midland first and then will get on Delaware. Really the Midland volumes are tracking in line with our guidance that we gave at the beginning of the year. Continued strong growth is really on track and we’ve seen that even ramp here in the fourth quarter. So it really kind of comes into the Delaware. We did have 200 million a day kind of roll off in between Q2 and Q3 when you kind of look at the averages. 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 third quarter. But it’s not quite enough to offset the $200 million 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 frankly it’s coming in a little bit later than we had thought we were going to have it in place at the beginning of the year. We’ve got 200 million a day scheduled to come online between now and 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 and 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.

Michael Blum: 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? 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.

Scott Pryor: And specifically to the Grand Prix pipeline Michael?

Michael Blum: Yes.

Scott Pryor: Okay. This is Scott. Sorry I just wanted to clarify. When we look the quarter — the third quarter, we had some volume improvements that came across in the quarter. Those were predominantly third-party volumes. Our upstream volumes as Matt indicated we’re relatively flat on the quarter. But we continue to see volume growth overall. As we look into 2024 and really in the fourth quarter 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 on to us as contracts mature into their in the beginning. With Daytona pipeline coming online in the fourth quarter of next year we feel very comfortable with the timing of that relative to the volume growth that we will have and we’ve seen a number of announcements in the marketplace obviously off late.