Q2 2020 Targa Resources Corp Earnings Call

August 6, 2020

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Since the recession.

To ask a question. During this session you would need to press star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I.

I would now like to had a conference over to your speaker for today, Mr., Sanjay Lad, Vice President Finance and Investor Relations. Thank you. Please go ahead.

Thanks, Sean.

Good morning, and welcome to the second quarter 2020 earnings Conference call for Targa Resources Corp, second quarter earnings release for Targa resources, along with the second quarter earnings supplement presentation are available on the Investor section of our web site, a targa resources Dot Com. In addition, an updated investor presentation has also been posts.

The two 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 21 E.

Securities Exchange Act of 934 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 SBC filings.

Our speakers for the call today will be Matt Malloy, Chief Executive Officer in Gen, Neil Chief Financial Officer.

Additionally, the falling senior management team members will be available for the Q and a session Pat Mcdonie, President gathering and processing, Scott prior President logistics, and transportation and Bobby MRO Chief Commercial officer.

I'll now turn the call over to Matt.

Thanks vendor.

During the second quarter, we navigated the challenges and impacts related to covert 19 extremely well across our organization.

We remain highly focused on employee safety, while efficiently operating our facilities and we have experienced no material impact to our operations.

I would like to extend the thank you to all our employees for their continuous efforts to keep their colleagues and family safe.

We appreciate all that you do on behalf of the target team, including delivering and maintaining first class service to our customers.

We had a strong second quarter, despite impacts from reduced demand and lower crude oil prices, which resulted in producers temporarily curtailing production and meaningfully reducing their activity levels.

We have seen a quicker than anticipated rebounded prices and related producer activity and forecast of activity for the remainder of 2020.

Our overall Permian gathering and processing position performed well and our Midland system, even showed sequential increase and the second quarter.

This sets us up well for the second half of the year as we expect to benefit from stronger production across the Permian.

We also benefited from our NGL storage position.

And the contango price structure, which existed for much of the second quarter, we expect to see those benefits show up in our margin throughout the remainder of the year.

We made significant progress on reducing costs across targa and expect to continue to benefit from these cost reduction measures.

And our free cash flow profile is improving and should continue to improve going forward as our capital spending comes down and our cash flow remains strong.

As we look forward, we are in a position where we expect to have the ability to capture growth volumes from the Permian without having to spend an incremental capex on Grand Prix fractionation or LPG export facilities.

And we have excess processing capacity in the Delaware.

This puts target and the position to de lever and generate strong returns going forward.

Now a bit more color on the shut ins that occurred in the second quarter on our previous earnings call. We estimated the potential impacts related to our producer customers shutting in production.

We saw a trough in production across our GMP systems in May.

And these declines were consistent with our estimates of about a 10% reduction in the Permian due to shut ins.

In the Permian the impact was less pronounced across our Permian Midland system than our Permian Delaware system.

We also experienced some declines on the Delaware due to some third party on low gas coming off the system during the second quarter.

Despite the temporary shut in production and reduced activity levels quarterly inlet volumes across our aggregate Permian footprint declined only 1% sequentially.

We have seen almost all volumes on our Midland and Delaware systems that were temporarily shut in come back online.

And we're continuing to see our volumes and Permian Midland proved to be resilience.

We are pleased to have our gateway plant online ahead of schedule.

Placing this asset in service early.

Even through the challenges presented by co bid 19 is outstanding performance by our target team.

With Gateway online, we are currently processing volumes and higher levels than our March levels in the Permian Midland.

The addition of gateway enhances our operational flexibility to move volumes across our system for other plants that were running over nameplate.

This allows us to enhance NGL recoveries and perform maintenance across our system footprint.

Moving on to the Badlands during May we saw shut in production impact our gas volumes by around 40%, which was at the high end of our previous estimate.

Our gas volumes for July have since rebounded and are up significantly over the second quarter average.

Across our Badlands crude system, we continue to have some production that remains shut in but expect additional volumes to return as we continue to move through the third quarter.

Turning to our central region, which is already largely been decline gas inlet volumes in the second quarter declined 15% sequentially, primarily driven by greater than expected shut in production on our south folks system and we also had some on low gas expire.

Despite the historically low commodity price environment. The durability of our GMP segment margin has strengthened as we have reduced our commodity exposure by adding fees and fee floors tar GMP contracts.

The financial performance of our GMP segment is now more driven by volume throughput in fees as opposed to direct commodity prices, which is evidenced in our year to date results and will serve us well going forward with fee floors. We also will benefit as prices begin to rise.

Shifting to our logistics and transportation segment.

Throughput volumes on our Grand Prix pipeline and at our fractionation complex in Mont Belvieu were slightly lower sequentially. As a result of lower inlet volumes from production shut ins and reduced activity across our GNP systems.

But now with most of the shut in production back online and the recent startup of our Gateway plant. We're currently seeing higher volumes through Grand Prix and our fractionation assets.

We remain on track to bring Frac train a online later in the third quarter as well as our Grand Prix extension into Central Oklahoma in the first quarter of 2021, where it will connect with Williams, New bluestem pipeline.

Our LPG export services business second lien apart continued to perform well during the second quarter sequentially volumes. During the second quarter were slightly lower as a result of scheduled downtime to tie in the phase expansion at our LPG export facility.

We recently completed our Galena Park expansion in early August and expect our LPG export volumes to be higher in the second half of this year as we are highly contracted for the balance of the year and beyond.

While the majority of shut in production has returned and activity levels begin to pick back up there remains a level of uncertainty for the second half of 2020 around the pace of demand and commodity price recovery due to co had 19.

However, our assets are performing very well and given we are more than six months through here and have more visibility today than we had back in March April or May.

We are revising the bottom end of our estimated full year 2020, adjusted EBITDA range higher.

And the updated arranges now 1.5 to 1.6 to 5 billion.

Spending related to our announced major capital projects is largely complete and target is well positioned to meaningfully benefit as business conditions strengthened with our best in class Permian supply position driving increasing volumes through our end of integrated midstream system.

We remain focused on continued capital and operating cost discipline and combined with the strategic measures. We executed earlier. This year, we expect to generate positive free cash flow after dividends in the second half 2020 based on our revised full year adjusted EBITDA.

While there may be some uncertainty in global commodity markets related to the Corona virus and other macro factors there is strength and what we can see for targets core business positioning us exceptionally well for the longer term.

With that I'll now turn the call over to Gen to discuss Targas results for the second quarter and other finance related maps.

Thanks, Matt Targas reported quarterly adjusted EBITDA for the second quarter was $351 million as Matt discussed our results for the second quarter were impacted by the low commodity price environment and temporary production curtailments and reduce producer activity, which resulted in lower volumes across our gathering processing and logistics and transportation.

Systems offset by our significant efforts to reduce costs.

And our logistics and transportation segment, while second quarter Grand Prix fractionation, and LPG export volumes were modestly lower when compared to the first quarter. The sequential decline in segment operating margin was driven by lower marketing and other.

Banality in our wholesale marketing businesses combined with less optimization margin realized in our marketing businesses. During the second quarter accounted for about half of the sequential decline in segment operating margin.

We're very proud of the entire target organizations efforts to manage operating and general and administrative expenses lower.

As we said on our second quarter call, we expected to have aggregate operating in gene a expense savings of approximately $100 million relative to our plan and we now expect to meaningfully exceed $100 million in 2020.

Looking forward quarterly operating expenses in each segment are estimated to be modestly higher in the third and fourth quarters when compared to the second quarter as new facilities began operations in both our GMP and LNG segments.

Turning to hedging based on a range of current estimates of producer customer activity levels, we remain substantially hedged for 2020.

We have hedged approximately 85% to 95% of natural gas approximately 80% to 90% of condensate and approximately 75% to 85% of Ngls.

Supplemental hedge disclosures, including 2021 hedge percentages by commodity can be found in our earnings supplement presentations on our website.

Related to counterparty risk, we've had no material credit losses, and remain focused on monitoring and managing our credit exposure you have a large diversified customer base across our operating businesses, which includes large integrated customers other investment grade counterparties and customers that are required to provide credit protection.

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Our 2020 net growth Capex estimate range remains between 700 million to $800 million and our 2020 net maintenance Capex estimate continues to be approximately $130 million.

We spend about $400 million of net growth capex through the first two quarters with growth Capex spending expected to continue to trend lower as we move through the second half of the year with free cash flow increasing.

We had over $2.1 billion of available liquidity as of June Thirtyth and have no near term maturities of senior notes or credit facilities with the earliest maturity occurring in May 2023.

On a debt compliance basis TRP leverage ratio at the ended the second quarter was approximately 4.1 times versus a compliance covenant of 5.5 times.

Our consolidated reported debt to EBITDA ratio was approximately 4.9 times.

With our premier integrated asset position and our talented employees target is well positioned for the longer term as business fundamentals improve we expect to generate increasing free cash flow after dividends that will be available to reduce debt and further strengthen our balance sheet profile.

Our business is performing very well across a difficult year and we are so proud of the exceptional performance of our employees.

The actions that we've taken and we'll continue to take this year, we expect to exit 2020 in a strong position with increasing flexibility.

Lastly, before we turn the call over to huge today, we wanted to provide an update that we are on track to publish our 2019 sustainability report during the third quarter and will include enhanced disclosures around our framework of policies practices and systems in the areas of safety environmental social and governance.

And with that operator, please open the lines for questions.

As a reminder, if you would like to ask a question you would need to press star one on your telephone to withdraw your question press the pound.

Please standby, while we compound acuity day roster.

And we kindly ask that you limit to two questions and reenter the queue any lineup if you have a different options.

Your first question comes from the line of Jeremy Tonet with JP Morgan.

Hey, good morning, guys, it's James on for Jeremy.

Maybe just start off with.

A two part question on the logistics size business.

Grand Prix volumes look pretty resilient.

During the quarter I assumed better than when you guys had originally anticipated, but just through July would you guys sitting on that pipeline and maybe relative to one Q volumes. If you can.

Do you expect to surpass that.

Level in Threeq you.

Indicated to the Fourq you.

And then the second part is just looking out at 2021 understand it's very early but just with the dock expansion now online do you see the business.

Shifting to the logistics side in 2021 versus versus 2020 in order to historically.

Hey, good good morning ill answer the first one just about Grand Prix and then go to the other one.

Yes, the Grand Prix volumes, we are seeing things some strength.

I'd say with gateway coming on in just the resilience that we're saying in the Permian.

And with that plant coming on volumes are continuing to ramp I'd say, we've been pleasantly surprise with how that assets performed the volumes going through it and our ability to enhance recoveries across that asset and the rest of our Permian footprint is going to continue to drive better recoveries going forward. So on a recovery basis I think we feel good about the outlook for moving those volley.

It was down down Grand Prix Andrew Us from the overall volume uplift, we're going to get from putting gateway on both of those things are going to drive more volumes on Grand Prix. So I think it's kind of happening real time, as we're ramping up gateway, but I think we're pretty optimistic about the volume profile for gateway through the back half of the year and then into 21.

In terms of business mix and how that shifting.

Yes, I'd say with Grand Prix.

Going to continue to ramp volumes fractionation export the investments we made on the downstream side I would say that overtime, partially dependent on commodity prices, but yes, we see more of the business mix shifting the downstream in terms of percentage operating margin than GMP, but we expect to have really growth in both areas over time.

Great. Thanks for the color.

And then just my second question I'm, just looking at slide 29 in the updated.

Precision this morning.

And just looking at the South Texas footprint.

You know, obviously look theres a few months rigs there from from your last slide precision not surprisingly, but.

Just as we for an update on maybe Sanchez activity on the footprint.

How is progressing.

With your expectations.

Sure on the on the South Texas footprint really amongst the whole your Eagle Ford, there's not a lot of activity out there, we actually didnt see a whole lot of volume shut in on that system, but there is just really not a lot of activities we've seen volumes.

Volumes move down.

Yes, we are getting some indications from producers that.

Some activity could start picking up here. So there remains some opportunity for kind of stemming the decline in maybe gone the other way here as we kind of get into the back half of the year.

But we really havent seen those a lot of progress made in terms of volumes here recently, but there is some.

Yeah.

There are some opportunity for those volumes to perform a little bit better as we go forward.

Got it thanks for the questions.

Okay. Thank you.

Your next question comes from the line of Tristan Richardson Truest Securities.

Hey, good morning, guys really appreciate all the comments you've given around what you're seeing in second half for volumes I guess kind of taking that commentary even some of the commentary from your large customers about reinvestment rates and then balancing natural decline in some of the other basis.

Can you talk a little bit about exit rates for the year now that curtailed volumes are back to exit rates look to be above two Q.

One lens that you're seeing in July or August or.

Decline comes and do we start to get back to more what you saw in Twoq.

Yes, I'd say for that were.

We've had good discussions with our producers and we're getting more visibility around their plans for 2020. So.

I'd say in the incremental data points, we're getting there continued to be more and more positive the more and more conversations we have.

So it would be our expectation that.

Out in the Permian that from here, Yes, I would not surprise me if we had some growth from where we are today through the end of the year in the Permian.

We still have a range and our EBITDA guidance because it's still there is still certainly some uncertainty there I'd say the most recent data points were getting our more supportive of having really growth from this point going forward.

In the Permian.

That's great. Thanks, Matt and then just on the.

The cost side of things generally you talked about the 100 million some incremental versus expectations I mean, certainly new assets coming online the second half, we'll see some land, but curious about just sort of.

The concept of.

Cost reduction permanent as you look out into 21 and beyond.

I think trust in that we've done an excellent job of taking costs out really across the board the focus of our organization whether it be supply chain every operations first and.

Every group and involved in.

Gnh savings, it's just been.

The remarkable effort.

When we compare that $100 million of cost savings, which we now expect to be that's relative to our plan as we approach this year and so I think that we see good permanence from a lot of those cost savings, partially because our expectations are that activity levels may be reduced versus where we were before so.

Our need to hire additional personnel and things like that some of that I expect we'll be permanent in terms of cost savings our management other operating costs around production.

We are doing a very good job of managing those with each and every supplier and we'll continue to be focused on that but as we see volumes increase across our systems.

Those costs, maybe a little bit harder to maintain the permanent but we're working very diligently to try to do that.

Thats great. Thank you guys very much.

Okay. Thank you.

Your next question comes on I know Christine Cho with Barclays.

Hi, Good morning, this is mark Entre Christine.

So Permian volumes held up better than what we would have thought and better than some of your peers could you just talk through what what were the potential drivers of that your customers have better stores physicians are sales agreements on the crude side that enabled them to keep flowing or were there. Other factors that played a part and just the impact from west shut ins.

Yes, I think we.

Continue to see the resiliency of our Permian Midland system.

When we.

When we add plants theres more volumes that usually come in to fill those up relatively quickly if theres other wells that are being shut and maybe at lower some pressures can we see it come from other parts of the system. So I think we benefit from just having a really large footprint on the Permian Midland side, with a really high quality well capitalized good.

Producers as well too I would say on average we would expect them to outperform the basin and we've seen that continued to prove out. So I think it's a combination of a number of factors I think it's the footprint system, we have but it's also a really strong producers we have behind our systems.

Got it that's helpful.

And then recognize and things are still pretty done dynamic on the producers side, but just how should we think about capex for next year.

Last quarter, I think you give a rough estimate for about 200 million and growth capex, but with activity holding up better across your acreage should we still think thats a good number.

Yeah. So for Capex as we look forward if you look through the.

Remainder of this year really that most of the large capital projects are coming on and going to be completed this year, adding the fractionation trains export facilities and processing plants as you look out into 2021.

We have the completion of our Grand Prix extension up and Oklahoma in the first quarter, but we don't have any large scale.

Projects announced to come online in 2021, so we'd expect that Capex. When you look to our recent history to be much lower than.

The amount we've spent over the previous previous several years, we have capacity on Grand Prix. So as volumes ramp will be able to just moved those volumes down Grand Prix, we have capacity in our fractionation and export. So we're really set up pretty well to be able to capture some growth volumes, whether it's in 21 or 22 going forward.

Sure.

To capture those growth volumes with really not much more incremental investment in the downstream side of the business events on the GMP side, where we'll have a regular field and compression and other spending will need to have to gather those volumes to the plants.

And as I noted in my comments as we have excess capacity in the Delaware sites with peregrine coming on.

We do have processing out there so it really comes to.

On the GMP side I'd say the next processing plant, we have visibility to if there is some growth is again in the Permian Midland where weeks, where we have seen strength. So it would be a processing plant on the Permian Midland side, which depending on how volume kind of move as we go through the remainder of this year there could be a need for an another plant out there and we're also.

I'd trying to be even more capital efficient with the way we do that so we're looking internally is there potential plant we could move from another area Thats underutilized re purpose that and move that.

Out into the Permian Midland when and if it's needed out there and so we're already looking at that and if we do that it'd be significantly less capital than a new build capital that we've had for the recent to fit 250 million day plants to put in.

Great Thats helpful. Thanks.

Your next question comes from the line of Colton Bean with Tudor Pickering Holt.

Good morning, So maybe just a follow up on the capital question, there with a slightly longer dated lens I think we've seen a few of the large Permian producers highlighted growth gap, even in the event a much higher oil prices. So obviously still long way out, but do you see next year's capital budget as a decent marker for 22, plus if growth was in line with kind of that mid single digit.

Commentary.

Yes, I'd say as we look out over multi years, what we see is the addition of processing plants.

Likely just going to be in the Permian you on the Midland side likely will be more plants there than the Delaware just kind of given where current volumes are relative to capacity so putting in a processing plant on the Permian side shouldn't need much more capital on Grand Prix as we up capacity on that pipe it to be just adding some pumps, but those are relatively relatively small.

Amounts of capital and then as when we're going to need another another fractionator. After train a so part of that will be the timing of what that growth looks like in 2021, and when will need to greenlight train nine on the fractionation and does that fall into 2022 to the phone to 20 point when do we need that how much growth as they are in 21 and 22, but.

It's going to average out yet though.

One year, we might be putting one in another year, we may not right. So it's going to its going to depend on when we put in those processing plants and fractionation facilities.

Got it and then just on the NGL marching down tick I understand the wholesale seasonality can you speak to the optimization cited that how you expect that to play out through the back after the year.

Sure. So we had if you look sequentially our marketing margin was down in the second quarter versus the first we pointed to our wholesale marketing, which is normal seasonality that we have every year in that business.

But we also it was it was actually a relatively good quarter for us on the NGL marketing.

Front, but the margin really won't be realized until later quarters as there was significant contango on some of the NGL products were able to purchased or put into storage will realize those margins.

As we go forward, so we factored that into our updated guidance.

And so we'll we'll reap those benefits as we as we realize those.

Contango trades.

Great appreciate them.

Question comes from the line of Kyle May with capital one securities.

Good morning.

Appreciate there's still a lot of uncertainty ahead, but just wondering if you can talk about some of the different factors that could put you.

One and or the other of your revised guidance for this year.

Sure.

At this point in the year. It really is less about I'd say commodity prices, we gave commodity prices with our updated guidance, but given our hedge position in our fee based position. It is less about commodity prices and it really is more about volumes. So yes, we've had positive signs from the producers in the Permian, let's see how that play.

He's out through the rest of the year. So I think theres still some potential variability and what the volumes look like for the Permian from now to the to the rest of the year and then we also still have some shut ends up in the Badlands and we have some shut ins and the south of.

Segment, and so there's some signs that those are going to be coming on when those come on do they fully come back on that's another variable so to be the return of shut in production and our central region combined with Permian.

Greetings and what the growth profile looks like from now to the end of the year.

I think Kyle Theres also uncertainty around call. It as we all know and so we're also being conservative factoring what we don't know into account. So we've got great visibility I think from our producers are certainly increased visibility versus where we work for back half of the year performance, which gives us a lot of confidence when we think about the strength and resiliency.

Our footprint.

But there has just continued uncertainty around Kelvin and so we're trying to factor some of that conservatism in as well.

Got it that's very helpful and as my follow up it seems like we've seen a little bit more stability in the last month or so and wanted to get your latest thoughts around M&A landscape and if you've seen the opportunity for target to make any changes that could improve the balance sheet.

Yes, so our our focus and we mentioned in our and our script multiple times is really on free cash flow after dividends and wanting to de lever we have a lot of really good.

Organic projects, adding picking up volumes through our Midland system, our Delaware system picking up the transport Frac and Xplore as we move the molecule downstream those are going to be really good returns for us. So our focus really is on if there's if they're spending to do it's on organic spending in and around our footprint for existing customers and add on customer.

There is in and around our footprint that is going to be our focus.

Right now because.

Our leverage is headed in the right direction, but we still want our leverage to move to move even lower.

Got it thanks for that.

Okay. Thank you.

Your final question comes on line of Sun Nielsen ball with Seaport Global.

Hi, good morning, everybody into what do you see.

So first.

Look you've been question for me, so seems like when I look at equity.

Earnings for the non controlling interests 96 million and.

Thats 30 million or so DDN, Dave so it seems like that or the dry Gulf about 10 million.

EBITDA for the quota.

Just curious unit was there any.

Onetime item in there which impacted that number.

Got kind ofi runrate kind of in them, but obviously some assets that ramping up.

We can dig into it somewhere in come back to you, but I don't believe there was anything that I characterize as onetime in nature, they're scenario.

Maybe just to support Gen. Sidney I think if you look to fourth quarter first quarter 1920, and then the current quarter here.

Non controlling interest cutback to EBITDA.

Been around kind of 100 $110 million.

That was consistent last quarter as well.

You.

Adjusts for the.

The impairment BDNA.

Okay got it and then on on the fractionation side I understand that Q2 numbers had some noise in that.

No you're bringing on the French Pneudraulics online. So I was just kind of curious how should we thinking about the volumes there.

Would you expect those you.

Well the fractionation capacity to be kind of 80% also utilized any.

And you touched in.

Yes so.

Right now we have excess fractionation capacity and then train eight is going to be coming online, but again with bringing on gateway with being able to enhance our recoveries out in the Permian and do some maintenance and other things we would expect more ngls from here going going forward and some growth in the in the Permian and from our third part.

I'd customers as those contracts kick in and ramp up over time. So we still have a positive outlook for being able to utilize our fractionation capacity, but the timing of when it will be full and when will need another.

Fractionation facility it really will depend on yes, as we kind of exit 2020, what's the growth outlook is from our producer customers in 2021 and beyond we're really just now kind of getting some of those indications from our customers. We don't have wasn't nearly as many data points for 2021 and beyond as we do for 2020, but I will say.

The early indications from some of our producer customers have been positive I'd say relative to maybe our expectations. Even just a few weeks or a few months ago. So we are seeing positive indications for 2021 and beyond but it's still pretty early.

To give you the kind of affirmed timeline there.

Okay got it thanks, Rhonda good nice.

Okay. Thank you.

There are no additional questions at this time I would like to trying to color just Sanjay lad for closing remarks.

Thank you will thank everyone that was on the call. This morning, and we appreciate your interest in Targa resources, we will be available for any follow up questions. You may have thank you and have a great day.

Ladies and gentlemen, this does conclude today's conference call you may now disconnect.

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Ladies and gentlemen, thank you for spending by and welcome to the Targa resources Corp. second quarter 2020 earnings Conference call. At this time all participants are in listen only mode. After this week a presentation. There will be a question and answer session to ask a question during the especially you want me to press star one on.

Telephone please be advised of today's conference is being recorded if you require any further associates. Please press star zero.

I'd now like they had to compress over to your speaker for today, Mr., Sanjay Lad, Vice President Finance and Investor Relations. Thank you. Please go ahead.

Thanks Posada good morning, you'll walk into the second quarter 2020 earnings conference call for Targa Resources Corp.

Second quarter earnings release for Targa resources, along with the second quarter earnings supplement presentation are available on the Investor section of our website, a targa resources Dot com.

In addition, and updated Investor presentation has also been posted to our website.

[music] statements made during this call that might include Targa resources expectations or predictions should be considered forward looking statements within the meaning of section 21 eight at the Securities Exchange Act at Nike 34.

Actual results could differ materially from those projected in forward looking statement.

For a discussion of factors that could cause actual results to differ please refer to our latest SBC filings.

Our speakers for the call today will be.

<unk> Chief Executive Officer in Gen, Neil Chief Financial Officer.

Additionally, the falling senior management team members will be available for the Q in a recession, Pat Mcdonie, President gathering and processing, Scott prior President logistics, and transportation and Bobby MRO Chief Commercial officer.

I'll now turn the call over to Matt.

Thanks <unk>.

During the second quarter, we navigated the challenges on impacts related to co that 19 extremely well across our organization.

We remain highly focused on employee safety, while efficiently operating our facilities and we have experienced no material impact to our operations.

I would like to extend the thank you to all our employees for their continuous efforts to keep their calling and families say.

We appreciate all that you do on behalf of the target team, including delivering and maintaining first class service to our customers.

We have seen a quicker than anticipated rebounded prices and related producer activity and forecast of activity for the remainder of 2020.

Our overall Permian gathering and processing position performed well and our Midland system, even showed sequential increase and the second quarter.

This sets us up well for the second half of the year as we expect the benefit from stronger production across the Permian.

We also benefited from our NGL storage position and I and the contango price structure, which existed for much of the second quarter.

We expect to see those benefits show up in our margin throughout the remainder of the year.

We made significant progress on reducing costs across targa and expect to continue to benefit from these cost reduction measures.

And our free cash flow profile is improving and should continue to improve going forward as our capital spending comes down and our cash flow remains strong.

As we look forward, we are in a position where we expect to have the ability to capture growth volumes from the Permian.

Without having to spend an incremental capex on Grand Prix fractionation or LPG export facilities.

And we have excess processing capacity on the Delaware.

This puts target and the position to de lever and generate strong returns going forward.

Now a bit more color on the shut ins that occurred in the second quarter on our previous earnings call. We estimated the potential impacts related to our producer customers shutting in production.

We saw a trough in production across our GMP systems in May.

And these declines were consistent with our estimates of about a 10% reduction in the Permian due to shut.

In the Permian the impact was less pronounced across our Permian Midland system than our Permian Delaware system.

We also experienced some declines on the Delaware due to some third party on low gas coming off the system during the second quarter.

Despite the temporary shut in production and reduced activity levels quarterly inlet volumes across our aggregate Permian footprint declined only 1% sequentially.

We have seen almost all volumes on our Midland and Delaware systems that were temporarily shut in come back online.

And we're continuing to see our volumes and Permian Midland proved to be resilient.

We are pleased to have our gateway plant online ahead of schedule.

Placing this asset in service early.

Even through the challenges presented by co that 19 as outstanding performance by our target team.

With Gateway online we are currently processing volumes at higher levels than our marks level in the Permian Midland.

The addition of gateway enhances our operational flexibility to move volumes across our system for other plants that were running over nameplate.

This allows us to enhance NGL recoveries and perform maintenance across our system footprint.

Moving on to the Badlands.

During may we saw shut in production impact our gas volumes by around 40%, which was at the high end of our previous estimate.

Our gas volumes for July have since rebounded and are up significantly over the second quarter average.

Across our Badlands crude system, we continue to have some production that remains shut in but expect additional volumes to return as we continue to move through the third quarter.

Turning to our central region, which is already largely been decline GAAP inlet volumes in the second quarter declined 15% sequentially, primarily driven by greater than expected shut in production on our south of system and we also had some on low gas expire.

The financial performance of our GMP segment has now more driven by volume throughput and fees as opposed to direct commodity price.

Which is evidenced in our year to date results and will serve us well going forward with fee floors. We also will benefit as prices begin to rise.

Shifting to our logistics and transportation segment.

But now with most of the shut in production back online and the recent startup of our Gateway plant. We're currently seeing higher volumes through Grand Prix and our fractionation assets.

We remain on track to bring Frac train a online later in the third quarter as well as our Grand Prix extension into Central Oklahoma in the first quarter of 2021, well connect with Williams, new below stem pipeline.

Our LPG export services business cycle in the park continue to perform well during the second quarter sequentially volumes. During the second quarter were slightly lower as a result of scheduled downtime to tie in the phase expansion at our LPG export facility.

However, our assets are performing very well and given we are more than six months through here and have more visibility today than we add back in March April or May.

We are revising the bottom end of our estimated full year 2020, adjusted EBITDA range higher.

And the updated range is now 1.5 to 1.6 to 5 billion.

Spending related to our announced major capital projects is largely complete and Targa is well positioned to meaningfully benefit as business conditions strengthened with our best in class Permian supply position driving increasing volumes through our integrated midstream system.

We remain focused on continued capital and operating cost discipline and combined with the strategic measured we executed earlier. This year, we expect to generate positive free cash flow after dividends and the second half 2020 based on our revised full year adjusted EBITDA.

While there may be some uncertainty in global commodity markets related to the Corona virus and other macro factors. There has strengthened what we can see for targets core business positioning up exceptionally well for the longer term with that I'll now turn the call over to Gen to discuss Targas results for the second quarter and other finance related matters.

Thanks, Matt Targus reported quarterly adjusted EBITDA for the second quarter was $351 million as Matt discussed our results for the second quarter were impacted by the low commodity price environment and temporary production curtailments and reduce producer activity, which resulted in lower volumes across our gathering processing and logistics and try.

Expectation systems offset by our significant efforts to reduce costs.

And our logistics and transportation segment, while second quarter Grand Prix fractionation, and LPG export volumes were modestly lower when compared to the first quarter sequential decline in segment operating margin was driven by lower marketing and other.

Seasonality in our wholesale marketing businesses combined with less optimization margin realized in our marketing businesses. During the second quarter accounted for about half of the sequential decline in segment operating margin.

We're very proud of the entire target organizations efforts to manage operating and general and administrative expenses lower as we said on our second quarter call. We expected to have aggregate operating and GNS expense savings of approximately $100 million relative to our plan and we now expect and meaningfully exceed $100 million in 2000.

The 20.

Turning to hedging based on a range of current estimates of producer customer activity levels, we remain substantially hedged for 2020.

We have hedged approximately 85% to 95% of natural gas approximately 80% to 90% of condensate and approximately 75% to 85% of NGL.

Supplemental hedge disclosures, including 2021 hedge percentages by commodity can be found in our earnings supplement presentation on our website.

Related to counterparty risk, we have had no material credit losses and remain focused on monitoring and managing our credit exposure, we have a large diversified customer base across our operating businesses, which includes large integrated customers other investment grade counterparties and customers that are required to provide credit protection.

Our 2020 net growth Capex estimate range remains between 700 million to $800 million and our 2020 net maintenance Capex estimate continues to be approximately $130 million.

We have spent about $400 million of net growth capex through the first two quarters with growth Capex spending expected to continue to trend lower as we move through the second half of the year with free cash flow increasing.

We had over $2.1 billion of available liquidity as of June Thirtyth and have no near term maturities of senior notes or credit facilities with the earliest maturity occurring in May 2023.

On a debt compliance basis TRP is leverage ratio at the end of the second quarter was approximately 4.1 times versus a compliance covenant of 5.5 times.

Our consolidated reported debt to EBITDA ratio was approximately 4.9 times.

With our premier integrated asset position and our talented employees target is well positioned for the longer term as business fundamentals improve we expect to generate increasing free cash flow after dividends and will be available to reduce debt and further strengthen our balance sheet profile. Our business is performing very well across a difficult year and we are.

So proud of the exceptional performance of our employees.

Given the actions that we have taken and we'll continue to take this year, we expect to exit 2020 in a strong position with increasing flexibility.

Lastly, before we turn the call over to Q1 day, we wanted to provide an update that we are on track to publish our 2019 sustainability report during the third quarter and will include enhanced disclosures around our framework of policies practices and systems in the areas of safety environmental social and governance.

And with that operator, please open the line for questions.

As a reminder, if you would like to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the Q1 day roster.

And we kindly ask that you limit the two questions and reenter the queue in a line that if you haven't this question.

Your first question comes from the line of Jeremy Tonet with JP Morgan.

Hey, good morning, guys, it's James on for Jeremy.

Maybe I'll just start off with a.

A two part question on the logistics side the business.

Graham pre volumes look pretty resilient.

During the quarter I assume better than when you guys had originally anticipated, but just through July what are you guys seeing on that pipeline and maybe relative to one Q volumes. If you can.

Do you expect to surpass that.

Level in Threeq you.

Indicate into the Fourq.

Then the second part is just looking out at 2021 understand.

It's very early but just with the dock expansion now online do you see the business.

Shifting to the logistics side in 2021 versus.

2021 or historically.

Okay.

Hey, good good morning ill answer the first one just about Grand Prix and then go to the other one.

Yes, the Grand Prix volumes, we are seeing things some strength.

I'd say with gateway coming on in just the resilience that we're saying in the Permian.

With that plant coming on volumes are continuing to ramp I'd say, we've been pleasantly surprised with how that assets performed the volume going through it and our ability to enhance recoveries across that asset and the rest of our Permian footprint is going to continue to drive better recoveries going forwards want to recovery basis, I think we feel good about the outlook for moving those volumes.

Down down Grand Prix Andrew from the overall volume uplift, we're going to get from putting gateway on both of those things are going to drive more volumes on Grand Prix. So I think it's kind of happening real time, as we're ramping up gateway, but I think we're pretty optimistic about the volume profile for gateway through the back half of the year and then and the 21.

In terms of business mix and how that shifting.

Yes, I'd say with Grand Prix.

Going to continue to ramp volumes fractionation export in the investments we made on the downstream side I would say that overtime, partially dependent on commodity prices, but yes, we see more of the business mix shifting the downstream in terms of percentage operating margin than GMP, but we expect to have really growth in both areas over time.

Great. Thanks for the color.

And then my second question I'm, just looking at slide 29 in the updated.

Perfect. This morning.

And just looking at the South Texas footprint.

Obviously look theres a few exercise their from from your last slide precision not surprisingly, but.

Just as we for an update on maybe Sanchez activity on the footprint.

How is progressing.

With your expectations.

Sure on the on the South Texas footprint really amongst the whole your eagle for there's not a lot of activity out there, we actually didnt see a whole lot of volumes shut down on that system, but there is just really not a lot of activities. So you've seen volumes.

Volumes move down.

Yes, we are getting some indications from producers that.

Some activity could start picking up here. So there remains some opportunity for kind of stemming the decline in maybe go on the other way here as we kind of get into the back half of the year.

But we really havent seen the a lot of progress made in terms of volumes here recently, but there is some.

Yes.

There are some opportunity for those volumes to perform a little bit better as we go forward.

Got it thanks for the question.

Okay. Thank you.

Your next question comes from the line of Tristan Richardson with Jewish Securities.

Hey, good morning, guys.

Really appreciate all the comments you've given around what youre seeing in second half for volumes I guess kind of taking that commentary even some of the commentary from your large customers about reinvestment rates and then balancing and natural decline in some of the other basins.

Can you talk a little bit about exit rates for the year now that curtailed volumes are back to exit rates look to be above two Q.

In one Lynn what you're seeing in July or August or.

Decline comes and do we start to get back to more what you saw in Twoq.

Yes, I'd say for that were.

We've had good discussions with our producers and we're getting more visibility around their plans for 2020. So.

I'd say in the incremental data points, we're getting there continue to be more and more positive the more and more conversations we have.

So it would be our expectation that.

Out in the Permian that from here, Yeah, I would not surprise me if we had some growth from where we are today through the end of the year in the Permian.

We still have a range in our EBITDA guidance, because it's still there is still certainly some uncertainty there I'd say the most recent data points were getting our more supportive of having really growth from this point going forward.

In the Permian.

That's great. Thanks, Matt and then just on the.

The cost side of things generally you talked about the the 100 million an incremental versus expectations I mean, certainly new assets coming online in the second half, we'll see some land, but curious about just sort of.

The concept the cost reduction permanent as you look out into 21 and beyond.

I think Tristan that we've done an excellent job of taking costs out really across the board the focus of our organization whether it be supply chain every operations person.

Every group and involved in.

And GNS savings, it's just been.

The remarkable effort.

Our need to hire additional personnel on things like that some of that I expect we'll be permanent in terms of cost savings our management of other operating costs around production.

We are doing a very good job of managing those with each and every supplier and we'll continue to be focused on that but as we see volumes increase across our systems.

Those costs, maybe a little bit harder to maintain the permanence out, but we're working very diligently to try to do that.

Great. Thank you guys very much.

Okay. Thank you.

Your next question comes on the line Christine Cho with Barclays.

Hi, Good morning, this is mark on for Christine.

Hold on the keep following or were there other factors that played a part and just the impact from west shut ins.

Yes, I think we.

Continued to see the resiliency of our Permian Midland system.

When we.

When we add plants theres more volumes that usually come in to fill those up relatively quickly. If there's other wells that are being shut and maybe at lower some pressures can we see it come from other parts of the system. So I think we benefit from just having a really large footprint on the Permian Midland side, with a really high quality well capitalized good.

Producers as well so I would say on average we would expect them to outperform the basin and we've seen that continue to prove out. So I think it's a combination of a number of factors I think it's the footprint system, we have but it's also a really strong producers we have behind our systems.

Got it Thats helpful.

And then recognize and things are still pretty dynamic on the producers side, but just how should we think about capex for next year.

Last quarter I think you gave a rough estimate for about 200 million and growth capex, but with activity holding up better across your acreage should we still think thats a good number.

Yeah. So for Capex as we look forward if you look through the.

We have the completion of our Grand Prix extension up end, Oklahoma and the first quarter, but we don't have any large scale.

Projects announced to come online in 2021, so we'd expect that Capex. When you look to our recent history to be much lower than.

The amount we've spent over the previous previous several years, we have capacity on Grand Prix. So as volumes ramp will be able to just moved those volumes down Grand Prix, we have capacity on our fractionation and export. So we're really set up pretty well to be able to capture some growth volumes.

Whether it's in 21 or 22 going forward.

To capture those growth volumes with really not much more incremental investment on the downstream side of the business events on the GMP side, where we will have a regular field and compression and other spending will need to have to gather those volumes to the plants.

And as I noted in my comments as we have excess capacity in the Delaware sides with paragraph coming on.

We do have processing out there so it really comes to.

Already trying to be even more capital efficient with the way we do that so we're looking internally is there potential plant we could move from another area that is underutilized re purpose that and move it.

Out into the Permian Midland when and if thats needed out there and so already looking at that and if we do that it'd be significantly less capital than a new build capital that we've had for the recent to fit 250 million a day plants to put in.

Great that's helpful. Thanks.

Your next question comes from the line of Colton Bean with Tudor Pickering Holt.

Good morning, So maybe just a follow up on the capital question, there was a slightly longer dated Len.

Yeah, I think we've seen a few of the large Permian producers highlighted gross gap even in the event a much higher oil prices. So obviously still long way out, but do you see next year's capital budget as a decent marker for 22, plus if gross was in line with kind of that mid single digit type commentary.

Yes, I'd say as we look out over multi years.

What we see is.

The addition of processing plants.

Likely just going to be in the Permian you on the Midland side likely will be more plants there than the Delaware just kind of given where current volumes are relative to capacity so putting in a processing plant on the Permian side shouldn't need much more capital on Grand Prix as we up capacity on that pipe and to be just adding some pumps, but those are relatively relatively small amount.

Capital and then as when we're going to need another another fractionator. After train a so part of that will be the timing of what that growth looks like in 2021, and when will need to greenlight train nine on the fractionation and does that fall into 2022 to the phone to 20 point when do we need that how much growth is there and 21 and 22, but it's going to.

Average out yet though.

One year, we might be putting one in another year, we may not right. So it's going to its going to depend on when we put in those processing plants and fractionation facilities.

Got it and then just on the NGL marching down tick I understand the wholesale seasonality can you speak to the optimization side of that how would you expect that to play out through the back half of the year.

But we also it was it was actually a relatively good quarter for us on the NGL marketing.

As we go forward, so, yes, we factored that into our updated guidance.

And so we'll we'll reap those benefits as we as we realize those.

Contango trades.

Great appreciate that.

Question comes from the line of Kyle May with capital one securities.

Good morning.

Appreciate there's still a lot of uncertainty ahead, but just wondering if you can talk about some of the different factors that could put you.

One and or the other of your revised guidance for this year.

Sure.

Yes.

So I think theres still some potential variability and what the volumes look like for the Permian from now to the to the rest of the year and we also still have some shut ends up in the bad land and we have some shut ins and the south folks.

I think Kyle Theres also uncertainty around coded as we all know and so we're also being conservative factoring what we don't know into account. So we've got great visibility I think from our producers are certainly increased visibility versus where we work for back half of the year performance, which gives us a lot confidence when we think about the strength and resilience.

Our footprint.

But there has just continued uncertainty around Kelvin and so we're trying to factor some of that conservatism in as well.

Got it that that's very helpful and as my follow up it seems like we've seen a little bit more stability in the last month, or so and where to get your latest thoughts around M&A landscape and if you've seen the opportunity for target to make any changes that could improve the balance sheet.

Yes, so our our focus and we mentioned in our and our script multiple times is really on free cash flow after dividends and wanting to de lever we have a lot a really good.

Organic projects, adding picking up volumes through our Midland system, our Delaware system picking up the transport Frac on Xplore as we move the molecule downstream those are going to be really good returns for us. So our focus really is on if there's if they're spending to do it's on organic spending in and around our footprint for our existing customers and add on Cussed.

Summers in and around our footprint that is going to be our focus.

Right now because.

Our leverage is headed in the right direction, but we still want our leverage to move to.

Moving even lower.

Got it thanks for that.

Okay. Thank you.

Your final question comes from the line of Sunil Sibal with Seaport Global.

Hi, good morning, everybody and we will receive.

So first.

Keeping question for me so it seems like when I look at the equity openings for the non controlling interests.

96 million and.

Thats 30 million ourselves DDN, Dave So it seems like they're trying to go below 10 million on EBITDA for the quota. So I'm just curious unit was there any.

Onetime item in there.

That could that number.

Kind of the run rate kind of a number obviously some assets that amping up.

We can dig into it similar and come back to you, but I don't believe there was anything that I characterize as onetime in nature, they're Sunil.

Maybe just to support Jen Hsun. The I think if you look to fourth quarter first quarter 1920, and then the current quarter here.

Non controlling interest cutback to EBITDA.

In around kind of 100 $110 million.

That was consistent last quarter as well.

Ooh.

Adjusted for the.

The impairment and BDNA.

Okay got it and then on on the fractionation side I understand that Q2 numbers had some noise in that.

Not only are bringing on the French pneudraulics online. So I was just kind of curious how should we thinking about the volumes that.

Would you expect those.

Well the fractionation capacity to be kind of 80% also utilized any.

And you touched in.

Yes so.

Don't have wasn't nearly as many data points for 2021 and beyond as we do for 2020, but I will say the early indications from some of our producer customers have been positive I'd say relative to maybe our expectations. Even just a few weeks or a few months ago. So we are seeing positive indications for 2021 and beyond but it's still pretty early.

To give you that kind of affirmed timeline there.

Okay got it thanks, Ironically nice.

Okay. Thank you.

There are no additional questions at this time I would like to try to color just Sanjay lad for closing remarks.

Ladies and gentlemen, this does conclude today's conference call you may now disconnect.

Q2 2020 Targa Resources Corp Earnings Call

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