Q1 2021 Targa Resources Corp Earnings Call

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Good day, and thank you for standing by and welcome to Targa Resources first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session.

Ask a question simply press star one on your telephone if you require any further assistance. Please press star zero. If it were like I would like to hand, the conference over to your speaker today, Sanjay Lad, Vice President of Finance and Investor Relations. Please go ahead Sir.

Thanks, Carmen good morning, and welcome to the first quarter of 2021 earnings call for Targa Resources Corp, first quarter earnings release, along with our first quarter earnings supplement presentation for Targa resources that accompany our call are available on our website, our targa resources Dot com in the investors section.

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

Statements made during this call that might include Targa resources expectations or predictions should be considered forward looking statements within the meaning of section 21 E of.

Of the Securities Exchange Act of 1930 for actual results could differ materially from those projected in forward looking statements.

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

Our speakers for the call today will be Matt Meloy, Chief Executive Officer, and Jen Kneale Chief Financial Officer. Additionally, the following senior management team members will be available for Q&A, Pat Mcdonald, President gathering and processing, Scott Pryor, President logistics, and transportation and Bobby Morrow Chief.

Full officer.

And with that I'll now turn the call over to Matt.

Thanks, Andrew and good morning.

During the quarter, our overall business continued to perform very well led by our position in the Permian basin, and our integrated NGL business and positive aggregate benefits from the winter storm.

We continue to execute on our key strategic priorities, including prioritizing free cash flow towards debt reduction as we reduced our debt balance by $383 million quarter over quarter.

<unk>, whether from a February winter storm impacted us across our operations during the first quarter.

Over a 10 day period around the storm, we experienced on average a 50% reduction across our gathering and processing and downstream system volumes.

Our overall system volumes quickly rebounded and return to around pre storm levels later in the first quarter.

Those operational impacts were offset by storm related benefits elsewhere in our business, which resulted in an aggregate margin benefit of about $30 million for the quarter.

Let's now turn to our operational performance and business outlook, starting in the Permian, We remain on track and expect our average total 2021, Permian inlet volumes to increase between five and 10% over last year.

We are seeing increasing activity levels across both our Midland and Delaware footprint with our current Permian Inlet gas volumes ahead of pre storm levels, averaging about $2 7 billion cubic feet per day.

Our Permian Midland system running close to capacity, our new 200 million cubic feet per day time plant will much needed and remains on track to begin operations early in the fourth quarter we.

We continue to evaluate the timing of our next Midland plant, which we estimate would cost about $150 million and could be needed as early as the second half of 2022 weeks.

We currently have adequate processing capacity in Permian, Delaware to accommodate our anticipated near to medium term growth.

Moving on to the Badlands, our gas and crude volumes during the first quarter each sequentially decreased 6% largely due to the winter conditions in North Dakota, we are seeing completions increase across our system and are having increasing producer dialogue around a ramp in activity levels.

Turning to our central region, which continues to largely be in decline GAAP inlet volumes in the first quarter for further impacted by the effects for the winter storm. We are currently seeing a modest uptick in completions and activity levels, which could mitigate some of the decline.

Across our gathering and processing business. Our margins are also benefiting from the inherent tailwind associated with higher commodity prices and the upside participation embedded in our fee floor arrangements as a result of our re contracting efforts.

Shifting to our logistics and transportation segment, our Grand Prix pipeline continues to perform very well current Grand Prix deliveries into Mont Belvieu are approximately 380000 barrels per day, and we expect volumes to continue to ramp from here.

We continue to estimate full year 2021 average deliveries into Mont Belvieu to increase over 25% from 2020 average throughput.

Our fractionation volumes in Mont Belvieu rebounded from the winter storm and we are once again seeing higher volumes of around 630000 barrels per day.

In addition to the winter storm impact lower sequential Frac volumes were also attributable to some minor repairs and recall that fourth quarter 2020, Frac volumes benefited from working down inventory as a result of scheduled maintenance performed in the second half of 2020.

In our LPG export services business at Galena Park first quarter volumes averaged $8 5 million barrels per month and were down 23% sequentially.

Fourth quarter 2020 volume benefited from the very strong export fundamentals, which enabled us to capture some shorter term volumes during the prior quarter the.

The impact from the winter storm combined with periods of fog, along the Houston ship channel during the first quarter also contributed to the sequential volume decline.

The outlook for full year 2021, and beyond remains strong and we expect our LPG export volumes to be higher during the second quarter over first quarter levels.

Taking into consideration our first quarter results strong business performance and continued focus around cost management.

With a stronger estimated commodity price outlook for the balance of 2021, we are increasing our full year estimated 2021 adjusted EBITDA to be between one eight to $1 9 billion 2021. Adjusted EBITDA is now estimated to be 13% higher in 2020 based on the midpoint of our new guidance for.

Range.

With our higher full year, adjusted EBITDA and free cash flow estimate we expect to end 2021 with reported leverage around four times.

As we look forward our integrated NGL business is poised to continue to benefit from an overall recovery and we have the ability to capture growth volumes from the Permian without having to spend much incremental capex on Grand Prix fractionation or LPG export facilities. This puts targa and are positioned to generate strong returns going forward.

<unk> and increasing free cash flow after dividends available to reduce debt and further strengthen our financial position with that I will now turn the call over to Jim.

Thanks, Matt Good morning, everyone targets reported quarterly adjusted EBITDA for the first quarter was $516 million, increasing 18% over the fourth quarter. The aggregate net benefit from the winter storm lower operating and G&A expenses and higher commodity prices drove the sequential increase in adjusted EBITDA.

Commodity prices meaningfully increased quarter over quarter, and while we are significantly hedged our gathering and processing segment gross margin directly benefits from higher prices across our unhedged equity exposure and to the extent prices are above our fee floors driven.

During the first quarter Targa generated free cash flow free cash flow of $336 million, which as Matt mentioned was utilized to reduce our aggregate debt balance significantly and our consolidated reported debt to EBITDA ratio was approximately four three times at the end of the first quarter, which is a reduction from four seven times.

At year end 2020.

We did make a reporting change that you may have noted beginning in the first quarter of 2021. We now include certain fuel and power costs. Previously included in operating expenses in product purchases and fuel to better reflect the direct relationship of these costs to our revenue generating activities and align with our evaluation of the performance of the business.

Prior periods have been updated to reflect this change.

We remain significantly hedged for 2021 and continue to add hedges for this year and beyond.

Relative to when we last reported in February we added incremental hedges across most commodity as we benefited from higher prices, particularly in the prompt year you can find our usual hedge disclosures in our quarterly earnings supplement presentation.

As Matt mentioned, we are increasing our full year 2021, adjusted EBITDA estimate to be between $1 8 billion to $1 9 billion.

Our updated financial estimates for the <unk> full year 2021, WTS crude oil prices averaged $60 per barrel NGL prices averaged <unk> 60 per gallon and Henry hub, and Wahaha and natural gas prices averaged $2 75.

And $2 65 per and then Btu.

Given the strength of first quarter, adjusted EBITDA and the seasonality of some of our businesses, we expect second quarter adjusted EBITDA to be lower than ramping through the back half of the year, providing significant momentum heading into 2022 as we expect to end 2021 was reported leverage of around four times.

Also we would expect aggregate opex and G&A to be higher in the second quarter as some cost shifted from the first quarter related to the winter storm in Q2 aggregate Opex G&A is estimated to more closely approximate the fourth quarter. We continue to be very proud of the organization's efforts on reducing costs and this will continue to be an area of.

Focus across the company.

Our 2021, Capex estimates remain unchanged with net growth capex to be between $350 million and $450 million and net maintenance capex of approximately $130 million.

There is no change to our near term capital allocation strategy to continue to improve our leverage ratios and simplify our corporate structure, we are making significant progress on advancing towards our long term consolidated leverage ratio target of three to four times as we continue to focus on improving our corporate ratings and becoming investment grade.

There is no change to our assumption that we will repurchase the <unk> interest in the first quarter of 2022, which would generate additional EBITDA in 2022 and beyond and be about leverage neutral.

Shifting to Targa is focused around sustainability and ESG, we continue to advance our efforts in internal initiatives in this area. We recently announced the formation of a sustainability committee at the board level, which will report to the board on a quarterly basis target who has also joined the one future coalition and we plan to publish our next sustainability report.

Port in the fall.

Finally, I would like to Echo Matts comments Targa continues to benefit from the strength of our integrated business and we remain exceptionally well positioned for the long term on behalf of management, we would all like to say thank you to all of our target team for continuing to prioritize safety and providing best in class service to our customers.

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

Thanks Jen.

We ask that you kindly limit to one question and one follow up and please reenter the Q&A lineup. If you have additional questions.

Carmen would you please open the lines for Q&A.

Thank you and our first question will be Jeremy Tonet with Jpmorgan. Please go ahead.

Hi, good morning.

Hey, good morning morning.

I see.

Thank you touched on this a bit during the prepared remarks, but just wanted to kind of dive in a bit more when it comes to.

Our capital allocation philosophy, a few different things that can happen here be it lowering leverage outright depressed that can be brought in.

Simplifying to bring in the Opco.

Just wanted to see kind of how you think about these these different priorities at this point and also I guess if activity levels are starting to tick up I mean, do you see pressure on capex moving up to kind of.

Facilitate that or do you think it's really these other measures I meant mentioned first our top priority.

Sure, Yes, thanks Jeremy.

I'll touch on capital allocation, and then let Jim kind of fill in some additional comments there. Our overall capital allocation priority is on leverage reduction you saw us do that in the first quarter, that's going to be our priority to try and make progress towards getting ratings increases towards investment grade and getting into our target 3% to four times so that.

Is going to be our overriding priority there.

And then on your second point in terms of Capex pressure with increasing volume. We are optimistic that Permian volumes are going to continue to grow year over year, we do have capacity out in the Permian Delaware. So.

So we really think in terms of capex pressure, where youre going to see it is on that Permian Midland side, and I mentioned in my remarks, we're evaluating right now the timing of when we may need to add another plant out there.

Volume currently run at around two seven Bcf a day, we're kind of hitting our capacity so we're going to need behind plant.

Come on we do have some ability to stretch beyond nameplate and provided some cushion for that next plant but.

But we're evaluating right now that next plant and that's for the tune of about 150.

$50 million, which would be spread out over the build cycle. So it's manageable. We can still continue to generate free cash flow deleverage and make progress in all of our goals even in a environment. If we see some more strength on volumes.

And then John you want to add any more on the capital allocation or I'd, just say Jeremy that being ahead of schedule.

Essentially it gives us more flexibility and so from our perspective that flexibility doesn't change the base plan that we articulated in our scripted remarks in that Matt just reiterate reiterated which is really reducing leverage improving our ratios and then simplifying both taking out the Dev co and redeeming the Trc preferred so those will continue to be our areas of for.

<unk>, which is very consistent with how we've been talking about our capital allocation strategy over the last many quarters.

That's helpful. Thank you for that and then.

Maybe kind of shifting gears, you've seen changes recently.

Do you see with the 45, <unk> kind of more credit happening there supporting initiatives such as carbon capture.

And it seems like we're processing plant stand on the cost curve for carbon capture for 45 queues could possibly make that economic given the purity of the <unk> stream. There just wondering if you had any thoughts on that side. If that's something you could see targa doing at some point in the future or any other thoughts on energy transition.

Like that you might want to share.

Sure Yeah in terms of <unk>.

Broader energy transition, we think Ngls crude gas are going to be here for decades to come and we're really well positioned within that environment.

That said, we will continue to look at other opportunities. We mentioned on our previous calls we will evaluate or are there. Some renewable projects that we could either support or help underwrite with commitments to offtake from electricity, whether it be solar or wind, we're continuing to evaluate those projects.

On the carbon capture front, we are taking a look at that so we have folks internally that are looking at can we aggregate <unk> and either <unk> or sequester it and just put a downhole. So we are evaluating that I'd say that does fit it seemed like more of our core competency gathering.

Putting it in a pipe and then moving it. So we are looking at that I'd say, we're in the early stages of that and whether the 45 two credits are enough or not.

Now its still too early we're in the scoping and seeing if something could work out there, but we are evaluating that as that one seemed that may have more potential but for any additional capital that we would spend whether it's carbon capture or anything else that would have to generate.

Strong returns.

Relative from our other organic growth opportunities and if.

So there may be some projects that we help support and we can find other sources of capital.

If it's not meeting our threshold.

That's quite encouraging to hear thank you.

Thank you Jeremy.

Our next question comes from Shneur <unk> with UBS. Your question. Please.

Okay.

Hey, everyone.

Maybe start off just kind of wanted to talk about your guidance a little bit here.

Definitely appreciate the color around timing for for <unk> as to why your guidance is not even higher in some cases with some complaining.

Please go ahead.

Last quarter, you had mentioned that the high end of the range.

Was achievable without any changes in volume expectations is that still the case and within the context of the guidance question.

Just wondering if you can talk about.

The performance of the fee floors, as well too and are there any elements of conservatism within your guide.

Shneur this is jen.

I don't recall, saying that we could meet the high end of our guidance range without changing any of our volume expectations.

But I think that the guidance range that we put out today is one that is higher for a variety of factors. We've actualized. The first quarter, we did benefit from the storm to the tune of $30 million, which is certainly additive and then as we look forward over the rest of the year I think just to continue to expect.

Patient and strong operating performance, Matt gave some color on where our volume sort of sit today and again I think we just feel better about the base performance of our business as a result of where volumes are and really the fact that it feels like maybe there's light at the end of the tunnel around COVID-19. So that's providing I think a little bit of a tailwind.

And as well just in terms of more macro stability and how that relates to targa.

Clearly to the extent that we continue to benefit from higher commodity prices that will be additive to what we published today.

To the extent that we have higher commodity prices that result in more activity levels and that could obviously increase our expectations for volumes for this year. So there are a lot of factors at play, but I think that it feels like we've got a lot of momentum right now and that momentum is creating a lot of flexibility and that's what we're really excited about and.

It's really the base business, that's creating a lot of that momentum along with just continued management of costs related to our base business activities, which again the organization has done a really good job of doing.

We haven't provided a lot of color around exactly where sort of the fee for us are set and what the upside for at different commodity prices means related to our fee for us, but what we have done is consistent with what we published in February as the commodity price sensitivity that we have for our business that.

We published also in our earnings supplement in broader presentation, a day that encompass is our expectations for additional margin from not only just direct commodity price appreciation on unhedged volumes, but also if prices move higher what that would mean for our fee floors.

And then there are a variety of other factors that are also included in there. So I do think that that's a pretty good sensitivity related to performance of aggregate target business and higher commodity price environment.

Perfect really appreciate all the color there.

Maybe following up on the momentum seen here.

Just sort of thinking about the simplification process.

Bob you talked about in your prepared remarks that you have not changed.

<unk> around the debt.

Does that mean, the despite the momentum of the IRR and the more accounting change or you're just not updating the timeline and maybe as we think about.

The whole simplification process.

Leveraging liquidity are certainly there for the GAAP to at this stage right now.

Should we be thinking about perhaps as the net simplification staffers and right sizing the dividend something on the radar screen and just any color with respect to your thoughts there would be great.

We've talked a little bit about the EBITDA expectations from the desk by and and so there is got train six and Gtx, which are relatively stable cash flows. Those essentially has been full since they came online so really the upside asset within the desk COSE is Grand Prix and so from our per.

Respective certainly Grand Prix is continuing to perform phenomenally well, but its not changing that base case assumption that we'll take out the desk codes in a single tranche in Q1 of 'twenty, two which is an assumption that I think has been well received it's easy I think for investors and potential investors to understand and it is consistent with what our base.

The plan is in that plan Hasnt changed.

Clearly the second part of what we characterize as our corporate simplification prioritization is redeeming the trc preferred and that steps down to 105.

At the end of the first quarter of 2022, and I think if you look at where our balance sheet is expected to be at that point in time, we have a lot of flexibility and our continued outperformance would just enhance that flexibility and so I think youre absolutely right that that is definitely a priority and that is again very consistent with what we've laid out over there.

The last many quarters, which is our simplification isn't really complete until the Trc prep is also redeemed.

Alright, perfect and.

Upside to the dividend would be share down the road.

Yes, I think once we achieve our target leverage ratio hit the simplification that Jim talked about then the best way to return capital look at our free cash flow and whether it's more organic growth or dividend or share repurchase that will be evaluated with the board and then decided about what the appropriate way to.

Distributed EDA.

Perfect. Thank you very much everyone really appreciate the color and I have a safe day.

Okay. Thank you thanks share.

Thank you. Our next question comes from Michael Blum with Wells Fargo. Please go ahead.

Thanks, Good morning, everyone.

Other question on the guidance.

As you know share appropriate inventories are somewhat depleted.

Do you think we could see domestic demand drive prices higher in the back half for the year as you head towards winter.

Potentially narrow the arb.

Which could impact exports just curious how youre thinking about that scenario for the year plays out and what exactly is factored into guidance.

Yes, sure Michael Yes, we have seen really strong NGL prices across the board and you are right on propane inventories are low and we've seen strong pricing there that could have some impacts.

For the shorter term.

It kind of on contracted volumes as we go through the remainder of the year, we have significant contracts in place and we feel good about our base business.

For the remainder of the year on the export side, but if there is some strength.

And pricing there, we do have upside exposure through our GNP business. So we have some offsets offsets there. So overall higher NGL prices generally speaking are going to benefit targa. There may be some offset to some shorter term opportunities in export, but I think overall due to higher propane prices other NGL prices.

Is likely going to be a positive for us.

Great and then I Wonder if you can just talk a little bit about.

Pioneer's share.

Tuck in acquisition of double point at least my.

Standing is that acreage already dedicated to you, but just curious if there's any.

Ancillary benefits or incremental upside there from that transaction as it relates to your volumes.

Yes, sure I'm going to.

We don't like to talk about specific customers and contracts that we have in place. So I'm going to answer that more generally Michael I think as some of our larger customers in general are growing whether it's in the Delaware or or Permian Midland.

The Midland side as they grow we have good relationships with those.

Larger customers I think in the short term, it's not going to be.

Have any material impact really positive or negative for us, but over the longer term of the larger guys. Good relationships.

We have with our customers continue to increase over the longer term. It is a good thing for us so.

Consolidation.

On the upstream side longer term as we view it as a net positive for us.

Great. Thank you.

Okay. Thank you.

Our next question is from Colton Bean with Tudor Pickering Holt Company. Please go ahead.

Good morning, So just looking at the business mix there on page nine of the presentation. It looks like marketing may have been north of 100 million for Q1. So can you just walk us through the marketing results last quarter, and then how that reconciles to $30 million of net benefit from weather.

Gordon This is Jen we generally are a little bit opaque about the benefits that we get within the marketing business, just because there tends to be a lot of moving pieces each quarter.

And we tend to have marketing benefits each quarter.

So I'm not going to really get into the specifics here, but youll recall in 2020 that we benefited from being able to enter into trades. When there was a lot of contango in various commodity markets and so youre seeing some of that be realized as we really moved through time going back to earlier.

In 2020 and in particular, we did benefit in the first quarter from that and then there were also some storm related benefits, which again, we're not going to get into the specifics of what those were also factored into the outperformance for the marketing business.

Got it so some of that or it sounds like a decent portion was already in the works in 2020, it wasn't necessarily related to February.

Correct, Okay, and then maybe just to ask <unk> question, a little bit more pointed I think on the on the updated EBITDA guide at the midpoint. It looks like it implies just under $450 million for the remaining three quarters. So if we back out that $30 million from Q1 still a little bit lower so just is that primarily the opex impact that you referenced.

Or anything else to point to.

That's primarily.

The Delta I think Youre looking for as we do expect that we will see higher aggregate opex and G&A in the second quarter and then we'll be continuing to try to manage those costs as we move forward through the year, but little bit dependent on volumes and also just dependent on higher costs.

There are some elements that we need to purchase for our operations, where we are seeing some increases in costs, but our guys are doing a really really good job of managing costs lower everywhere across our businesses. So we'll continue to look for outperformance in that realm as we move through the rest of the year.

And there is some seasonality in our NGL business on the wholesale refinery services side, which generally has a better Q4 and Q1 is there is more sales in the winter. So there is some all.

All things equal softness from the second quarter relative to the FERC first quarter because of that but Jens right. I'd say, it's largely are they more on the opex side, but then partially due to some seasonality as well.

Understood I appreciate the detail.

Okay. Thank you.

Thank you. Our next question is from Christine Cho with Barclays. Please go ahead.

Thank you.

I actually have a follow up to that propane question.

Given that inventories are depleted.

Earlier in the quarter, we saw propane prices at Conway trading at a nice premium on and I suspect that we can see that later again this year.

Can you remind us if you are able to benefit from higher Conway prices would that just be from any supply.

Physically have hitting that hub from their current operations.

Or is there any other way to I don't know if physically bring up volumes from Mont belvieu or benefit from your pipeline.

You now have.

We're seeing this is Scott.

First off just to reiterate some of the things that Matt was saying certainly from from an inventory perspective, which is leading to what Michael's question was inventories across the industry standard about 41 million barrels with the most recent inventory stats, we didn't have much of a bill from the last stats again.

Just a week on week that puts us below where we were at this time last year, but certainly that has helped increase the prices which is.

I think it will take some time before we see some of the pricing from cross the growth globe to reflect some of that activity, but increased prices. Obviously, there is going to help sustain some increased growth on.

The production side of things.

As it relates to Conway on the margin, we have opportunities to bring products down from from Conway recognizing that we've got the pipe in place, but it is predominantly a Y grade pipeline, but there are some opportunities on the margin to bring them down. So I think relatively speaking, though we're going to continue to see increased production from the Permian.

And that's going to help us translate into larger volumes of Y grade coming into our systems and I think youll help shore up inventories over time, but again, depending upon what we see from an export perspective.

And just touching base on that for just a little bit certainly our volumes were down from the first quarter relative to the fourth quarter, but as Matt alluded to in our comments, we certainly see that our second quarter export volumes will be up over our first quarter volumes.

Okay.

And then just going onto Capex for the new Midland plant.

Is that going to be new builds or are you moving around.

For your other plants and can you remind us for lead time on that so if you want it potentially in second half of next year.

To start spending money.

Sure, Yes, we're evaluating kind of have evaluated and are continuing to evaluate the best play.

Plan to put in for the next point right now the reason I said the $150 million I think we're leaning towards putting in a new build there.

Yes for timing.

Other factors that makes the most sense. So we think it's likely going to be a newbuild side $150 million reflects newbuild.

And then depending on infrastructure one of the.

Lead time long lead time items is getting electricity out for these plants.

Our typically electric.

Plants.

I would say think of it as kind of 18 months or so 12 to 18 months, depending on how much how far you have to go.

Our like for that gives us confidence that we'd be able to do something in the back half of 'twenty two.

And when would you essentially sales.

How much could that impact capex this year.

Yes, it really depending on when we.

Green light and say, we're seeing enough strength in volumes.

<unk>.

It could have some impact to capex. This year, we didn't change our capex guidance, we had really strong performance on our growth Capex from Q1. So I think it remains to be seen whether we need to update our capex or not depending on the timing of that plant because we do have a range in there.

Got it thank you.

Our next question comes from John.