Targa Resources Corp. (NYSE:TRGP) Q4 2023 Earnings Call Transcript

Targa Resources Corp. (NYSE:TRGP) Q4 2023 Earnings Call Transcript February 15, 2024

Targa Resources Corp. misses on earnings expectations. Reported EPS is $1.26 EPS, expectations were $1.53. Targa Resources Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Targa Resources Corp. Fourth Quarter 2023 Earnings Webcast and 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 speaker today, Sanjay Lad, Vice President of Finance and Investor Relations. Please go ahead.

Sanjay Lad: Thanks, Shannon. Good morning and welcome to the fourth quarter 2023 earnings call for Targa Resources Corp. The fourth quarter earnings release, along with the fourth quarter earnings supplement presentation for Targa that accompany our call, are available on our website at targaresources.com 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. 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, we’ll have the following senior management team members available for Q&A: Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer. And with that, I will now turn the call over to Matt.

Matt Meloy : Thanks, Sanjay, and good morning. 2023 was another record year for Targa. And I would like to recognize and thank our employees for their focus, dedication and execution throughout the year. Some of our highlights for 2023 include record safety performance; record Gathering and Processing volumes in the Permian; record volumes across our logistics and transportation assets; record adjusted EBITDA of $3.53 billion, a 22% increase over 2022, while also reducing our share count; major projects came online on time, on budget and have been highly utilized since start-up; ended the year with 90% of our G&P volumes fee-based or with fee floor; positive outlook to our current investment-grade ratings with each of the three agencies and the completion of two successful notes offerings; and higher year-over-year return of capital to our shareholders through both an increased common dividend and record common share repurchases.

Our performance was particularly strong given Waha natural gas and NGL prices were about 64% and 34% lower year-over-year. And we benefited from margin from fee floors in our Gathering and Processing business across 10 of 12 months, demonstrating our business is more insulated to downside — to downward commodity prices than ever before. We also exited 2023 with a lot of volume momentum in the Permian. Our December reported inlet averaged 5.5 billion cubic feet per day, a 450 million cubic feet per day improvement from our third quarter average. While our volume ramp materialized later than we forecasted for 2023, we are pleased that we ended the year with December actuals in line with our original guidance expectations for the Permian, providing us with strong momentum in 2024.

We expect another year of record financial and operational metrics with full year adjusted EBITDA estimated to be between $3.7 billion and $3.9 billion for 2024. The significant year-over-year increase in adjusted EBITDA is primarily driven by higher expected Permian Gathering and Processing volumes and higher expected NGL transport fractionation and export volumes. Consensus growth expectations for Permian-associated gas in 2024 is about 9%. And given our track record of outperforming the basin, we are installing over 400 million cubic feet per day of compression in the first half of 2024, which will drive increasing volumes through our downstream assets. We currently estimate between $2.3 billion and $2.5 billion of growth capital spending in 2024 as we bring online two Permian plants, three fractionators in an NGL pipeline while also spending on projects that will come online beyond 2024, including additional Permian plants and fractionation trains.

Beyond these projects already announced and under construction, we’re also ordering long lead time items for our next Permian plants and frac Train 11 to ensure we keep pace with the significant activity we continue to see. Backed by the strength of our outlook and increasing stability of our cash flows we announced in November an expectation of a 50% year-over-year increase to our annualized 2024 common dividend per share. The increased dividend will be recommended to our board in April for the first quarter of 2024 with payment to shareholders in May. We also repurchased a record $374 million of common shares in 2023 and continue to be in position to execute on our opportunistic share repurchase program in 2024. Beyond 2024, we really like our positioning driven by a view of cost-advantaged basins like the Permian continuing to be a key supplier of hydrocarbons for decades to come.

As we look to 2025, we estimate about $1.4 billion of growth capital spending burdened by the next major projects that are not currently board approved but would be necessary to support continued volume growth, including Train 11 and additional Permian G&P plants. With increasing EBITDA in 2025 relative 2024 and lower estimated growth capital spending, we expect to generate significant free cash flow in 2025. Also, we included in our presentation slides this morning an illustrative buildup of multiyear average spending that would approximate about $1.7 billion per year. This assumes high single digit gas volume growth in the Permian, requiring us to continue to add infrastructure across our value chain. $1.7 billion of capital spending at a 5.5 times multiple would drive over $300 million of EBITDA growth year-over-year and increasing free cash flow, supporting our ability to continue to return an increasing amount of capital to our shareholders.

We also included our estimated spending to maintain volumes currently on our system, which we think is helpful in demonstrating the resiliency of our business. Growth capital spending to maintain existing volumes is estimated at around $300 million annually, which is informed by how quickly we’re able to rationalize spending in 2020 and 2021, when we still had strong volume growth across our assets. In a scenario of $300 million of annual growth capital spend, we would be in a position to utilize significant free cash flow to continue to return capital to shareholders while maintaining a very strong balance sheet. As we look forward, our excitement is our — our excitement and our outlook is driven by a few things. First, we have the largest Permian Gathering and Processing footprint in the industry with several million dedicated acres across Midland and Delaware Basins.

That, coupled with an integrated NGL system, positions us nicely to generate high return organic opportunities to invest around $1.7 billion annually over a multiyear average, delivering over $300 million of annual EBITDA growth, driving significant free cash flow and positions Targa to continue to meaningfully increase the amount of capital returned to shareholders and deliver significant value to our shareholders over the long term. Let’s now discuss our operations in more detail. Starting in the Permian, activity continues to remain strong across our dedicated acreage. Fourth quarter inlet volumes averaged a record 5.3 billion cubic feet per day, an 11% increase when compared to the fourth quarter of 2022. We brought online significant compression across our Midland and Delaware systems during the fourth quarter, driving a 5% sequential increase in volumes.

In Permian Midland, our new 275 million a day Greenwood plant, which commenced operations during the fourth quarter, is already highly utilized. Our next Midland plant, 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 the Permian Delaware, activity in volumes across our footprint are also running strong. We brought online our new 275 million a day Wildcat II plant in late fourth quarter, and it’s already highly utilized. Our Roadrunner II and Bull Moose plants remain on track to begin operations in the second quarters of 2024 and 2025, respectively. As mentioned earlier, we are ordering long lead time items for our next Permian plants to support continued production growth across our footprint.

Shifting to our Logistics and Transportation segment. Targa’s NGL pipeline transportation volumes were a record 722,000 barrels per day, and fractionation volumes were a record 845,000 barrels per day during the fourth quarter. Our Grand Prix NGL pipeline deliveries into Mont Belvieu increased 9% sequentially as we benefited from increased supply from our Permian G&P systems and higher third-party volumes. The outlook for NGL supply growth from our G&P footprint and third parties remains robust, and our Daytona NGL pipeline expansion will be much needed to handle growth from our system. We have obtained all required permits and have commenced construction on Daytona. We now expect the pipeline to begin operations ahead of schedule in early fourth quarter of this year, assuming favorable weather conditions.

Our fractionation complex in Mont Belvieu continues to operate near capacity. And we expect our Train 9 fractionator to be highly utilized when it commences operations during the second quarter of 2024. The restart of GCF will also provide much-needed capacity when it is fully online 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 plan additions and remains on track for the first quarter of 2025. As mentioned earlier, also ordering long lead items for Train 11 support continued production growth across our footprint. In our LPG export business at Galena Park, our loadings were a record 13.3 million barrels per month during the fourth quarter as we benefited from our recently completed expansion, strong market conditions and the Houston Ship Channel allowance of nighttime transits for larger vessels, providing strong momentum for 2024.

Before I turn the call over to Jen to discuss fourth quarter results in more detail as well as our expectations for 2024, I would like to extend a second 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 fourth quarter was $960 million, a 14% increase over the third quarter. The sequential increase was attributable to higher Permian volumes, which resulted in higher system volumes across our integrated NGL business. Full year 2023 adjusted EBITDA was roughly $3.53 billion, supported by record financial and operational metrics across the company. We spent approximately $2.2 billion on growth capital projects and $223 million in net maintenance capital during 2023, largely in line with our previous estimates. In November, we successfully completed a $1 billion offering of 6.15% coupon senior notes due 2029 and a $1 billion offering of 6.5% coupon senior notes due 2034.

This allowed us to reduce our term loan borrowings by $1 billion and enhance our liquidity position. At the end of the fourth quarter, we had $2.7 billion of available liquidity and our net consolidated leverage ratio was approximately 3.6 times, well within our long-term leverage ratio target range of 3 to 4 times. Also, this morning in an announcement that was made public while we were on this call, S&P has upgraded us to BBB, reflective of the progress we have made to date and our outlook for the future. Turning to our expectations for 2024. We are really excited about that short and longer term outlook. We estimate full year 2024 adjusted EBITDA to be between $3.7 billion and $3.9 billion, an 8% increase over 2023 based on the midpoint of our range, assuming commodity prices of $1.80 per MMBtu for Waha natural gas, $0.65 per gallon for our weighted average NGL barrel and $75 per WTI crude oil barrel.

We expect first quarter 2024 adjusted EBITDA to be lower than fourth quarter 2023 as volumes across our systems were impacted by very cold winter weather, and operating expenses are increasing in anticipation of system expansions across both our segments. We expect quarterly adjusted EBITDA to increase sequentially as we move through the year and benefit from increasing volumes across our systems. We estimate $2.3 billion to $2.5 billion of growth capital spending for 2024, including the vast majority of spending on Greenwood II, Bull Moose, Daytona and Train 10. Our estimate for net maintenance capital spending is about $225 million reflective of our spending in 2023 and the increased assets that our operations teams are managing. We expect to end 2024 with our leverage ratio comfortably within our long-term leverage ratio target range of 3 to 4 times, providing continued flexibility going forward.

We are well hedged across all commodities for the balance of 2024 and continue to add hedges for 2025 and beyond. The combination of hedges and fee-based margin across our businesses will continue to provide us with cash flow stability. Our fee floors in our G&P business support our ability to invest across lower commodity price environments while positioning us to benefit from higher commodity prices. Relative to our full year 2024 financial guidance, a 30% move higher in commodity prices would increase full year adjusted EBITDA by around $165 million, while a 30% decrease would reduce adjusted EBITDA by around $75 million. As Matt described earlier, we also provided you with our current view of 2025 growth capital spending and an illustrative multiyear buildup across a couple of scenarios.

We hope these are helpful. Our goal in providing them was to highlight some key points. We believe that there will continue to be strong growth in Permian volumes on our system going forward, which is going to drive incremental volumes through our downstream assets, requiring continued investments, which will continue to be at attractive returns, particularly given our efforts around adding fees and fee floors. Downstream projects are larger and spending is lumpier. As those projects come online and we benefit from the operating leverage associated with increased available capacity, our growth capital spending moderates as evidenced by our current expectation of $1.4 billion of capital spend in 2025. Across multiple years, we would expect growth capital spend in an environment of continued volume growth to approximate around $1.7 billion.

We are bullish Permian growth going forward but are often asked the question, how much capital would it take to maintain volumes? And our answer is approximately $300 million. This is not a scenario that we anticipate. It is merely intended to be instructive and hopefully helpful in demonstrating the strength of the Targa value proposition across the downside scenario, when the strength of our free cash flow generation and balance sheet would leave us very well positioned. 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. 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 in the 2024 annual common dividend, $3 per share, and we expect to be able to grow our dividend meaningfully thereafter.

We also expect to remain in a position to continue to execute opportunistically under our common share repurchase program. In 2023, we repurchased a Targa record $374 million of common shares at a weighted average price of $76.72 with $41 million repurchased during the fourth quarter. We had about $770 million remaining under our $1 billion share repurchase program at the end of the fourth quarter. Across our base scenarios, we are continuing to model the ability over time to return 40% to 50% of cash flow from operations to equity holders, providing a framework for thinking through our return of capital proposition looking forward. As it relates to taxes, based on our estimate for earnings and spending and current tax policy, there’s no change to our assumptions that we may be subject to the federal minimum tax in 2026 and a full cash taxpayer in 2027.

We believe that we continue to offer a unique value proposition for our shareholders and potential shareholders, growing EBITDA, a growing common dividend per share, reducing share count and excellent short, medium and long-term assets — outlook, excuse me. Our talented team continues to execute on our strategic priorities and safely operate our assets to deliver the energy that enhances our everyday life. And we are very thankful for the efforts of all of our employees. 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 enter the Q&A line up if you have additional question. Shannon, would you please open the line for Q&A?

See also 15 Best Hospitals for Cancer Treatment in the US and 20 Cities With The Highest Cost of Living in the US.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Jeremy Tonet with JP Morgan Securities, LLC. Your line is now open

Jeremy Tonet : Hi, good morning.

Matt Meloy : Hey, good morning, Jeremy.

Jeremy Tonet : Just wanted to start off, I guess, with the news about 2025 CapEx stepping down so significantly versus 2024, creating a lot of flexibility there as it relates to return on capital. Just wondering if you might be able to provide a little bit more detail as far as thoughts on capital allocation at that point in weighting dividend growth relative to buybacks. Just kind of any other — any incremental color would be helpful there with that extra — with that $1 billion step-down in CapEx.

Jen Kneale : Good morning, Jeremy. This is Jen. I think that we’re really excited about 2025 and the possibilities for Targa and our shareholders. There’s really no change to how we are thinking about return of capital. I think part of the excitement that we have around this year, next year and really many years to come is that we believe we offer a really unique value proposition, where we will be in position from a significantly increasing amount of free cash flow to meaningfully increase our common dividends per share and continue to execute under our opportunistic share repurchase program. We published the framework in November that said that we would expect to be in a position to return 40% to 50% of cash flow from operations to our shareholders.

And that’s what we’re modeling. And as we get into 2025 and beyond, that means that there’s a lot of incremental capital that can flow to our shareholders. And again, that’s really what is underpinning what we think should be a very exciting Targa story for both our company and our shareholders.

Jeremy Tonet : Got it. Thank you for that. And maybe just pivoting towards LPG exports, a good step-up there. Just wondering if you could comment a bit more if the lifting of daylight hour restriction, I think, it is planned and we expect the Port Authority to drop the trial moniker not too far down the road here. I’m just wondering how you think that impacts Targa capacity when the daylight hour restriction is fully removed then?

Scott Pryor : Hey, Jeremy, this is Scott. First off, you’re right, fourth quarter was a really nice quarter for us with over 13 million barrels per month, which was a combination of both propanes and butanes across the dock. Certainly, a couple of benefits there that we took in — to our advantage. One was obviously the export expansion project that we had that increased our refrigeration capacity, increased our ability to load vessels faster. And we were able to operate through the — really the entire fourth quarter, so we got the step up with that. The nighttime transits that were lifted or provided another benefit. So the Houston Ship Channel, along with the Houston pilots, collaborated together to provide that to the industry as a whole.

Targa benefited from that as a result of that. I would say that nominally speaking, we think that, that probably provided us about a 5% to 10% benefit. It’s difficult to really pin that down because there’s a variety of factors that play into that. And on top of that, we were able to benefit from spot activity as a result of those increased liftings. I would like to add that I give a huge thank you to the Houston pilots and the Houston Ship Channel. That provides that change in nighttime transit that they have done very safely, effectively and efficiently, not only benefits Targa, but it really benefits a wide variety of industries along the Houston Ship Channel that help drive Texas economy as well as the U.S. economy. So going forward into 2024, you’re right, currently today it is kind of labeled as a trial period.

But I think based upon the success that they’ve had, the safe operating environment that they’ve been able to conduct themselves under, we view this really as a long-term change. And we will continue to benefit from it. We hope to find other ways to optimize around that as we learn more about the nighttime transits and the vessels that are available to move through that process.

Jeremy Tonet : Got it. Okay. So it sounds like there could be upside down the road versus the 5 to 10?

Scott Pryor : Well, what I would say is, I think that in the fourth quarter, it was not — the nighttime transits were not a part of the entire fourth quarter. It really got instituted in November. And I think that we will hopefully find some better ways to optimize around it, again, as we learn more about the program. So it benefited us now, and we’ll continue to see how that fares for us going forward.

Matt Meloy : Yeah. It’s still early, Jeremy. So I think we’re thinking 5% to 10% is a good — kind of a good range of upside right now, but it’s still pretty early.

Jeremy Tonet : Got it. That’s helpful. Thank you.

Sanjay Lad: Okay, thank you.

Operator: Thank you. Our next question comes from the line of Spiro Dounis with Citi. Your line is now open.

Spiro Dounis : Thanks, operator. Good morning, team. Wanted to go back to Permian production quickly. Jen, you had mentioned maybe a slower start to the year, and I think that’s pretty consistent with what producers are saying. Just curious, though, as we think about the year as a whole, can you give us a sense of what Permian production growth is underwriting the guidance? And to the extent that it’s back half loaded, what that implies about 2025?

Jen Kneale : I think that we’re continuing to see a lot of very robust growth on our Permian assets. A couple of important points that I think were mentioned in scripted comments were, one, that by the time that we got to the end of 2023, we actually outpaced our initial expectations for the year. While that growth materialized a little bit more slowly than we expected, it did materialize and ended up exceeding expectations at year-end. What I was trying to highlight was we did experience some extreme winter weather here thus far to start the year, and that will impact our Q1 results. But our operations teams are doing an excellent job of getting our assets back up and running. So as we think about the balance of this year and beyond, I think you’ve seen our track record that we outperform the expectations for growth out of the Permian Basin on the gas side.

And there’s nothing that we’re seeing that would change that trend in any meaningful way. We didn’t give a statistic this year for Permian growth relative to what we’ve provided previously in the past. One, just because we think that individual operational statistics are less meaningful than some of the high-level corporate information that we give. And I think that our performance in 2023 highlighted that a little bit, right? Our volumes ended up coming in a little bit lower than our initial guidance for the full year average. But again, we exited higher than we initially anticipated. So everything is just really setting up well for our continued execution across both the Midland and the Delaware Basin. And we have a very strong outlook for robust continued growth for as long as we can see.

Spiro Dounis : Got it. Thanks a lot, Jen. Second question, maybe going to 2025. I know you’re not providing ’25 EBITDA today, but some of the materials did maybe give us some tools on how to help think about that. You guys are pointing to significant growth. You’ve also talked about in the slides $300 million of annual EBITDA growth with $1.7 billion of spending. So I guess, if I look back at ’23-’24, spending over $2 billion in each of these years, it would seem like as we think about the lease of ’25, over $300 million of EBITDA growth would seem like an easy hurdle. But I don’t want to get too ahead of myself.

Matt Meloy : Yeah, yeah. I think what I’d say is we feel really good about our position coming out of ’24 going into ’25. I think ’25 is going to set up very well. I think we see significant EBITDA growth in ’25, and frankly, beyond ’25. We guided 2.3 to 2.5 of CapEx this year. We were about 2.2 last year. So the kind of 5.5 times investment multiple is a multiyear average. It’s not — you spend a set amount in one year so it results in EBITDA in that year. It’s a multiyear average that we think we can do, call it, 5 to 6 times EBITDA on our CapEx. So when you kind of look at what we spent the last couple of years, I think it just sets up for a very strong 2025. We decided not to give EBITDA guidance for ’25, but just kind of point you to our historical spending and just the overall volume trajectory that we’re seeing across our footprint is just going to set up very nice for us in ’25.

Spiro Dounis : Fair enough. Thanks for that, Matt. Appreciate the time today.

Sanjay Lad: Okay. Thank you.

Operator: Thank you. Our next question comes from the line of Brian Reynolds with UBS. Your line is now open.

Brian Reynolds : Hi, good morning everyone. Maybe to follow up on some of the kind of long-term EBITDA growth outlook, I think you outlined kind of a build multiple around 5.5 times. I think a quarter or two ago, you kind of outlined in the past three years that some of these projects came in at much lower multiples. So kind of just trying to understand maybe the difference there if you can — maybe there’s some doses of conservatism in the build or whether the commodity has anything to play with that and whether we could maybe see some upside to the EBITDA build multiple. Thanks.

Matt Meloy : Sure. No, good question. I mean, really, historically, you go back years, we kind of said 5 to 7 times build multiple is kind of what we targeted. We’ve been able to do better than that. I think that was just kind of some cushion in that 5 to 7. If you look back at the last five years, we’ve really been kind of closer to a 4 times build multiple. We’ve had really good volume growth across our system. And the Permian, Grand Prix filled up much quicker even than our expectations, which just drove the returns even higher. So I think we’ve really had some strong performance. But I’d say there’s really nothing fundamentally different in what we’re investing in this year and next year, go forward than what we invested in, in the past where we did have a lower investment multiple.

I’d say perhaps there’s a little bit of conservatism put into that number. But it’s not — there’s not a large delta from commodity prices one way or the other. I’d say we have more commodity price upside given the fee floors that Jen and we’ve talked about, which could drive that lower if we get some commodity price tailwinds.

Jen Kneale : I would just add that, I think, Brian, the conservatism is further highlighted by how highly utilized we think our projects will be that are in progress right now when they come online, which has been really the same playbook that we benefited from over the last many years. It feels like we’re just in time on a number of our assets, which is great for the finance person in the room because it means that they’re very highly utilized at start-up and provide significant incremental cash flow very quickly. It makes it a little bit tougher for our operations and engineering teams, of course, as they try to plan. But I think that that’s part of the conservatism as well that really is reflective in the 5.5 times versus the realized multiples that you’ve seen across our footprint.