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.
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