Q3 2019 Earnings Call
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Benji Lad senior director of an Investor relations.
Please go ahead.
Good morning, and welcome to the third quarter 2019 earnings call for target resources <unk>, the third quarter earnings release for Targa resources core along with the third quarter earnings supplement presentation are available on the Investor section of our website I Targa resources Dot Com. In addition in updated investor presentation.
Adults been posted to our website.
A reminder, that statements made during this call. It that might include Targa resources expectations or predictions should be considered forward looking statements within the meaning of section 21 E. at the Securities Exchange Act of 1934.
Actual results could differ materially from those projected in forward looking statements.
For discussion of factors that could cause actual results to differ.
Refer to our latest S.D.C. filings.
Are speakers for the call today will be Joe Bob Perkins, Chief Executive Officer map, Malloy, President and Jen Neil Chief Financial Officer.
We also have the falling senior management team members available for Q. in a Pat Mcdonie, President gathering and processing Scott prior presidents logistics and marketing.
<unk> cheap commercial officer.
Joe Bob will begin today's call with a few strategic highlight fall by Matt who are provide an update on business outlook and then Jim we'll discuss third quarter results before we take your questions.
What's that Oh, now turn the color to Joe Bob.
Thanks, and J. good morning, and thank you to everybody on the call.
Before we get into our remarks I'd like to acknowledge the recent retirement objective Macfarlane consistent with our long term succession planning.
Recently, Jeff served as President of administration, Jeff was also targets for C.F.
On behalf of the entire target team, we think Jen first tremendous leadership and help shaping our financial organization Park as early years.
It continues to be an exciting time at Targa.
Beginning to benefit from numerous major projects now online.
Most of which began over two years ago. This year, we completed in commenced operations on approximately $4 billion worth of projects <unk>.
Projects, which have successfully transform targa into a leading integrated midstream company. These completed projects and the cash flow from these projects.
Positions Targa very well our balance sheet in cash flow profile are expected to strengthen meaningfully as we move forward and we will capture improve returns on Capitol benefiting from our integrated platform and lower capital spin.
I want to express my personal things do the exact exceptional team at Targa for their continued focusing commitment executing on these projects on our company's longterm strategic priorities and most importantly safely operating our infrastructure facilities every day.
With premier assets in a premier reputation in both are gathering and processing business and in our downstream in G.O. business.
And with those assets and reputation complimented bar talented leadership in employees target is very well position for the future.
With that.
Turn the call over to map to discuss our business outlook.
Thanks job and good morning.
Certainly is an exciting time at Targa two three was a strong quarter as we are beginning to benefit from a cash flow ramp associated with our significant investment cycle.
Since our second quarter conference call, we completed our new 250 million cubic feet per day Falcon point in Permian, Delaware and the rebuild the dock to at our L.P.G. export facilities and going apart.
Our Grand Prix pipeline continues to perform very well since commencing operations in early August .
On our last earnings call. We said, we expected volumes of about 200000 barrels per day, and we exceeded those expectations expectations, averaging about 230000 barrels per day of deliveries into Bellevue in September .
We anticipate volumes to continue to improve going forward and will provide more information on 2020 volume expectations. When we give our formal operational and financial guidance in February .
How do we think about our positioning going forward, there's some key points I like to touch on in summary, and then I will expand on as well.
First are gathering and processing business is growing and expected to continue to have strong performance, even if we experience moderation of production growth.
Second our growth is coming from primarily fee based assets drunk driving a higher percentage of fee based margin and less commodity price sensitivity.
Hurt our continued organization wide focus on Capitol discipline, largely along our core business of moving MA molecules from GMT transport fractionation, an export is leading to more moderate capital spend going forward.
Fourth our financial metrics are improving and expected to improve going forward as we benefit from our integrated platform growing even lower cap accident better returns.
Let's talk about her gathering and processing business.
And the Permian our systems remain highly utilized as volumes across both the Midland down Delaware Bay since I've been tracking above our initial expectations.
And Permian Midland volumes, and the third quarter sequentially increased 8% as our Pembroke plant quickly ramped up in September .
Our next Permian Midland plant Gateway is on track to begin operations in the fourth quarter of 2020.
And Permian, Delaware volumes, and the third quarter sequentially increase 15% as production from our customers continue to ramp.
We completed our new Falcon plant ahead of schedule and commenced operations at the end of the third quarter.
Falcon as quickly ramping and we remain on track to complete our next Permian, Delaware plant paragraphs and the second quarter of 2020.
We expect volumes to increase across our Permian Midland and Permiam, Delaware systems, and 2020 from continued production growth collectively from our diverse customer base full year contributions from a recently completed processing plants and 2019, and our new plants that will begin operations and 2020, we remain and regular.
Dialogue with our producer customers and our growth is underpinned by the majors enlarge independents, who are forecasting continued growth.
With our integrated system, the increasing NGL production from target plans would largely be transported down Grand Prix into our motto Bellevue fractionation complex.
The Gulf Coast Express pipeline commence full operations in late September and provided much needed incremental residue gas.
Into premium markets.
Moving to the Badlands, our gas gathered volumes increase and the third quarter as a result of incremental processing capacity available from the recent completion of our new little Missouri for plant. The volume's will continue to ramp through the balance of this year has incremental NGL take away capacity from the base and comes online.
But the completion of many downstream system expansions, including Grand Prix our business mix has shifted more towards downstream, resulting in increasing feebates margin.
We also have a key strategic initiatives underway, which includes increasing our fee based margin across our gathering and processing business.
Continue to pursue opportunities with our customers to review current prospective commercial arrangements and I've had recent success in converting certain percentage of proceeds arrangements. The fee based arrangements and I've also added incremental fee based elements.
We now estimate our feebates margin to increase in 2020 to be about 80% of our forecasted operating margin.
Turning to our downstream business overall business fundamentals and my Bellevue continue to remain robust.
During the third quarter, we completed a schedule turnaround unrelated maintenance that are fractionation complex and my Bellevue without the turnaround we expect that volumes would've been higher by approximately 50000 barrels per day.
And with the turn around now complete our fractionation complex continues to operate a very high utilization rates.
Construction continues on train seven and eight which are expected to be online late first quarter and late third quarter of 2020, respectively.
We expect both rack trains to be highly utilized at startup based on our expectation of growing NGO volumes from Grand Prix Uncontracted third party arrangements.
And our L.P.G. export business, we completed our Doc to rebuild at the end of the third quarter of 2019, which enhances our flexibility and increases our loading capabilities, where we can now load up to 10 million barrels per month of L.P.G.'s beginning in the fourth quarter, depending on the product mix vessel size. Among other factors are next phase of L.
Sport expansion at our Galena Park facility remains on track as well and will increase our effective capacity to up to 15 million barrels per month, and the third quarter of 2020.
For the completion of Grand Prix in several gathering and processing and downstream expansion projects and 2019, the trajectory of our capital spend is substantially moderate.
We continue to be highly focused on managing our net growth cap x. with discipline and continue to estimate approximately 2.4 billion for this year.
And based on current assumptions are preliminary outlook for 2020 net growth cap axes, approximately 1.2 to 1.3 billion.
Our preliminary estimate includes the remaining spend on announced projects currently underway across our G.M.P. and downstream businesses plus our current best planning assumptions for additional infrastructure from new projects.
The timing of moving forward with new Permian gas processing plants and additional fractionation expansion in my Bellevue is predicated on our outlook for estimated volume growth in activity levels.
Which would impact whether we were at the lower or higher end of our estimated net growth capital range as a result of the timing of that capital spend.
We continue to thoroughly evaluate and highly scrutinize all future new capital projects prioritizing future investments around our core strategy with a continued focus on balance sheet improvement over time.
With that I will now turn the call over to Jan to discuss targets results for the third quarter.
Thanks, Matt Good morning, everyone targets reported clearly adjusted even for the third quarter was $350 million with dividend coverage of approximately one time.
G.N.P. segment operating margin contribution from higher sequential in that volumes.
Our Permian Midland and Permian, Delaware regions was partially offset by the impact of lower N.G.L. and crude oil prices net realized hedge gains third quarter G.N.P. operating margin was about $15 million higher than the second quarter.
In our logistics of marketing segment operating margin sequentially increased predominantly do do a partial quarter contribution from Grand Prix impact of the schedule turnaround in our fractionation facilities. During the third quarter was offset by the early start up a G.C.X.
Operating expenses and our G.M.P. segment in the third quarter decreased over the second quarter, primarily due to lower property tax estimates for the increase in sequential downstream operating expenses was attributable to a full quarter of train six operations and a partial quarter of Grand Prix deliveries into my Bellevue.
Turning to hedging I presented proceeds equity commodity positions are well heck [noise].
Continue to execute additional hedges to increase cash flow stability, we are more than 80 per cent hedged across all commodities for the pollen border and more than 50 per cent hedged across all commodities for 2020 additional updated hedge disclosures can be found in our investor presentation.
During the third quarter, we recognized and unrealized noncash mark to market loss of $101 million associated with hedging or natural gas transportation agreements, which will be offset by underlying locked in transportation gains in future period.
As Matt mentioned 2900, net gross cap X. estimate pronounce projects remains at approximately $2.4 billion and we have spent about $1.9 billion through the end of the third quarter. Our full year 2019 maintenance Catholics forecast remains unchanged at approximately $130 million.
On a debt compliance basis therapies leverage ratio at the end of the third quarter was approximately 4.7 times versus a compliance covenant a 5.5 times.
Consolidated reported that T., but die ratio was approximately 5.8 times.
Using annualized third quarter, Eva die to calculate our consolidated leverage debt to either die ratio was 5.4 times, which we think is more reflective of our leverage trajectory given our expectation to benefit from ramping if it does.
We also continue to evaluate and execute asset sales as a catalyst to reduce leverage during the third quarter. We closed on the sale of an equity method investment for $70 million.
In our press release, we announce that we are evaluating the potential divestiture of our crude gathering business in the Permian, which includes crude gathering and storage assets in both the Delaware and Midland Jason.
I'm very pleased to announce that we have an update to our earlier press release, and we have now executed agreements to sell our Permian, Delaware crude business to oryx mid stream for approximately $135 million subject to customary regulatory approvals and closing conditions. The sale is expected to close in the fourth quarter of 2019.
I would like to publicly thank our team that work tirelessly through the night and early morning to execute the agreements.
Combine these asset sales were executed and an attractive double digit multiple.
Yeah.
We're also evaluating the potential sales germanium permit increased origin gathering assets in the middle and basin.
No common equity has been issued year to date and based on current market conditions are expectation is that we do not need tissue any equity into the foreseeable future as we benefit from increasing cash flow and lower leverage from our projects now in service.
Consistent with our expectations entering 2019.
<unk> and dividend coverage are expected to be at their highest points for the year during the fourth quarter, providing target was significant momentum as we exit 2019.
With that I would like to turn it back to Matt for a few closing comments. Thanks Ya.
Also like to bring to your attention or inaugural sustainability report, which we published inaudible August highlighting or framework of policies practices and systems and the areas of safety environmental social and governance, we remain focused and continuing to progress or disclosures in these areas and to enhance our performance.
So with that operator, please open the line for questions.
Yeah.
Ladies and gentlemen, if you have a question at this time. Please press says sorry, then the number one.
T I switched and telephone.
<unk> Oh, you wish to remove yourself from <unk>.
Please press the pound key.
Your first question comes from the line ups, you know they're shooting from U.P.S.
<unk>.
Hi, good morning, everyone.
Hey, good morning.
Yeah, we can start off with you know you you have Grand Prix coming on line a lot of P. based asked is coming align and your your fee based component of earnings. It is definitely increasing but there's also been some talk about some commercials that says that you and some others have had in converting percentage of.
<unk> contract he floors to sort of bring the exposure down further can you talk a little bit about this have you had some success is do you expect more successes, if so and how that how <unk>, how we should be thinking about it on to go forward basis.
Sure so in our commodity sensitive areas as we're going out and continuing to spend capital to hook up additional wells and facilitate growth for our producers given current commodity prices that returns on some of those are you know relatively low compared to recent points in history. When you look at commodity prices. So it's it's <unk>, it's not too difficult a discussion.
To half of them to to show what our overall margins are and we want to continue to invest for our producers. So we're adding fee based components to those contracts were adding some fee floors and instances, sometimes we're moving to to completely to fee. So it just depends on producer preferences, but we would like to see a meaningful if not me.
Majority are plus of a fee base to protect our investment as we go forward.
Alright, perfect and his eat a follow up question you know really pleased to see the the asset sales plus which you've just talked about and you're prepared remarks do you see any more opportunities for us it's sales down the road like would you consider selling G.C.X. when the Jafco presumably comes in house.
So the the other asset that we named in the press release. This morning was our crude business in the midline. So that that's another one that were in the process now we've engaged jeffries and we're going to look to to monetize that I think we're going to continue to look across our asset base and see what well it might be complimentary if it's not core and down our strategic gas.
Value chains of gathering and processing all the way down you know to the export dock, we're going to have a discussion and and and take a hard look at it but right now the only one that's really on that would be the mid the crude business in the in the middle inside.
Great. One final question, how much Lex do you have to be towards the lower end if your growth cap x. range for 2020.
Well I think you saw us give a relatively narrow range you know as we're you know ramping up our internal processes for what projects. We want to include and what that budget is going to look like for 2020, I think we feel pretty comfortable with that 1.2 to 1.3.
And then it's really going to be when we add another processing plant in the Permian you know we're gonna have some spending you know in 2020 or does it get pushed to the and and the 2020, that's what's going to really move the 1.2 to 1.3 timing of when processing is getting added and then when we green light you know rack train seven and eight fill up.
Are we ordering long lead times for train nine and other things. So that's the why that I think there's a relatively tight range and then it's just the completion of our major projects already out there well is the majority of that.
Alright, perfect. Thank you very much appreciate the time Tonight.
Okay. Thank you.
[noise]. Your next question sounds from the line as five is doing some credit Suisse.
Yeah.
Good morning, everyone, maybe starting up with 2020 or a cap x., if he could coming down significantly in great to see just curious how do you think about the backlog beyond 20, you guys. It got it to aggregate cap X. at one point of about 1.8 billion between 2021, which I guess implies maybe five or 600 million and 21, how much can we see that figure kind.
To change over time or is the right way to think about it that you maybe use any sort of excess spending capacity to to bind to death co interest instead of new projects.
Yeah, I think as we look at our capital spending trajectory I think 2020 is a big step for US you know it's about half of what it was last year. So you're seeing that cap x. moderate I think when we gave that guidance back in November of last year. The the the point of that was to show that going forward. The cap X. is gonna be moderating.
Significantly I think 2020 shows that.
But even in 2020, we have you know spending on two fractionation trains, which is higher than a normal amount of spending would be for fractionation right. So you know we plan to give annual guidance. So 2020 shows a step in the in the right direction significantly moderated cap X. men as we move through the year you know, we'll give annual guidance for for 2021.
Predicated on activity levels right Spiro. So at this point when we think about the assets coming online and 2020. The expectation is that they will be highly utilize relatively quickly train seven we could use you know pretty much very quickly today and so I think that if activity levels stay consistent with where they are today their expectations.
Where the near term then obviously cap x. would be higher as a result of that if activity level of decrease then I think we've got more flex as we go through time to delay the timing of when we have our next plant in the for me on either the bed linen, the Delaware side or when we would need that additional fractionation, though.
Okay that makes sense and it just just circling back on asset sales. Congrats again to deal done. So quickly maybe just talk about how you think about using the proceeds maybe as you look at basins or assets outside of outside of the Permian, where maybe growth is a little bit slower Catholics needs I imagine are much lower.
About the evaluation hurtle, there to sell those assets, which I presume, we're sort of free cash flow positive at this point.
Yeah.
Good question, we've got a lot of interest in assets across the portfolio and we've gotten a lot of risk reversing cleary around different assets were very pleased with the announcement. This morning that we were able to successfully execute agreements on a per me in Delaware crude side and now will be evaluating the potential sale of the Permiam Midland crude assets when you.
Look across the portfolio beyond that I think that everything is for sale for the right price that's part of our jobs, but as you rightly point out there are some areas within our system, where we're spending relatively little capital, where we then incredibly successful in reducing costs and really squeezing every last time out of assets that we possibly can and so getting.
Evaluation that makes sense for us to sell those assets versus just continuing to harvest that cash flow can be a difficult decision, but we're always open evaluating anything that's in our portfolio.
And just to add on to that to jazz you know, we're we have been active in that market as a buyer and as you see now as as a seller.
For selling assets and the G.N.P. visit it's not a great market for that so it was we're looking around that potential opportunities and what we could or could not monetize you know, it's not a a great market for that on the gas gathering and processing side.
Got it appreciate all that color. Thanks.
Okay. Thank you.
Yeah next question comes from interest in Richardson some centrist.
Hey.
The morning, guys just on the 1.2 to 1.3 <unk>.
There is some.
Assumption of new project potential in that number could you give us a sense of the buckets between sanctioned projects and then kind of the wedge of of potential projects that you've got high visibility to that aren't necessarily Greenland today.
Yeah. So most of that spending is related to projects had already underway right train seven train a gateway paragraph export facility. The reason, it's a relatively tight range as we do expect highly likely to be announcing another plant out in the <unk>. So there'll be some spending.
For that and that's why we gave a range of you know we see it as about 100 million dollar range for depending on when we greenlight that plant and then when why grade volumes are increasing as a result of production activity. If they're going we're going to have any spending or some modest amount of spending entree nine 420 20. So those those are the two kind of drivers to be at the high end or low end of that range.
Isn't that mentioned in his prepared remarks, we are expecting rose from the producers on our systems, particularly in the <unk> and so there is a lot of spending that we're assuming will take place to facilitate their growth as they continue to drill and be successful.
Matt I would add one other project to that and that is the extension of our Grand Prix pipeline nor into stack that is highly backed by a Williams contract. Yeah agree that that's another large project Thanksgiving that's largely plenty bad then into 20, yeah yeah.
Helpful. Thank you and then just to follow it.
As we think about the D. lovering cycle that kicks off here and in into 2021.
Any thoughts to updating the market on sort of long term leverage targets either.
You know.
Most you're in 19 or beyond or is particularly as we think of prospects for consolidating the death 'cause multi year out multi years out.
I think tourist in that we've been consistently saying that a goal of ours is to reduce our leverage we deliberately let it move higher over the last couple of years as we had good visibility to the ramp in cash flow and either <unk> projects coming online and now you're hearing I'd say that one of the reasons that we're exploring some of the asset sales that we've been successful on executing.
You see more quickly to our leverage and so that's a big focus area for us.
I think that because our leverage is where it is today a goal of four times consolidated overtime is a reasonable assumption, but it's going to take us from time to get there just given where we are today, even as or if it ramps and so we'll be looking at the death calorie purchase and the terms of those repurchases and our leverage as we move through time, we've got great fat flexible.
<unk> and that structure in terms of having four years from essentially the for order to take it out. So I think that we feel like we have a lot of options to use our additional cash flow as it's generated.
Okay. Thank you guys very much.
Okay. Thank you.
The next question comes from Christine She's from Barclays.
Okay.
Morning, everyone I want it to start with the your comments about increasing their fee based cashless.
So when you say, you're adding fee based components and for Angel are just outright all fees is it just for new volumes and there's nothing for existing volumes and if it is just bringing volumes I mean would it be fair to say that office contracting that you're talking as primarily taking place in the apartment.
I I'd say, it's a mix of new volumes and existing so we have multiple contracts with our producers that art and different you know stages of their life. Some or you know have left on them. You know relatively short term some are longer term, but I'd say, it's a mix of growth volumes and existing volumes and then you'd.
Correct isn't that most of it I think we'll be taking place in the Permian, but we also have some P.L.P. and some other commodity price sensitivity elsewhere. So you know, there's there's less activity, there's less opportunities for us to go in there and do that we are going into those other areas as well, but it is primarily in the permit.
Okay great.
Then I want it to just talk about law Hot you know that basis is lightning back out even know Grand Prix isn't service and could you just kinda from that you won't be exposed to this basis teach your capacity on the line and we should think that you're <unk> the terrorists you're paying.
<unk> half that you're paying for the pipeline capacity.
Yeah. This is pad mcdonie I.
Take a shot at that I mean, we obviously have a variety of different ways that we move gas from our assets and the Permiam basis. <unk> is just one of those obviously have from transportation on that Piper moving gas dog with all see we also have.
You know from capabilities out of the base. It on the other pipelines, we really have a mix portfolio, where we have from sales <unk> two people with from transportation take away, we have our own from transport going west coming back east going into Mexico et cetera. So when we look across her portfolio, we feel very good.
Our capabilities of moving or gas a lot of it out of the base and.
But with some <unk> realize price.
Most of that based on sales in other locations out a wall.
Okay great.
And then just a one last question. So on Grand Prix you expect that you know September to be to hit 200000 pounds per day and it looks like you're tracking better at 230 is this just an acceleration out of the timing of volumes and is it 250000 pounds per day still the right number can't hit some timing.
2020, or <unk> beyond the concerns aside and but that <unk> volume seeing better on your system or third party passes.
Yeah, I I'd say when we gave the original 200000 I'd say it was a conservative estimate it was our first full month in service and so we wanted to make sure. We thought you know we're going to be able to exceed that number that we gave you saw volumes on our system sequentially, increasing the Permian Midland and and the Delaware both of which.
Helped you know drive some of that out outperformance. So I think it's really across the board it's across the permission. It's it's our volumes and it is a third party volumes as well I think as you get into 2020 I think we you know we'll give some updated volume guys are we anticipate giving so what they did volume guidance.
And 2020 for Grand Prix, which will include Grand Prix I think we feel really good about our previous you know 250 at some point in 2020, we'll be bringing that.
We'll be updating that in in February , but yeah, we feel really good about being able to exceed that.
Great. Thank you.
Okay. Thank you.
Mmm.
Your next question comes from the line of Michael Blood from Wells Fargo.
It is open.
Thanks.
We were on.
So you kind of you kind of gravity references early in your comments, but I'm. One of you could talk a little more directly about what you're hearing from your producer customers in various bases that you operate just to get a feel for just how much of a slowdown do you anticipate overall are you really not seeing it.
We seem to be hearing kind of mixed messages from the mainstream side.
Yeah. This is Pat and all dress I'll be Sarah biggest capitols fans in the Permian base and and Ah.
Our our biggest growth over the past several years now it's been in the <unk>.
And obviously, we them put a lot of capital there in the recent past and those contracts and that activity level is underpinned by you know the large majors and the the large independence certainly we do have some smaller guys that maybe more impacted by.
A slowdown but generally.
If you look at what we've done the last nine months in the Delaware and Permian were 30% increase your on your own nine month look would we expect to 30% increase with rigs down roughly 16% year on year, probably not a 30% increase but a substantial increase our Delaware volumes, obviously are coming off a smaller.
Base, we we expect continued growth there.
The activity level and the <unk>. Those producers is we've got good line of sight on and we see that activity level being high.
The permit the middle inside you know who are producers are you seeing their public releases they have drill bit committed to drilling on the middle inside the base and we expect robust growth there. So.
Is there some slow down on some areas, yes is it materially impacting does not at all we see a lot of room most growth in the good part about it is all of the growth a really hits are fully integrated stray, but it's it's coming through her G.M.P. plants and it's all stuff, that's going to get into Grand Prix and down too though.
You into her export terminal so it looks fantastic for 2020 for US right now when we look yeah just to add one one point to that Pat increasing share of our growth is from the majors in large independence too so as the Delaware ramps and as as we ran up our growth it is.
Increasingly tied to the majors large independents, who move rigs a little bit slower than some of the smaller gas.
Okay got it second question is as you are adding here, but you know a fair amount of new for our capacity and spending your L.P.G. export can you speak to any trend in rate you're seeing them. You know you've seen rates hold steady are they going up down just wanted to get.
Feel for that and then kind of related to that if you can give us your updated views on just global L.P.G. demand as a as you're running the dock. Thank you.
When you look at it on this a scout and when you look at it on the frog side, we are.
Recognizing that are expansion that we have on the product side is supported by contracts that Pat referred to on the upstream side that is related to those larger companies the larger independence as well. So when we look into fractionation business. It is highly supported by that and are integrated platforms, not only feeding a upstream it's feeding through.
Our Grand Prix pipeline, and ultimately into our fractionation business and all the way down to the dog.
There's been some talk of late of that we have seen on the front side. Some increase in spot rates on fractionation I would say that we are highly focused in on operating are fractionation business around the secure in contracts, we have and performing for those producers into our fraud.
Even though we've seen some increases on that on the spot basis, it's not the frenzy that you solve this same time last year.
And again, we are you know we are managing our inventories and looking forward to train seven coming on line into first quarter and again as just said in her comments seeing that that will be highly utilize because we've got good transparency to the market and the four months on the on the export side of the business.
Again, we will benefit and we're already seeing benefits across our Doc relative to the refurbishment of our docked to that was announced that we said that we'd completed so we'll see benefit of that in the fourth quarter, which from primarily D. bottlenecks us on the butane side of our business. So the market is strong.
We're seeing opportunities out there we are highly contracted today and I think we'll continue to benefit from.
From that going forward and again it links us up relative to what we export across her dog is highly tied to what are fractionation growth business looks like as well as how that is tied all the way back into our G.M.P.
<unk> and don't forget we've also got another expansion it'll be completed and the third quarter of next year, which is adding additional refrigeration what steps up to roughly from 10 million barrels amount today to 15 million barrels of bone some time in the third quarter of next year.
Great. Thank you.
Okay. Thank you.
So.
You're an X. question comes from the line of sure I need to that some J.P. Morgan.
<unk>.
Good morning, just want to pick up on the comments you said earlier about getting too 80 per cent d. based being kind of your expectation for 2020 and a was just wondering if that was if that was an average for the year or does that continue to kind of like progress over the years. The x. ray higher or is there any ability to kind of you know keep nudging.
That number up I mean, it seems like it that's a pretty big step change versus where cure G.B.'s. Then historically, so just want to start there.
Yeah. It that 80% is an average, but we see a continuing maybe not in a straight line, but continuing up until the right. So that fee based percentage should just continue to increase over time. So I would expect the back half the year to be higher p. based percentage than earlier, but that is <unk> annual average.
And I guess for the open exposure at this point how do you guys. You know is think about hedging.
And I'm not sure if you touch on how much you've locked in a 420 20 as of now.
Yeah. So <unk>, we're hedged over 50 per cent across all commodities for 2020, Jeremy and I think that we're very much focused on cash flow stability as our leverage is higher and it begins to work down and so you've seen us add significant number of hedges really in the back half of this year and I would expect that that will continue.
That's that's helpful. Thanks, and just was curious if the agency's they'd kind of taken notice of this and how this kind of impacts a you're standing say are given how the businesses and changing over time.
We continue to try to have a very active dialogue with the agency's make sure. There are no surprises there so delivering on the forecast that we show them delivery on asset sales that we tell them. We expect to have making sure that were just delivering on all fronts and so that's an ongoing dialogue and we expect that continued growth of our business in terms of sea bass.
Margin asset diversity et cetera will only help us in the is the dialogues.
That's helpful. That's it for me thanks.
They started.
The next question comes from Keith steadily from Wolf Research domain.
Hi, I just wanted to clarify any early thoughts on the funding plan for for the cap X. budget next year I think in the prepared remarks, you said no common equity should I think mainly asset sales to execute on would you consider preferred equity or or or mainly debt financing of the Catholics.
We benefit from increasing cash flow and Eva Don have very good visibility to that so that provides us with additional debt capacity plus more internally generated cash flow. So I think you've seen us through 2019, each quarter to deliver more strongly the message just as our business has performed that we do not have expectations to need to issue any act.
<unk> foreseeable future as Matt said, we've got the assets that we've already executed in terms of asset sales. We've got the one that we announced this morning with the Permian, Delaware crude business and the only active asset sale other than that that's under way it which is in the early stages as a potential sale of the middle inside of the Permian crude business.
And that's really all that we're expecting at this point.
Okay, and and just to clarify the the 1.2 to 1.3 billion net is that is at the same as the gross numbers that net of some of the asset sales or any project financing.
That's not of all of our partnership so that's what target is expected spending is relative to all the growth projects that we have visibility too for 2020.
Okay, and then <unk>.
I'm sorry go ahead.
Oh, sorry, I was just going to add that it doesn't include any potential asset sales or anything like that it's the peer spending for growth capital on projects that we have visibility too.
Okay, great and and one less small on just the you said you sold the Delaware crude gathering business for I think 135 million can use remind me the the size of the Midland gathering relative to the Delaware and on crude.
So current operating margin on the middle inside of the crude business is higher than it is on the Delaware side, but we're not going to provide any more detail at this point given were just really kicking off the potential evaluation of the sale of the middling crude assets.
<unk> that's it for me thank you.
Thank you.
Right next questions of comes from Korea.
I'll see from Jeffress.
Hey, good morning, everyone Nice taking my question.
10, I guess <unk> relative to our modeling saw a nice sequential improvement and the G.M.P. operating costs. This corner size will decline from from last corner, Yes, I'm just curious any additional color on the drivers and sustainability of that improvement.
I think that are operating team particular, and repairmen, where we've been spending a lot of capital only bring then bring a lot of assets in a service has been very much focused on reducing operating expenses and I applaud them for those efforts, we mentioned on our second quarter call that we were putting an A.G.I. well in the service as well this summer, which was going to help reduce our chemicals.
So part of that is what you're seeing and the third quarter, but this is a big area focus for us crass, along with capital discipline, managing our costs up acts as well as G.N.A. is a big pointed from this across the organization and so this is consistent with our expectation in terms of Q3 being lower than the second quarter second quarter. We also had the reclass of some.
G.N.A. into affects as well so that was sort of more one tiny in nature and <unk> I would expect that will continue to remain very focused on this and what we're mostly focused on is having reduced per unit costs as volume's her continuing to ramp across a lot of our G.N.P. business in all sorry downstream business.
Okay, right and then congrats on the quick selling Delaware I suppose that speaks to.
The quality of the acid on the banking team involved and good luck on the mainland side [laughter] internally.
[laughter] I'm I'm curious with those asset sales you know you've mentioned some more that are pending perhaps and then the recent pullback them producer activity, yeah, how much it impacts anticipated maintenance activities in the future any any meaningful toggle, we should expect on that front.
I would expect a meaningful toggle in terms of our maintenance spending looking for we've also placed a lot of new assets and service, but new assets don't require a lot of maintenance, but no I wouldn't expect that there's a big step change that's about to occur there up or down.
Okay, and then I just have one final it's it's more of a clarification point on questions from earlier <unk> and Christine It asked about the fee and commodity mixing business and efforts to grow the fees stream I think in response to Germany, you said that you're still planning a hedge the open commodity exposure to ensure cash flow stability in your hedged about 50 per cent for next.
<unk>.
You can you just remind me of any internal hurdles or targets that you have to be you know hedged a certain percentage at a certain time.
So our entire general yeah, our general targets as as we work with the risk Committee of the board of directors is to hedge 75% for the next 12 months out 50% for the 12 months after that 25% for the 12 months. After that those are the general guidelines and then within those general guidelines on a quarterly basis where work.
With the risk committee to figure out the appropriate tolerance for hedges within Targa.
Okay, <unk>, but you're in your point at this point is that those are unlikely to change even as a business becomes more fee. You think that's still good target for us to at least assume.
I think that's a fine target for now you've seen as hedge more when we've been given on the opportunity higher than those thresholds or.
At the same time of also hedged less than those levels. When there has been something in the market that has sort of driven that decision, making so we'll continue to be flexible that those are our targets and I don't see those changing in the near term.
Good alright, thanks, a lot for the times one.
Okay. Thank you.
The last question from said L. table from global security.
Okay.
Yeah hide with money and thanks for taking my question couple of months for me and you talk about transitioning from commodity to see based contracts. Besides I.
I was wondering if you could talk a little bit about.
Is it any kind of.
<unk> commodity prices were those this transition is kind of any new <unk>.
You know when when we're discussing with a producers we're really looking at when we put capital out getting it all in return on capital. So we're targeting you know if if we start with a fee based contract with what's fee do we need to earn inappropriate gathering processing you know return on capital and that's where we start and then.
If they Wanna mix, a piece of that into P.L.P. or do a hybrid or floor were flexible with all those things. We've done some of those things, it's less about us agreeing on a commodity price and where we get revenue neutral and more over a range of scenarios.
Understanding we need to have inadequate return or at least price more protection to to to spend that capital.
Okay.
The second question I had was related to the loading up off Bucks in Q3, what's this cute too I think Jen mentioned.
Somebody evaluation on the property taxes, which helps that <unk> I was wondering you know hope frequently used property taxes evaluation done.
Well what happens is at the beginning of the air we make an estimate on our adlong taxes and as we move through the air and we have realized numbers or better visibility too numbers that we expect to be realized we change that estimate. So generally we started every year on the gathering processing and downstream sides with a high advalue or estimates that as we move through the year.
And that estimate becomes again, either more realized her we have more visibility to what it's going to be it tends to come down. So that's really just the pattern that we generally have your in your out for AD warm taxes.
Okay got it and then just lost one for me on the on to explore a side.
<unk> indicates you know, what's the big don't between the <unk> being explored send the beauty unexplored well seem currently.
We have not given that it is moving more towards butane always seen historically, whereas I think you to go back over the number of years, we've been kind of 80 20, I think now Scott we've been closer to 30% or even more so on <unk>. Yeah. We've seen that increase over time again pointed back to the projects that.
We have focused in on a bolt on type projects that have d. bottle.
<unk> inside so I think overtime, you will see that gradually increase with more focus on butane in that Optima helps us also optimize on the upside how much by me, we would actually see across the dog.
You can see in our invest your presentations and you know we provide a breakdown of the propane butane mix of what's already been loaded at the facility.
Okay.
Thanks, guys and congrats on a good <unk>.
Okay. Thank you. Thank thanks, everybody.
I'm showing no further questions at this time I would like to try to conference.
<unk>.
Great. Thank you to every one that was on the call. This morning, and we appreciate your interests and Targa resources. Please note that will be available for any follow up questions. You may have throughout the day. Thank you.
[noise] data since I told them. This concludes cities conference. Thank you for your participation and have a wonderful day give me all disconnect.
Oh.
Yeah.
Yeah.