Q4 2022 Targa Resources Corp Earnings Call

February 22, 2023

Yeah.

Good day, and thank you for standing by and welcome to the Targa resources fourth quarter 2022 earnings Conference call.

This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you within a year and automated message advising your hand this race to win.

The other question. Please press Star one again also be advised that today's conference is being recorded I would now like to hand, the conference over to the Vice President of Finance and Investor Relations Sanjay Lai. Please go ahead.

Thanks, Carmen good morning, and welcome to the fourth quarter 2022 earnings call for Targa Resources Corp, fourth quarter earnings release, along with our fourth quarter earnings supplement presentation for cargo that accompany our call are available on our website at Targa resources Dot com in the investors section.

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

Statements made during this call that might include Targa resources' expectations or predictions should be considered forward statements within the meaning of section 21 E of the Securities Exchange Act of 1934 actual results could differ materially from those projected in the 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.

Following senior management members will be available for Q&A.

Mcdonald, President gathering and processing, Scott Pryor, President logistics, and transportation and Bobby Morocco, Chief Commercial officer.

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

Thanks, Sanjay and good morning to everyone 2022 was an excellent year for Targa and I would like to recognize and thank our employees for their focus dedication and execution.

Some of our highlights from 2022 include record safety performance based on multi year low total recordable incident rate <unk>.

Record gathering and processing volumes in the Permian record volumes across our logistics and transportation assets record adjusted EBITDA of $2 9 billion of <unk>.

41% increase over 2021, while also reducing our share count.

Major projects came online on time on budget and had been highly utilized and startup.

<unk> and successful integration of our Delaware Basin acquisition, and our South Texas acquisition.

Execution of our corporate simplification with our Dev co repurchase and preferred share redemption.

Accessible sale of our 25% equity interest in Gulf Coast Express pipeline for approximately 11 times EBITDA.

Upgrades to investment grade by all of the rating agencies and completion of two successful investment grade offerings and higher year over year return of capital to our shareholders through both an increased common dividend and continued common share repurchases.

We expect our momentum to continue through 2023 and beyond given the strength of the business fundamentals underpinning our assets.

There is a continued need for critical midstream infrastructure like cargo to balance.

And linked cost advantaged U S production to domestic and global markets.

Global events have underscored the critical nature of safe reliable and affordable fossil fuels to support everyday life domestically and around the world.

Cost advantaged basins like the Permian, where we are the largest gatherer and processor of natural gas will continue to be a key supplier of hydrocarbons for decades to come.

We are less than two months into the year and already had some notable announcements, including the successful negotiation and closing of our acquisition of the remaining 25% interest in our Grand Prix NGL pipeline.

Our early January offering of 10, and 30 year senior notes that funded the Grand Prix acquisition and reduced floating rate borrowings on our revolver.

And within this morning's release, our operational and financial estimates for 2023, which are expected to be records across many fronts, including an estimated 24% increase in year over year adjusted EBITDA.

Our transfer and construction of a plant from our South Texas acquisition to the Delaware Basin, which we are calling the road runner two plant where activity around southern New Mexico is currently exceeding our expectations.

And an expected 43% year over year increase to our 2023 annualized common dividend per share versus last year.

For 2023, we estimate that our adjusted EBITDA will be between $3 5 billion and $3 7 billion.

The significant year over year increase in adjusted EBITDA is driven by higher expected gathering and processing volumes higher expected NGL transportation fractionation and export volumes higher expected marketing optimization and LPG export opportunities.

Your fees from contract escalators, a full year contribution from our Delaware Basin, and South Texas acquisition contribution from our acquisition of the remaining 25% interest in Grand Prix and higher hedge prices.

Related to capital allocation, maintaining a strong investment grade balance sheet cross cycle continues to be a priority at target.

We also have attractive opportunities to continue to invest organically, which we believe will support the continued creation of significant shareholder value over time, we currently.

We estimate between one eight and $1 9 billion of growth capital in 2023, as we build infrastructure that we expect to be highly utilized across our footprint.

Our major projects in progress are core to our business five new Permian gas processing plants train nine fractionator and our Daytona NGL pipeline.

Along with our partners. We are also in the process of restarting the 135000 barrel per day Gulf Coast Fractionator in Mont Belvieu, which we expect to be operational in the first quarter of 2024.

Beyond those projects already announced and in progress we are evaluating when we will need additional gas processing capacity in the Permian and we are ordering long lead time items for our next Midland plant.

We believe our organic growth opportunities create value for targa and our investors over time as we have demonstrated strong returns over the last five years as you can see from slide four in our earnings supplement presentation, we generated an attractive 26% return on invested capital since 2017 despite.

Volatile commodity price backdrop over the last several years.

For our recent major capital projects, we have invested at a low single digit multiple of EBITDA as the immediate high utilization of assets like new gas processing plants have resulted in very attractive returns despite higher build costs from inflation.

Our strong balance sheet and continued investment in high return projects positions us to continue to prudently return and increasingly an increasing amount of capital to our shareholders across cycles, we announced an expectation of a 43% year over year increase to our annualized 2023 common dividend per share.

This morning.

The increased dividend will be recommended to our board in April for the first quarter of 2023 with payment to shareholders.

Our expected 2023 dividend increase reflects a lot of different factors, including our near and long term business fundamentals and balance sheet strength across scenarios flexibility.

Flexibility associated with our increasing size scale and fee based margin and targeted positioning relative to our midstream C Corp peers, the S&P 500, and cyclical industries within the S&P 500.

We also expect to be in position to continue to execute opportunistically under our common share repurchase program, which will allow us to further increase our return of capital to shareholders and reduce our share count over time, we bought back $225 million worth of common shares in 2022 and had about $144 million remaining.

Under the $500 million share repurchase program, we put in place in October 2020.

Our current expectation is we will request board approval to authorize a new $1 billion share repurchase program once we exhaust our existing program.

We believe that we will offer a unique value proposition for our shareholders and potential shareholders growing EBITDA growing dividend and reducing share count.

We expect to continue to set expectations for our annual common dividend each February when we announced our financial and operational guidance and expect to continue to increase our return of capital to shareholders over time. In addition to our standard annual disclosures around our financial expectations. We also included in our Investor presentation. This morning, describing targa.

Across upside and downside commodity price scenarios.

We have spent the last many years focused on increasing our cash flow stability and reducing our volatility to downward moving commodity prices.

As you can see from slide 12 in our earnings presentation relative to our <unk>.

Full year 2023 financial guidance of 30% move higher in commodity prices from our guidance levels would increase adjusted EBITDA by around $100 million, while a 30% decrease would reduce adjusted EBITDA by around $60 million.

This asymmetric risk, where we have significantly more upside than downside across commodity prices continues to be an area of focus at target, where our commercial teams are working really well with our producers and other customers to maintain alignment to be in position to continue to invest across cycles.

As we look forward, we believe that Targa is in excellent position to continue to provide best in class service to our customers and create additional value for our shareholders I will now turn the call over to adjourn to discuss our fourth quarter and full year 2022 results in more detail as well as our expectations for 2023.

Thanks, Matt Good morning, everyone targets reported quarterly adjusted EBITDA for the fourth quarter was $840 million, increasing 9% sequentially as we benefited from our first full quarter of our Delaware Basin acquisition optimization opportunities and recent processing additions across our Permian system. Despite.

Lower commodity prices and operational impacts from winter storm Elliot.

Full year 2022, adjusted EBITDA was $2 9 billion.

<unk>, 41% increase over 2021, driven by record volumes in gathering and processing NGL transportation and fractionation.

Our consolidated leverage ratio at the end of the year was three seven times well within our long term leverage ratio target range.

We spent approximately $552 million on growth capital projects in the fourth quarter and our full year 2022 growth capital spend was one $1 77 billion.

About $30 million of growth capital shifted from 2022 into 2023.

Maintenance capital spend for 2022 was about $168 million.

We repurchased approximately $28 million of common shares in the fourth quarter and as Matt mentioned had approximately $144 million remaining under our $500 million share repurchase program at year end.

In early January we announced and shortly thereafter closed our acquisition of the remaining 25% interest in our Grand Prix NGL pipeline for approximately 1.05 billion.

The acquisition price represented an 875 times multiple of Gran <unk> estimated 2023, adjusted EBITDA, which we believe was an attractive purchase price with a 100% ownership of Grand Prix, including our Daytona pipeline expansion, we benefit from having significantly more operational flexibility and also near and <unk>.

<unk> term capital synergies.

We funded the Grand Prix acquisition through a successful $1 75 billion offering of 10, and 30 year senior notes and used the incremental proceeds to reduce borrowings on our revolver.

Currently have about $2 5 billion of available liquidity, which provides us with a lot of flexibility looking forward.

Turning to our expectations for 2023 as Matt described in his remarks, we really are very excited about the continued momentum at Targa. We estimate full year 2023, adjusted EBITDA to be between three five and $3 7 billion, a 24% increase over 2022 based on the midpoint of our range.

Assuming commodity prices of $2 25 per annum Btu for Wahaha natural gas 70 cents per gallon for a weighted average NGL barrel and 70 to $75 per WTS crude oil barrel.

We are well hedged across 2023 and beyond and are benefiting from significant additional fee based margin year over year.

We expect significant margin benefit in the first quarter from increased LPG exports natural gas and natural gas and NGL marketing optimization opportunities. Please see the additional disclosures that we added to our investor presentation. This morning on sensitivities to commodity price changes and our hedges.

We currently estimate between $1 8 billion and $1 9 billion of growth capital spending based on announced projects and other identified spending and $175 million of net maintenance capital spending.

Operationally high activity levels continue across our dedicated acreage in the Permian.

Our reported full year 2023 average Permian basin natural gas inlet volumes are projected to increase about 10% over average fourth quarter 2022, Permian inlet volumes.

There is no change to the estimated in service dates of our plants under construction with the legacy <unk> and Midway plant expected in service in the second quarter of 2023 Greenland in service late in the fourth quarter of 2023 and Wildcat to in service in the first quarter of 2024.

As Matt mentioned, we are also moving a plant acquired in our South Texas transaction to the Permian, Delaware, which we are calling roadrunner too and expect in service in the second quarter of 2024.

The significant increase in Permian Basin volumes is expected to result in record NGL transportation and fractionation volumes in 2023, there is no change to the expected in service dates of our major downstream projects with train nine expected to be complete in the second quarter of 2024, and the Daytona NGL pipeline complete by the end of 2020.

Four.

DCF will provide some much needed help on the fractionation side and we expect it fully restarted in the first quarter of 2024.

We will also benefit from the mid 2023 completion of our project at our Galena Park LPG export facility, which will increase our propane loading capabilities by about 1 million barrels per month, we are well contracted across our export facility and are estimating that 2023 will be a record year for LPG export volumes for Targa as well.

We expect to pay an annualized common dividend in 2023 of $2 per share and have the flexibility to continue to use our common share repurchase program opportunistically to return incremental capital to shareholders through the year.

Our balance sheet is strong with leverage near the midpoint of our long term leverage ratio target range of three to four times and we expect to end 2023 around the midpoint of our range, providing continued flexibility for target going forward.

Lastly, I would like to Echo, Matt and extend a thank you to our employees for their continued focus on safety safety, while executing on our strategic priorities and continuing to provide best in class services to our customers and with that I will turn the call back over to Sandy.

And as a reminder, simply press star one on your telephone to get into Q1 moment, while we compile the Q&A roster.

Okay.

And we have our first question from the line of Jeremy Tonet with JP Morgan. Please proceed.

Hi, good morning.

Hey, good morning, Germany.

I wanted to touch on the 23 guide and I want to touch on three components to it if I could.

Just wondering as far as our Permian volume growth I'm just wondering.

The growth seems very strong here do you see yourselves growing faster than the based on your acreage or do you see yourself taking market share just curious on the drivers of the strong Permian growth. There and then also I guess the.

Drivers what are the drivers behind marketing optimization stepping up in LPG exports stepping up just color on those points would be super helpful.

Yes sure Jeremy.

On the Permian growth, yes, we are seeing significant activity across our acreage both in the Delaware and the Midland.

So part of that relates to the recent acquisition that we made there is a lot of activity and frankly exceeding our expectations towards the opportunities. There I know Pat you want to give some additional color on what we're seeing firming sure.

You think about this year versus last year, you started January and February with basically 50 more rigs than what you had last year.

<unk> for the remainder of the year, but obviously off to a better start than what we saw last year then.

And then when you look historically, how target performed in the Midland Basin, we always have outperformed the average gross growth across the Midland Basin.

We performed well in the Delaware basin, but lucid on the other hand significantly outperform the average growth in the Delaware Basin.

So with that asset in our Delaware side of our overall Permian portfolio we.

The best performing assets on the Midland side of the best performing assets on the Delaware side.

<unk>, coupled with the rigs currently running on that acreage.

Your line of sight with a great producer group.

And what they're doing.

We're very in tune with them, we feel very very good about our volume forecast.

And then Jeremy as it relates this is Scott as it relates to the LPG export business and the growth that we're seeing for 2023, just recognize third quarter versus fourth quarter or fourth quarter volumes were up we expect that our first quarter volumes here in 2023 will be up there and then obviously.

With the with the increase in production that we're seeing.

Our integrated platform speaking to what Pat was talking about feeding through our downstream assets, we see opportunities. There for continued growth and that is certainly complemented by the growth that we're seeing across the global marketplaces benefiting on that side as things like the reopening of the Chinese <unk>.

<unk>.

Increased demand for PVH demand in Asia as a result of that we've also seen improvements on the shipping side, because we are seeing new deliveries of Vlccs, which is providing more liquidity on the water and certainly some improvements and efficiencies out of the Panama Canal. So I think the combination of all those which will certainly also.

Benefit with the small expansion that Jim spoke to in her opening comments that.

That will be online mid year that 1 million barrels per month of additional capacity will just complement what we're doing and as Jim also mentioned, we continue to be highly contracted while also feeling comfortable about the available space that we would have to participate in the spot market. When the market presents itself, so that lends flexibility to our customers reliability.

To our customers, while also providing economic benefit to target when when the pricing.

<unk> up at times.

Yes, and just to add to that Scott and Jeremy I know you asked about our optimization.

Our marketing I'd say, we had really good opportunities in the fourth quarter in both NGL markets and natural gas markets as we move a lot of volumes of both products and when there's increased volatility, which we saw in the fourth quarter, we were able to optimize and make some additional margin there and we're off to a strong start in the first quarter as well, which is why we kind of pointed to that in our 2023 guys.

So we're already kind of factoring some of that that has already occurred. This year. So we do expect a strong first quarter because of some of that optimization as well.

Got it great to hear a strong data points across all three components, there and just one last question if I could.

Wanted to touch on capital allocation, a little bit more in you gave some thoughts in the prepared remarks and in the PR, but just wanted to touch on I guess, how you think about that in the future I mean, we had a very nice 43% step up in the dividend here, it's going to be an annual determination going forward, but how do you see can you give any more color on what future years could look like to book and us to make sure.

We don't get off the rails as.

As far as capital spend is concerned is this kind of kind.

Kind of closer to the peak or do you expect this level to persist.

Sure.

Yes, Jeremy on capital allocation.

Our priority within how we want to see.

Spend both organically and return capital to shareholders, we want to start with a strong balance sheet and make sure. We have flexibility to continue to invest and to continue to return capital to shareholders over time.

The good thing about our forecast and what we're showing this year as well.

Think we can do all of that we think we can grow our EBITDA and invest in our business while significantly increasing the dividend.

We did or which we anticipate to do for 2023, I think we have the ability for future significant dividend increases as we go forward just as you look at our EBITDA growth.

Our balance sheet I think we will have some ability to continue to grow the dividend while continuing to buy back shares we were pretty active in 2020 to buying back shares I see us being opportunistic in how we buy back those shares but we have the.

Significant ability to continue to repurchase shares so that is where we see us position growing our EBITDA growing our dividend and reducing our share count over time.

Wonderful. Thank you so much.

Okay, great. Thanks, Jeremy.

One moment for our next question please.

Okay.

And it comes from the line of Brian <unk> with UBS. Please proceed.

Hi, Good morning, everyone, maybe just a follow up on some of the guidance assumptions you talked about the 10% Permian exit to exit growth, which implies just really strong Permian growth once again.

You recently had some plants come online full during <unk> and it seems like plants come on can't come online fast enough with over half a day of capacity coming online next year. So I'm curious of how much of those offloaded volumes coming back on the target system post to look at acquisition is baked into that volume forecast or should we effectively assume those volumes coming back onto the cyst.

Hmm is upside.

Your Permian growth forecast thanks.

Yes.

I would say that we do have some outflows in the Delaware basin.

Minimal on the Midland side.

We just brought up plan up growth.

Got another plant coming up fairly quickly in the next call. It six to eight weeks on the Midland side. So we feel like we're in pretty good shape.

In Midland and there isn't anything currently being offloaded that'll come back onto the system.

On the Delaware side, because lucid was behind in processing capacity, we had some things to do there.

The Red Hills six plan in September frankly, it was immediately full we had existing connections between the target Delaware system.

The elusive system, which we were immediately.

Able to offload 150 million a day into our far west plant complex as the Peregrine Falcon plant and we had available capacity.

We also had contracted some third party offload capacity, which we have retained because frankly the performance of those assets is better than what we had in our acquisition case and I think you can see by what we've announced we've got the Wildcat two plant coming on mid.

<unk> will be that midway that will be that midway point, basically adding capacity and may wildcat too at the end of the year at the very beginning of next year because of the.

<unk> growth in the road runner announcement, right behind that coming on because frankly, we're going to need it.

But.

We've done some things in the meantime, we've increased our ability to move.

The old lucid system, what we call target north Delaware gas into our far West plans, which again, we have available capacity. So over the next let's call. It nine to 12 months, one will fill up the midway capacity, we had a little bit of remaining capacity at Wildcat, we have a suite plant loving thats kind of our.

Wayne plant that will fill up.

And then we'll utilize the offload and the spare peregrine Falcon capacity to get us to the Wildcat to plan and don't forget we have the ability to run our plants over nameplate.

Which can give us another 100 to 150 million a day of incremental capacity.

Great. Thanks, It sounds like there's a significant amount of runway of growth in the Delaware over the year.

As my follow up the last 24 months, we've just seen target integrate and simplify itself in a series of transactions to become the S&P.

500 company. It is today moving forward as you talked about there seems to be a healthy amount of organic growth opportunities within targa and thus given the amount of organic growth backlog.

Should we view the recent Grand Prix M&A is kind of the last piece of simplification for Targa at this time or are there other missing pieces to the portfolio that could use some of that excess free cash.

This is John I don't think that there are any missing pieces to the portfolio. I think we are very pleased with the asset footprint that we have and see significant opportunities for continued organic investment going forward that will help underpin that increasing year over year EBITDA growth that we expect.

The Blackstone acquisition Youre exactly right that in our view was an acquisition, but a simplification as well and I think operationally and in terms of how we invest capital around our NGL transportation assets going forward. It just gives us enhanced flexibility. So we do see that as sort of the final piece of our simplification story.

Going back to beginning with the <unk> and then the Trc preferred repurchase.

Great I'll leave it there thanks for the color and appreciate and enjoy the rest of your day. Thank you. Okay. Thank you. Thank you one moment for our next question. Please.

And it comes from the line of spiral Jonas with Citi. Please proceed.

Thanks, operator, good morning, Jamie.

You have to go back to the commodity sensitivity that and that asymmetry that Matt referenced earlier I guess, it's a bit different than how you guys were traded in the past.

I guess I'm, just curious is that an indication that fee floors could trigger before.

30% down move in commodity prices I know the calculation is probably a bit complex, but just curious how you think.

How youre thinking about the fee floors, and maybe what's embedded in that low end of the guidance beyond the commodity move down.

This is Jen we're really proud of the efforts of our commercial teams over the last many years to put in fee floors really across our gathering and processing businesses and part of what we wanted to provide today was additional information that indicates that the targa today, it looks very different than the target of several years ago and a big reason for that.

That is the key for us that we have in place.

So we tried to publish was that if you had a significant move downward in commodity price as it would be call. It a 30% down move would be about a $60 million impact to our 2023 adjusted EBITDA and I think that is again reflective of not only the fee for us, but we also just have a lot more fee based margin now.

Both on the logistics and transportation side, which is essentially all fee based margin and then also on the gathering and processing side, where the lucid acquisition was the latest element of fee based margin that we brought into the portfolio. So I really think it's a combination of a number of factors that we think demonstrates that targa is downside exposure is.

Secondly, reduced today than what it was previously and Thats all enhanced by our hedging program that really hasnt changed over the last several years, but I do think that it's realistic to assume that in a 30% leg down in commodity prices across the board versus what we had in our guidance the fee floors would all be in play at that point.

Okay got it that's helpful. Thanks for that Jen <unk>.

Maybe just to go back to the volume growth. It sounds like it is exceeding expectations and a lot of discussion. So far has been around the processing plants and John I know you mentioned that all the in service dates for expansion, indicating Daytona.

Still in place, but I guess on my math just based on some of this discussion it would seem like.

Grand Prix is going to get pretty tight potentially before Daytona could come online. So I'm. Just curious is there an ability to bring that on sooner or in phases or do you have any sort of bridging solution if that gets tighter than expected.

Spiro. This is Scott first off I would say that when we look at Grand Prairie we've been on.

Obviously the success of that is evident in the continued growth that we'll see in the Permian will feed into that.

<unk> recognized that as we enter into 2023, we've got some additional pump stations that will commission throughout 2023, probably more heavily in the first half of this year versus the back half of the year.

And during that timeframe, we would push our overall capacity up to what we call our nameplate of roughly 550000 barrels a day just on the west leg alone.

We feel comfortable that we can likely operate above that call. It in the 600000 barrel a day range.

And then we will certainly be expediting as quickly as we can the installation of the Daytona pipeline fourth quarter of 2024 is kind of where we're at with that were calling at the end of 2024, but we will be working hard to make sure we get that online as quickly as possible in the interim if we do have some situations, where we need to offload capacity, we've got a number.

The plants that are connected to multiple pipelines and they are not solely dependent upon just the Grand Prix pipeline. So we feel as though we've got a lot of flexibility to manage through it we certainly want to make sure that its preferred that the volumes are moving on our pipelines.

But we've got some opportunities to to manage through that if necessary if the volume growth exceeds our expectations.

Great I appreciate all the color today guys. Thank you.

Okay. Thank you.

One moment for our next question please.

And it comes from the line of Theresa Chen with Barclays. Please go ahead.

Good morning.

Love to get your take on <unk> outlook, given the tightness that we're seeing evidence of anecdotes.

Have tightened in the Gulf Coast meeting most recently from the restarted announcement at Gcs and would you mind, giving us an update of your outlook on utilization for that part of the value chain in general.

The outlook for the purity products, maybe touching on combat LPG export commentary what are you hearing from your customers what are your general expectations for demand for ethane and LPG.

Again this is Scott so when we look at the fractionation complex that we have certainly bringing on gcs.

The partnership has agreed to restart that will start we expect to commission that in the first quarter of 2024 and that'll be needed capacity.

I will say that when you look at our volumes that we had from third quarter to fourth quarter of 2022.

Those probably don't illustrate exactly the volume growth that we're seeing over time across our various assets and alluding to the comments that Pat made as it relates to our growth on the GMP side of our business. We did have some planned and unplanned outage.

At our facility during during the fourth quarter, which really basically is behind US now so we feel as though that we should be at or basically at our full complement of fractionation capacity going forward.

And some of that when you look at the impacts of that were also impacted by by Winter Storm Elliot.

We obviously have substantial amount of storage that allows us to manage the influx of products on the inbound side, whether it's Y grade spec products as well as on the outbound side. So we feel very comfortable with that but certainly the additive of train nine coming on.

In the second quarter of next year will be an important piece of the pie for us from a fractionation perspective as it relates to the distribution of products on the spec side.

Certainly products of inflow of product coming into us.

<unk> export facility that we have at Galena Park is a very important integral piece of our platform that we have today for propane as well as butane.

And.

Again, what we mentioned earlier with the small expansion we have that provides us additional capacity there and so we feel very comfortable with our with our expectations on that side.

As it relates to ethane.

Certainly the market continues to pull on the ethane molecule. We've had a number of pet chem expansions that have been announced recently new.

New expansions have come online over the course of the last two years.

Our team has done an excellent job as we've added fractionation capacity as we have future expansions that are coming online. The team has done an excellent job of increasing our connectivity to the downstream petrochemical market to make sure that we can clear that ethane molecule.

So we view that that is a continuation of that and I think the pet Chem industry is starting to really get more on solid footing as it relates to improvements in the global economy.

Going forward, we look look good for us.

Thank you.

John I wanted to go back to your comments about the breakdown between fee based versus commodity based margin and now that you are 85% in base as you bring online incremental processing capacity.

Embedded waste contract escalators over time, Deforest et cetera, how do you think this breakdown evolves.

With the asymmetrical risk that you currently see within that 60% band do you see that becoming more favorably skewed and going forward I think lately and more before it then general fee based margin.

I think that we have demonstrated our commitment to our producers to continue to invest capital and infrastructure to support their drilling activities, but in order to do that we need to have protections in place that we will get at least a minimum rate of return on that invested capital and so I think that we have seen good support in our areas.

Where we are spending capital to put in <unk> and we are trying to bring that to other basins as well as contracts come up for expiration or are there as a catalyst for a renegotiation and I do think it creates excellent and alignment for us to continue to invest and benefit from higher commodity prices, but have a little bit of production in <unk>.

In a lower commodity price environment, I think it's difficult to see us going from 85% fee based margin to 100% fee based margin just by the nature of our assets I think we're also very comfortable with the commodity price exposure that we have particularly if it can be with a fee for a structure in place. So I think that's the trend that will continue for us.

And our commercial teams have really done a great job of putting those fee floors in place when they have had the opportunity to do so and so I believe that that will continue to be a big point of focus for us, but it's difficult to predict what that means in terms of where fee based margin goes in the future, but I would expect that we will continue to have more margin protected with the FIFA.

Our structure.

Thank you.

Thank you and one moment for our next question. Please.

Okay.

And it comes from the line of Colton Bean with Tudor Pickering, Holt and company. Please proceed.

Good morning, So the transport and Frac unit margins were up materially relative to Q3 any drivers in that apart from lower Opex and was there a mix shift.

Based on the origin or any contracts on the ground and then between the two transporting frac any waiting in terms of the margin uplift.

Yes sure Heiko.

We really benefited from a couple of things there we had as I mentioned before some optimization just related to our marketing activities in both NGL marketing and gas marketing, but let Scott also mentioned is our fracs or we had some planned and unplanned maintenance we were bringing in more fractionation volumes and we were able to fractionate. So here in the <unk>.

First quarter those are behind us and we'll be operating closer to the nameplate. So we had the opportunity there build inventory or to do some off loads. So we were able to execute some offload that cheaper rates than our overall TNF. So it kind of creates a margin spread for us even though our volumes did move up as much. So I would say we have more volumes coming in and kind of what was reported because thats what.

We actually frac, but we're able to do some third party offload that.

That work is really behind us. So we have more capacity now in Q1, so that is for us, creating a little bit more flexibility in terms of the overall frac market.

And with other Fracs coming on in 2023, we see some looseness in 2023 in the Frac market. So we will be able to I think be in good position ahead of gcs startup and train nine coming on but its really a combination of all of those things.

Okay. So it sounds like it was more concentrated on the frac side and relatively stable for transport.

Yes.

I think that's about right.

Great and then on Opex. So Q4 was relatively flat the GNP and actually down in logistics.

You see you're expecting continued increases as you get a full quarter of lucid and higher overall activities. So just it was Q4 or more of a structural shift in your outlook or should we still expect that step up in expense levels heading into 2023.

Gordon This is Jen what tends to happen is through the year, we overestimate what our AD Val costs may end up being just because we generally tend to forecast conservatively and so as those costs come in throughout the year. It means that after in fourth quarter Opex for <unk> steps down a little bit versus prior quarters on that front. So that was a benefit.

For us in the fourth quarter and then our teams have also done just an excellent job of managing our operating expenses as well within the fourth quarter. We did have opex associated with winter storm Elliot, which our teams did a great job of managing through we will actually have a little bit of Opex that comes into the first quarter related to winter storm Elliot, but it's also.

To really well management, particularly on the G&P side, where we did have the step up or expected step up from the <unk> acquisition, and then managed it very very well on the downstream side. We had the benefit also of lower AD valorem costs in the fourth quarter and we also had repairs and maintenance in the third quarter that Scott mentioned and so there was a.

Step down there just because we did not have those repairs and maintenance in the fourth quarter those were one time.

Great appreciate the time.

Thank you okay. Thanks, Rob.

Thank you one moment for our next question. Please.

And he comes from the line of Keith Stanley with Wolfe Research. Please go ahead.

Hi, good morning, Thank you.

Just wanted to start on commodities and hedges, so if I compared the hedge prices for 2023 to the forward curve where it sits.

Are your hedges now in the money would you say for this year and so additive to EBITDA or are they below market still.

Asking across commodities just to try to give a better picture of where an unhedged outlook might be for 2023 versus the $3 5 billion to $3 7 billion guidance.

On the hedge disclosures that we gave this morning on the natural gas side, that's aggregated swaps across everywhere that we hedged. So I'd say that the majority of those hedges are wahaha swaps, where we actually would say that wahhab prices for a balanced 2023 are now lower than where we have hedged.

So it's a little bit of a mixed bag, depending on each basis point that we hedge to and the swaps that we have in place there.

On the NGL side, I think where prices are right now is really since the beginning of the year. We've seen NGL prices that are a little bit higher than where we have hedges in place. We'll just have to see how that plays out for calendar 2023 and will be continuing to layer in hedges as we move through time, and then our exposure to <unk> Ti crude prices just isn't that significant but <unk>.

<unk> are a little bit lower I think today than where it is where we've got our hedge prices hitting.

Okay. So overall big picture your Youre, a little above market on gas a little below on Ngls and crude but.

Net net it doesn't sound like the hedges.

Materially change what the EBITDA outlook is for the year.

Yes, I think Thats fair.

I'd call it.

North of $400 million of hedge losses in 2022, and we said that we were hedged at higher prices. This year. So I articulated that that was a tailwind for 2023 relative to 2022, and then when we think about where hedges are relative to where prices sit today, maybe a little bit of a tailwind, but we'll have to see how it plays out through the year.

Got it okay.

Thank you.

Second question was just on.

The Capex guidance are you baking in any spend for unannounced plants or other likely future spending and related to that just how are you thinking about the potential need to start work on a frac 10 before the end of this year or is that now pushed out into 2024 with the gcs.

Yes, sure so for US we have the five plants that we have announced and I also said in the script. We are ordering long lead time items for another plant in the Permian Midland. So we factored in some of that Capex.

The end of this overall guidance.

So it really depends on when we greenlight that and say, okay. We are going forward with it so there could be some additional shift of capital.

<unk> Green light that plant sooner rather than later.

I'd say right now we are evaluating even though we're adding wildcat too and Roadrunner too we are evaluating potentially another plant out in the Delaware. So we're going to see kind of how the first part of this year plays out and if we need to.

Go forward with another plant sooner rather than later right now thats not factored in we're evaluating we have a lot of plants coming on between the midway Wildcat to Roadrunner have some offload capability. So we'll try and be capital efficient there, but we kind of have our eye on.

When we're going to need another plant in the Delaware as far as Frac train 10, again, I think lets see how volumes kind of play out this year and what producers are saying for next year. We have trained nine coming on we have gcs coming on but we are talking about wind when we're going to need trained that when you have kind of 10 ish percent growth on the.

The footprint that we have that significant amount of Ngls moving through.

Grand Prairie moving into our Frac. So I'd say, we're having discussions on when we're going to need to add train 10, and we're trying to kind of evaluate that as the year plays out.

Thank you.

Okay. Thank you.

Thank you one moment for our next question. Please.

And it comes from the line of Neel Mitra with Bank of America. Please proceed.

Hi, Good morning, I was wondering if you could speak to the capital associated with Whats moving road runner to the Delaware, how that would compare to a newbuild and then.

Where would you be moving that plant.

Delaware.

Where are you seeing that pocket of growth that would require that that plant to be moved there.

Yes, sure what's great about where we're moving that is connected to our existing footprint. So the road runner two will be right next to the road runner one plant, which was part of the lucid acquisition. There was a red Hills complex in the road runner, which will now be a complex when we add that add that there.

The overall capital flat at about 120, or so million for that move. So it is capital efficient relative to just doing a newbuild. The new builds are say closer to $175 million give or take.

Those are the new builds are about $275 million. The road runner move is about call. It 230, or so million. So you get a little more capacity on the new build but it's still on a per unit basis, a little bit better for the move and timing being able to move it does help our timing as Pat mentioned, we're getting.

Getting tighter on capacity out there so moving it is quicker than just putting a newbuild out there.

Okay. So just to clarify this would be for.

The lucid acreage and wouldnt necessarily connect to Grand Prix.

Is that fair.

What's interesting is what's the lucid acreage, we're starting now with all Targa and its really get mixed when you talk to producers as it.

Targa system, it's all becoming really quickly all one system out there.

And sorry, Bob do you want to add some color on that I.

I was just going to say also when you think about the scale of the system in the Midland Basin.

The fungibility across.

The aerial extent of it you don't exactly drop a plant right on top of acreage that you see coming because we can move volumes across the entire system. So as we start to build out the Delaware in the same manner such that we are putting plants generally speaking where we see growth.

All the growth doesn't have to happen right on top of there because of the fungibility of that system integration will lose assets that we bought into our existing asset footprint with the big <unk>, we did with Chevron several years ago.

Creates fungibility such that that's a convenient place in a fast paced but.

But it also is gaskets welcome lots of different spots to that client.

We're also working to connect Roadrunner and integrate that system into Grand Prix.

We're building that line now.

Got it and then if I could just follow up on on Grand Prix seems like.

For the second half of 'twenty two volumes were relatively flattish and then now early <unk> you had some ethane rejection and that slipped to recovery maintenance and weather should.

Should we see.

Step up back in kind of <unk>.

Or are there any other kind of lingering issues on granite training the volumes for you.

Start stepping back up to kind of be consistent with the processing growth.

Yes, we expect volumes to start moving moving higher here as we get into the year, what you'll see there is grand Prix the mix between Permian and our North language goes up into Oklahoma, We've seen continued growth on our west leg.

Have seen volumes move south a little bit kind of battle.

Not as much strength there have you seen in the Permian.

Relatively flat, but we are already seeing it frankly at the start of this year, we're seeing volumes move higher and Thats, what we would expect in Grand Prairie as we move through the year pretty pretty strong growth there and I would also just add Matt that we've got the second half of this year. We've got some third party contract contribution that'll be coming in from the north leg more of the back half of the year. So youll see.

Those volumes starting to ramp up for deliveries into Bellevue as well and.

So we touch on every quarter of growth for Grand Prix in the second quarter, we will have legacy II coming online and then the additional capacity available at midway So those will be a nice catalyst in the second quarter.

Got it thank you for all the color.

Thank you one moment for our next question.

Okay.

And it comes from the line of John <unk> with Goldman Sachs. Please go ahead.

Hey, thanks for the time.

Wanted to just sit on Permian growth from other half second.

Clarify one comment from before were you, saying that the.

The growth outlook right now so 10% off of fourth quarter 2002 assumes no incremental rig adds off of what we've seen so far through February thats. The first part and then second I'd love to just hear how you're thinking about the other basins relative.

Relatively less gas drove an exposure of course, but we're seeing a slowdown as elsewhere. So curious what your view on maybe the Barnett and other slipped luck.

Thanks.

Yeah I'll hit the first one and then <unk> come out in the second yes.

We were not specific on the rig adds.

We do a bottoms up build with our producers in both Midland and Delaware and there is a combination of some folks adding in doing more in some doing less are shifting so it's an aggregate of all of those we don't we haven't given one number and said it assumes rig adds or takeaways. It's a bottoms up build but we also kind of do a top down and say how they performed.

The history and then what do we really expect.

To do so it is kind of the usual way we do.

Our forecast on that and then Pat you want to hit on other basis.

Sure.

We will start in Oklahoma.

We've seen frankly good activity.

And both our south Oklahoma in.

Our western Oklahoma areas, good activities relative to let's call it a loss.

Three four years prior to that obviously, there was a lot of activity, but enough. So that we were able to offset decline.

Thankfully in southern Oklahoma, We show.

Basically flat and frankly that includes a pretty significant chunk of volume rolled off under a contract and we were able to fill that back end behind so we are seeing some activity there.

<unk>.

North, Texas, we have.

Volume growth on our system.

And we continue to see drilling activity, certainly and frankly, southern Oklahoma are more sensitive to gas prices.

So.

We have expectations at the beginning of the year here that will get incremental volumes. There are planned drilling on our system throughout the year will ultimately see how those pan out.

And upon commodity prices and the decisions of those producers.

Our south Texas activity has been very good.

The addition of.

The South cross assets and <unk> capabilities there.

Out of the level of drilling activity and some of our contracts that originally underpinned the assets. Those producers are active so we've seen benefits in volumes for from both of those.

Sure.

Kind of.

Types of producers so.

We feel good about volume growth there, but its not significant in the overall scheme of things.

<unk> same thing.

Good steady pace of drilling so.

Good replacement of crude oil and natural gas are we going to say hey, we're going to significantly grow in that basin or are we going to hold our own and see some slight growth problem yes.

Alright, that's great. Thank you for all that and maybe just one last one from me on Capex. Just curious if you could talk a little bit about any inflation pressure, you're still seeing flowing through.

Whether that's on the plants are on kind of gathering compression side, just anything kind of directionally, there and how we can kind of think about that going forward. Thanks.

We are seeing some higher cost whether it's compression pipelines are just larger facilities, we're putting in place and that's a part of the capex to that.

Included in the 1819 this year is us with longer lead times on some of the assets. We are buying some compression right now which is longer lead time, which is actually for 2024.

So part of it is us getting ready because we know theres going be future growth next year is long lead because lead times have been extended as pushing some more capex into this year as well. So part of it has been inflation part of those I was trying to get ahead of kind of some of the supply chain disruptions and lead time.

Growth.

Alright, Thanks for your time I appreciate it.

Thanks, Ron Thank you one moment for our next question. Please.

Okay.

Hello moment, please for having technical difficulties from this side.

Alright, and our last question for today will be from Sunil Sabal with Seaport Global. Please proceed.

Yes, hi, good morning, everybody.

Hey, so I wanted to.

Just wanted to get a little bit of clarity on the returns on investments.

Thank you.

Two years back you had talked about five to seven the next kind of an EBITDA multiple.

Gathering and processing.

Capital spend I was curious you know how that has changed.

In the current environment.

I think we've actually seen an improvement in those returns partially because as a result of I think being very capital efficient when we bring new projects online they tend to be very well utilized particularly on the gathering and processing side. So we've actually seen them.

Turns improve just as a result of utilization as we tried to get plants constructed as quickly as possible, but as Pat mentioned, sometimes have to operate the system overcapacity prior to a new plant coming online <unk> utilized third party offloads that means that once the new plant is online it tends to be very highly utilized.

Or at least that has been our very recent history and so I think thats driving returns lower on that side of the business returns higher on that side of the business of multiples lower sorry.

Yes.

Just to add to that I think as we think about going forward five to seven is still kind of what we think about how we would articulate returns we were able to execute better than that if you look back over the last five years closer to four times and also part of that is we were successful at investments like for example, Gtx, we invested and we saw that at a significant multiple of <unk>.

Capital is a really good return for us and that kind of nets into the Capex number. So we had some one time items like that which also helped drive that higher but I think five to seven is a good kind of planning case, and we'll of course try to beat that through optimizing.

But five to seven is good good planning case.

Okay. Thanks for that and then one clarification I think.

In the past you've talked about.

Spend on the comp.

Compression and pipeline being minus two one but the new build cost.

Assessing plant cost so I think on the previously in the call you said $175 million is what the new typical processing plant is costing so is that one is the one time goes to four.

The capital to fill up the plant.

Yes.

I think.

Over time, that's a reasonable assumption I would say now what we have been seeing recently is potentially even a little bit more capital efficient than that but maybe maybe a little bit last night. Some of our producers are being more efficient with where they are drilling so.

But it can vary from year to year. So I'd say, that's not an unreasonable assumption maybe I'll take the under on that maybe it's a little bit less gathering and compression versus the 175 to fill up a plant, but it can vary from year to year as well.

Got it thanks for that and congratulations on a good print.

Thanks, Okay. Thank you.

Thank you ladies and gentlemen, this concludes our Q&A session I will turn the call back to Sanjay Lad for final remarks.

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

Thank you and everybody. This concludes today's conference call. Thank you for participating and you may now disconnect.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good day, and thank you for standing by and welcome to the Targa resources fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to Chris.

One one on your telephone.

Within a year and automated message advising Johan is race to withdraw your question. Please press star. One again also be advised that today's conference is being recorded I would now like to hand, the conference over to the Vice President of Finance and Investor Relations Sanjay.

Please go ahead.

In addition, an updated investor 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 statements within the meaning of section 21 E of the Securities Exchange Act of $19 34 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.

The following senior management members will be available for Q&A, Pat Mcdonald, President gathering and processing, Scott Pryor, President logistics, and transportation and Bobby Morocco, Chief Commercial officer.

With that I'll now turn the call over to Matt. Thanks, Sanjay and good morning to everyone 2022 was an excellent year for Targa and I would like to recognize and thank our employees for their focus dedication and execution.

Some of our highlights from 2022 include record safety performance based on multi year low total recordable incident rate <unk>.

Record gathering and processing volumes in the Permian record volumes across our logistics and transportation assets.

Adjusted EBITDA of $2 9 billion or 41% increase over 2021, while also reducing our share count.

Major projects came online on time on budget and had been highly utilized in startup.

Execution and successful integration of our Delaware Basin acquisition, and our South Texas acquisition.

Execution of our corporate simplification with our Dev co repurchase and preferred share redemption.

Festival sale of our 25% equity interest in Gulf Coast Express pipeline for approximately 11 times EBITDA.

We expect our momentum to continue through 2023 and beyond given the strength of the business fundamentals underpinning our assets.

There is a continued need for critical midstream infrastructure like targets to balance.

Link cost advantaged U S production to domestic and global markets.

Global events have underscored the critical nature of safe reliable and affordable fossil fuel to support everyday life domestically and around the world.

Cost advantaged basins like the Permian, where we are the largest gatherer and processor of natural gas will continue to be a key supplier of hydrocarbons for decades to come.

Our early January offering of 10, and 30 year senior notes that funded the Grand Prix acquisition and reduced floating rate borrowings on our revolver and within this morning's release, our operational and financial estimates for 2023, which are expected to be records across many fronts, including an estimated 24% increase in year.

Over year adjusted EBITDA.

And an expected 43% year over year increase to our 2023 annualized common dividend per share versus last year.

For 2023, we estimate that our adjusted EBITDA will be between $3 5 billion and $3 7 billion.

The significant year over year increase in adjusted EBITDA is driven by higher expected gathering and processing volumes higher expected NGL transportation and fractionation and export volumes higher expected marketing optimization and LPG export opportunities.

Fees from contract escalators, a full year contribution from our Delaware Basin, and South Texas acquisition contribution from our acquisition of the remaining 25% interest in Grand Prix and higher hedge prices.

Related to capital allocation, maintaining a strong investment grade balance sheet cross cycle continues to be a priority at target.

We also have attractive opportunities to continue to invest organically, which we believe will support the continued creation of significant shareholder value over time.

We currently estimate between one eight and $1 9 billion of growth capital in 2023, as we build infrastructure that we expect to be highly utilized across our footprint.

Our major projects in progress are core to our business five new Permian gas processing plants train nine fractionator and our Daytona NGL pipeline.

Along with our partners. We are also in the process of restarting the 135000 barrel per day Gulf Coast Fractionator in Mont Belvieu, which we expect to be operational in the first quarter of 2024.

Volatile commodity price backdrop over the last several years.

For our recent major capital projects, we have invested at a low single digit multiple of EBITDA as the immediate high utilization of assets like new gas processing clients have resulted in very attractive returns despite higher build costs from inflation.

Sure good morning.

The increased dividend will be recommended to our board in April for the first quarter of 2023 with payment to shareholders.

Our expected 2023 dividend increase reflects a lot of different factors, including our near and long term business fundamentals and balance sheet strength across scenarios flexibility.

<unk> associated with our increasing size scale and fee based margin and targeted positioning relative to our midstream C Corp peers, the S&P 500, and cyclical industries within the S&P 500.

Under the $500 million share repurchase program, we put in place in October 2020.

Our current expectation is we will request board approval to authorize a new $1 billion share repurchase program once we exhaust our existing program.

We believe that we will offer a unique value proposition for our shareholders and potential shareholders growing EBITDA growing dividend and reducing share count.

In addition to our standard annual disclosures around our financial expectations. We also included in our Investor presentation. This morning, describing targa across upside and downside commodity price scenarios.

We have spent the last many years focused on increasing our cash flow stability and reducing our volatility to downward moving commodity prices.

As you can see from slide 12 in our earnings presentation relative to our full year 2023 financial guidance of 30% move higher in commodity prices from our guidance levels would increase adjusted EBITDA by around $100 million, while a 30% decrease would reduce adjusted EBITDA by around $60 million.

Asymmetric risk, where we have significantly more upside than downside across commodity prices continues to be an area of focus at target, where our commercial teams are working really well with our producers and other customers to maintain alignment to be in position to continue to invest across cycles.

As we look forward, we believe that Targa is in excellent position to continue to provide best in class service to our customers and create additional value for our shareholders I will now turn the call over to Jim to discuss our fourth quarter and full year 2022 results in more detail as well as our expectations for 2023.

<unk> prices and operational impacts from winter storm Elliot.

Full year 2022, adjusted EBITDA was $2 9 billion.

41% increase over 2021, driven by record volumes in gathering and processing NGL transportation and fractionation.

Our consolidated leverage ratio at the end of the year was three seven times well within our long term leverage ratio target range.

We spent approximately $552 million on growth capital projects in the fourth quarter and our full year 2022 growth capital spend was one $1 77 billion.

About $30 million of growth capital shifted from 2022 into 2023.

Maintenance capital spend for 2022 was about $168 million.

In early January we announced and shortly thereafter closed our acquisition of the remaining 25% interest in our Grand Prix NGL pipeline for approximately $1.05 billion.

Longer term capital synergies.

We funded the Grand Prix acquisition through a successful $1 75 billion offering of 10, and 30 year senior notes and used the incremental proceeds to reduce borrowings on our revolver.

Currently have about $2 5 billion of available liquidity, which provides us with a lot of flexibility looking forward.

Assuming commodity prices of $2 25 per M. M. Btu for Wahoo on natural gas 70 cents per gallon for a weighted average NGL barrel and 70 to $75 per WTS crude oil barrel we.

We are well hedged across 2023 and beyond and are benefiting from significant additional fee based margin year over year.

We expect significant margin benefit in the first quarter from increased LPG exports natural gas and natural gas and NGL marketing optimization opportunities. Please.

Please see the additional disclosures that we added to our Investor presentation. This morning on sensitivities to commodity price changes and our hedges.

We currently estimate between $1 8 billion and $1 9 billion of growth capital spending based on announced projects and other identified spending and $175 million of net maintenance capital spending.

Operationally high activity levels continue across our dedicated acreage in the Permian Our reported full year 2023 average Permian basin natural gas inlet volumes are projected to increase about 10% over average fourth quarter 2022, Permian inlet volumes.

There is no change to the estimated in service dates of our plants under construction with the legacy <unk> and Midway plant is expected in service in the second quarter of 2023 Greenland in service late in the fourth quarter of 2023 and Wildcat to in service in the first quarter of 2024.

Matt mentioned, we are also moving a plant acquired in our South Texas transaction to the Permian, Delaware, which we are calling roadrunner too and expect in service in the second quarter of 2024.

DCF will provide some much needed help on the fractionation side and we expect it fully restarted in the first quarter of 2024.

Yes.

Lastly, I would like to Echo, Matt and extend a thank you to our employees for their continued focus on safety safety executing on our strategic priorities and continuing to provide best in class services to our customers and with that I will turn the call back over to Sandy.

Thanks, Ken for the Q&A session. We kindly ask that you limit to one question and one follow up and re enter the lineup. If you have additional questions. Carmen would you. Please open the lines for Q&A. Thank you and as a reminder, simply press star one on your telephone to get into Q1 moment, while we compile the Q&A roster.

Okay.

And we have our first question from the line of Jeremy Tonet with Jpmorgan. Please proceed.

Hi, good morning.

Hey, good morning, Germany.

I wanted to touch on the 23 guide and I wanted to touch on three components to it if I could.

Just wondering as far as our Permian volume growth I'm just wondering.

And then also I guess the drivers what are the drivers behind marketing optimization stepping up in LPG exports stepping up just color on those points would be super helpful.

Yes sure Jeremy.

On the Permian growth, yes, we are seeing significant activity across our acreage both in the Delaware and the Midland.

So part of that relates to the recent acquisition that we made there is a lot of activity and frankly, it's exceeding our expectations for the opportunities. There I know Pat you want to give some additional color on what we're seeing in Permian sure.

Do you think about this year versus last year, you started January and February with basically 50 more rigs than what you had last year the levels for the remainder of the year, but obviously off to a better start than what we saw last year.

Then when you look historically of how target performed in the Midland Basin, we always have outperformed the average gross growth across the Midland Basin.

We performed well in the Delaware basin, but lucid on the other hand significantly outperform the average growth in the Delaware Basin.

So with that asset in our Delaware side of our overall Permian portfolio.

We have the best performing assets on the Midland side of the best performing assets on the Delaware side.

That coupled with the rigs currently running on that acreage.

Our line of sight with great producer group.

And what they're doing and we're very in tune with them, we feel very very good about our volume forecasts.

Was the increase in production that we're seeing.

On our integrated platform speaking to what Pat was talking about feeding through our downstream assets, we see opportunities. There for continued growth and that is certainly complemented by the growth that we're seeing across the global marketplaces benefiting on that side as things like the reopening of the Chinese.

Marketplace.

Benefit with the small expansion that John spoke to in her opening comments.

To our customers, while also providing economic benefit to target when when the pricing.

Arms up at times.

Yes, and just to add to that Scott and Jeremy I know you asked about our optimization.

So we're already kind of factoring in some of that that has already occurred. This year. So we do expect a strong first quarter because of some of that optimization as well.

Got it great to hear a strong data points across all three components, there and just one last question if I could.

Wanted to touch on capital allocation, a little bit more in you gave some thoughts in the prepared remarks and in the PR, but just wanted to touch on I guess how are you.

Think about that in the future I mean, we had a very nice 43% step up in the dividend here, it's going to be an annual determination going forward, but how do you see can you give any more color on what future years could look like to book and us to make sure we don't get off the rails.

As far as capital spend is concerned is this kind of high kind of closer to the peak or do you expect this level to persist.

Sure.

Yes, Jeremy on capital allocation, our priority within how we want to spend both organically and return capital to shareholders. We want to start with a strong balance sheet and make sure. We have flexibility to continue to invest and to continue to return capital to shareholders over time, the good thing about our forecast and what we're showing this year is.

We think we can do all of that we think we can grow our EBITDA and invest in our business, while significantly increasing the dividend, which we did or which we anticipate to do for 2023, I think we have the ability for future significant dividend increases as we go forward just as you look at our EBITDA growth strong balance sheet. I think we will have some ability to continue to grow the dividend while <unk>.

<unk> to buy back shares we were pretty active in 2020 to buying back shares I see us being opportunistic in how we buy back those shares but we have the.

Significant ability to continue to repurchase shares so that is where we see us position growing our EBITDA growing our dividend and reducing our share count over time.

Wonderful. Thank you so much.

Thanks, Jeremy.

For our next question please.

And it comes from the line of Brian <unk> with UBS. Please proceed.

Hi, Good morning, everyone, maybe just to follow up on some of the guidance assumptions you talked about the 10% Permian exit to exit growth, which implies just really strong Permian growth once again.

You recently had some plants come online full during <unk> and it seems like plants come on can't come online fast enough with over half a bit of capacity coming online next year. So I'm curious of how much of those offloaded volumes coming back on the target system post to look at acquisition is baked into that volume forecast or should we effectively assume those volumes coming back onto the <unk>.

System is upside to your to your Permian growth forecast. Thanks.

Hi.

I would say that we do have some outflows in the Delaware basin.

And minimal on the Midland side, because we just brought up plant upgrades and we've got another plant coming up fairly quickly in the next call. It six to eight weeks on the Midland side. So we feel like we're in pretty good shape.

In Midland and there isn't anything currently being offloaded that'll come back onto the system.

On the Delaware side, because lucid was behind in processing capacity, we had some things to do there.

The Red Hills six plan in September frankly, it was immediately full we had existing connections between the target Delaware system.

The lucid system, which we were immediately.

Able to offload 150 million a day into our far west plant complex as the Peregrine Falcon plant and we had available capacity.

<unk> will be that midway that will be that midway point, basically adding capacity and may wildcat too at the end of the year at the very beginning of next year because of the anticipated growth in the road runner announcement right behind that coming on because frankly, we're going to need it.

But.

We've done some things in the meantime, we've increased our ability to move.

The old Lucent system, what we call target north Delaware gas into our far West plans, which again, we have available capacity. So over the next let's call. It nine to 12 months, one will fill up the midway capacity, we had a little bit of remaining capacity at Wildcat, we have a suite plant loving thats kind of our <unk>.

<unk> plan that will fill up.

Then we'll utilize the offload and the spare peregrine falcon capacity to get us to the Wildcat to plan and don't forget we have the ability to run our plants over nameplate.

Can give us another 100 to 150 million a day of incremental capacity.

Great. Thanks, It sounds like there's a significant amount of runway of growth in the Delaware over the year.

As my follow up the last 24 months, we've just seen target integrate and simplify itself in a series of transactions to become the S&P.

500 company. It is today moving forward as you talked about there seems to be a healthy amount of organic growth opportunities within targa and thus given the amount of organic growth backlog.

This is Jen I don't think that there any missing pieces to the portfolio. I think we are very pleased with the asset footprint that we have and see significant opportunities for continued organic investment going forward that will help underpin that increasing year over year EBITDA growth that we expect.

Going back to beginning with the <unk> and then the Trc preferred repurchase.

Great I'll leave it there thanks for the color and appreciate and enjoy the rest of your day. Thank you. Okay. Thank you. Thank you one moment for our next question. Please.

And it comes from the line of spiral Jonas with Citi. Please proceed.

Thanks, operator, good morning, Jamie.

You have to go back to the commodity sensitivity that and that asymmetry that Matt referenced earlier I guess, it's a bit different than how you guys were traded in the past.

I guess I'm, just curious is that an indication that fee floors could trigger bookstore.

A 30% down move in commodity prices I know the calculation is probably a bit complex, but just curious how you think.

How youre thinking about the fee floors, and maybe what's embedded in that low end of the guidance beyond the commodity move down.

That is the <unk> that we have in place.

So we tried to publish was that if you had a significant move downward in commodity price as it would be call. It a 30% down move would be about $60 million impact to our 2023, adjusted EBITDA and I think that is again reflective of not only the fee for us, but we also just have a lot more fee based margin now.

Okay got it that's helpful. Thanks for that John .

Maybe just to go back to the volume growth. It sounds like it is exceeding expectations and a lot of discussion. So far has been around the processing plants and John I know you mentioned that all of the in service dates for expansion, including Daytona.

Still in place, but I guess on my math just based on some of this discussion it would seem like.

Spiro. This is Scott first off I would say that when we look at Grand Prairie we've been on.

Obviously the success of that is evident in the continued growth that we'll see in the Permian will feed into that.

Just recognize that as we enter into 2023, we've got some additional pump stations that will commission throughout 2023, probably more heavily in the first half of this year versus the back half of the year.

And during that timeframe, we would push our overall capacity up to what we call our nameplate of roughly 550000 barrels a day just on the west leg alone.

We feel comfortable that we can likely operate above that call. It in the 600000 barrel a day range.

Plants that are connected to multiple pipelines and they're not solely dependent upon just the Grand Prix pipeline. So we.

We feel as though we've got a lot of flexibility to manage through it we certainly want to make sure that its preferred that the volumes are moving on our pipelines.

But we've got some opportunities to manage through that if necessary if the volume growth exceeds our expectations.

Great I appreciate all the color today guys. Thank you.

Thank you. Thank you one moment for our next question. Please.

And it comes from the line of Theresa Chen with Barclays. Please go ahead.

Good morning.

To get your take on the Frac outlook, given the tightness that we're seeing evidence of anecdotes.

Titans in the Gulf Coast meeting most recently from the restarted announcement at Gcs and would you mind, giving us an update of your outlook on utilization for that part of the value chain and general demand outlook for security products, maybe touching on that LPG export commentary what are you hearing from your customers what are your general expectations for demand for ethane in it.

Okay.

Again this is Scott.

When we look at the fractionation complex that we have certainly bringing on gcs.

That the partnership has agreed to restart that will start we expect to commission that in the first quarter of 2024 and that will be needed capacity.

I will say that when you look at our volumes that we had from third quarter to fourth quarter of 2022.

Those probably don't illustrate exactly the volume growth that we're seeing over time across our various assets and alluding to the comments that Pat made as it relates to our growth on the G&P side of our business. We did have some planned and unplanned outage at our facility during during the fourth quarter, which really basically is behind US now so we.

Phil is though that we should be at or basically at our full complement of fractionation capacity going forward.

And some of that when you look at the impacts of that were also impacted by by Winter Storm Elliot.

In the second quarter of next year will be an important piece of the pie for us from a fractionation perspective as it relates to the distribution of products on the spec side.

Certainly our products of inflow of product coming into us.

<unk> export facility that we have at Galena Park is very important integral piece of our platform that we have today for propane as well as butane.

And.

Again, what we mentioned earlier with the small expansion we have that provides us additional capacity there and so we feel very comfortable with our with our expectations on that side.

As it relates to ethane.

Certainly the market continues to pull on the ethane molecule. We've had a number of pet chem expansions that have been announced recently new.

New expansions have come online over the course of the last two years.

So we view that that is a continuation of that and I think the pet Chem industry is starting to really get more on solid footing as it relates to improvements in the global economy.

Going forward, we look look good for us.

Thank you.

John I wanted to go back to your comments about the breakdown between fee based versus commodity based margin and now that you are 85% fee base as you bring online incremental processing capacity.

Embedded waste contract escalators over time T Force et cetera, how do you think this breakdown evolves.

With the asymmetrical risk that you currently see within that 60% band do you see that becoming more favorably skewed and going forward I think layering more equal than general fee based margin.

Where we are spending capital to put in fee floors, and we are trying to bring that to other basins as well as contracts come up for expiration or are there as a catalyst for a renegotiation and I do think it creates excellent and alignment for us to continue to invest and benefit from higher commodity prices, but have a little bit of production in <unk>.

Our structure.

Thank you.

Thank you and one moment for our next question. Please.

Okay.

And it comes from the line of Colton Bean with Tudor Pickering Holt <unk> Company. Please proceed.

Good morning, So the transport and Frac unit margins were up materially relative to Q3 any drivers in that apart from lower Opex and was there a mix shift.

Based on the origin and any contracts on the ground and then between the two transplant frac any weighting in terms of the margin uplift.

Yes sure Heiko.

We really benefited from a couple of things there we had as I mentioned before some optimization just related to our marketing activities in both NGL marketing and gas marketing well, let Scott also mentioned as our Frac. So we had some planned and unplanned maintenance we were bringing in more fractionation volumes and we were able to fractionate. So here in the <unk>.

First quarter of those are behind us and we will be operating closer to nameplate. So we had the opportunity there build inventory or to do some off loads. So we were able to execute some offload that cheaper rates than our overall TNF. So it kind of creates a margin spread for us even though our volumes did move up as much. So I would say we have more volumes coming in and kind of what was reported because thats what.

We actually <unk>, but we're able to do some third party offload that.

That work is really behind us. So we have more capacity now in Q1, so that is for us, creating a little bit more flexibility in terms of the overall frac market.

And with other Fracs coming on in 2023, we see some looseness in 2023 in the Frac market. So we'll be able to I think be in good position ahead of gcs startup and train nine coming on but its really a combination of all of those things.

Okay. So it sounds like it was more concentrated on the frac side and relatively stable for transport.

Yes.

I think that's about right.

Great and then on Opex. So Q4 was relatively flat the GNP and actually down in logistics.

Are you expecting continued increases as you get a full quarter of lucid and higher overall activity. So just it was Q4 or more of a structural shift in your outlook or should we still expect that step up in expense levels heading into 2023.

Step down there just because we did not have those repairs and maintenance in the fourth quarter those were one time.

Great appreciate the time.

Thank you okay. Thanks, Paul.

Thank you one moment for our next question. Please.

And it comes from the line of Keith Stanley with Wolfe Research. Please go ahead.

Hi, good morning, Thank you.

Just wanted to start on commodities and hedges, so if I compared the hedge prices for 2023 to the forward curve where it sits.

Are your hedges now in the money would you say for this year and so additive to EBITDA or are they below market still.

Asking across commodities just to try to give a better picture of where an unhedged outlook might be for 2023 versus the $3 5 billion to $3 7 billion guidance.

On the hedge disclosures that we gave this morning on the natural gas side, that's aggregated swaps across everywhere that we hedged. So I would say that the majority of those hedges are wahaha swaps, where we actually would say that wahhab prices for a balanced 2023 are now lower than where we have hedged.

So it's a little bit of a mixed bag, depending on each basis point that we hedge to and the swaps that we have in place there.

<unk> are a little bit lower I think today than where we are we've got our hedge prices hitting.

Okay. So overall big picture your Youre, a little above market on gas a little below on Ngls and crude but.

Net net it doesn't sound like the hedges.

Materially change what the EBITDA outlook is for the year.

No I think Thats fair.

I'd call it.

Got it okay.

Thank you.

Second question was just on.

The Capex guidance are you baking in any spend for unannounced plants or other likely future spending and related to that just how are you thinking about the potential need to start work on our Frac 10 before the end of this year or is that now pushed out into 2024 with the gcs.

Yeah sure. So for US we have the five plants that we have announced and I also said in the script. We are ordering long lead time items for another plant in the Permian Midland. So we factored in some of that Capex.

In the end of this overall guidance.

So it really depends on when we greenlight that and say, okay. We are going forward with it so there could be some additional shift of capital.

<unk> Green light that plant sooner rather than later.

When we're going to need another plant in the Delaware as far as Frac train 10, again, I think lets see how volumes kind of play out this year and what producers are saying for next year. We have trained nine coming on we have gcs coming on but we are talking about wind when we're going to need trained 10. When you have kind of 10 ish percent growth on the.

Footprint that we have that significant amount of Ngls moving through.

Grand Prairie moving into our Frac. So I'd say, we're having discussions on when we're going to need to add train 10, and we're trying to kind of evaluate that as the year plays out.

Thank you.

Okay. Thank you.

Thank you one moment for our next question. Please.

And he comes from the line of Neel Mitra with Bank of America. Please proceed.

Hi, Good morning, I was wondering if you could speak to the capital associated with Whats moving road runner to the Delaware, how that would compare to a newbuild and then.

Where would you be moving that plant.

Delaware.

Where are you seeing that pocket of growth that would require that that plant to be moved there.

The overall capital flat at about $120 million for that move so it is capital efficient relative to just doing a newbuild. The new builds are say closer to $175 million give or take.

Getting tighter on capacity out there so moving it is quicker than just putting a newbuild out there.

Okay. So just to clarify this would be for.

The lucid acreage and Wouldnt necessarily connect Grand Prix.

Is that fair.

What's interesting is what's the lucid acreage, we're starting now with all Targa and its really get mixed when you talk to producers as it.

Targa system, it's all becoming really quickly all one system out there.

And sorry, Bob do you want to add some color on that.

We can say also when you think about the scale of the system in the Midland Basin and the Fungibility across.

The aerial extent of it you don't exactly drop a plant right on top of acreage that you see coming because we can move volumes across the entire system. So as we start to build out the Delaware in the same manner such that we're putting plants generally speaking where we see growth.

All the growth doesn't have to happen right on top of there because of the fungibility of that system and the integration of the loose assets that we bought into our existing asset footprint with the big <unk>, we did with Chevron several years ago.

Creates fungibility such that that's a convenient place in a SaaS place to put Rosa but.

But it also is gaskets locum lots of different spots to that client.

So working to connect Roadrunner and integrate that system into Grand Prix.

We're building that line now.

Got it and then if I could just follow up on on Grand Prix seems like.

For the second half of 'twenty, two volumes were relatively flattish and I know early three key you had some ethane rejection and that slipped to recovery maintenance and weather should.

Should we see.

Step up back in kind of <unk>.

Or is there any other kind of lingering issues on granite training the volumes for us.

Stepping back up to kind of be consistent with the processing growth.

Have seen volumes move south a little bit kind of bass.

Not as much strength there have you seen in the Permian to us looked relatively flat, but we are already seeing it frankly at the start of this year, we're seeing volumes new hire and that's what we would expect in Grand Prairie as we move through the year pretty pretty strong growth there and I would also just add Matt that we've got the second half of this year. We've got some third party contract contribution that'll be coming in.

From the north leg more of the back half of the year. So you'll see those volumes starting to ramp up for deliveries into Bellevue as well and so we touch on every quarter of growth for Grand Prix in the second quarter, we will have legacy two coming online and then the additional capacity available at midway So those will be a nice catalyst in the second quarter.

Got it thank you for all the color.

Thank you one moment for our next question.

Okay.

And it comes from the line of John <unk> with Goldman Sachs. Please go ahead.

Hey, thanks for the time.

Wanted to just sit on Permian growth from other half second.

Clarify one comment from before were you, saying that.

We're thinking about the other basins.

Relatively less gas turbine exposure of course, but we're seeing slowdowns elsewhere. So curious what your view on maybe the Barnett and other slipped luck.

Thanks.

Yeah I'll hit the first one <unk> come out in the second yes.

We were not specific on the rig adds.

The history and then what do we really expect.

To do so it is kind of the usual way we do.

Our forecast on that and then Pat you want to hit on other basis.

Sure.

We will start in Oklahoma.

We've seen frankly good activity.

And both our south Oklahoma.

Our western Oklahoma areas, good activities relative to let's call it the loss.

Three four years prior to that obviously, there was a lot of activity, but enough. So that we were able to offset decline.

Frankly in southern Oklahoma, We show.

Basically flat and frankly that includes a pretty significant chunk of volume rolled off under a contract and we were able to fill that back end behind so we are seeing some activity there.

<unk>.

North, Texas, we have.

Seen volume growth on our system.

And we continue to see drilling activity, certainly and frankly, southern Oklahoma are more sensitive to gas prices.

So.

We have expectations at the beginning of the year here that will get incremental volumes. There are planned drilling on our system throughout the year will ultimately see how those pan out.

And upon commodity prices and the decisions of those producers.

<unk>.

Our south Texas activity has been very good.

The addition of.

The South cross assets and the sour gas capabilities there of out of the level of drilling activity and some of our contracts that originally underpinned the assets. Those producers are active so we've seen benefits in volumes for from both of those.

Sure.

Kind of types of producers so.

We feel good about volume growth there, but its not significant in the overall scheme of thing Badlands same thing.

A good steady pace of drilling so.

Good replacement of crude oil and natural gas are we going to say hey, we're going to significantly grow in that basin or are we going to hold our own and see some slight growth problem. Okay.

And whether that's on the plants are on kind of gathering compression side, just anything kind of directionally, there and how we can kind of think about that going forward. Thanks.

We are seeing some higher cost whether it's compression pipelines are just larger facilities, we're putting in place and that's a part of the capex to that.

Included in the 1819 this year is us with longer lead times on some of the assets. We are buying some compression right now which is longer lead time, which is actually for 2024.

Part of it is us getting ready because we know there's going to be future growth next year is long lead because lead times have been extended as pushing some more capex into this year as well. So part of it has been inflation part of those I was trying to get ahead of kind of some of the supply chain disruptions and lead time.

Both.

Alright, Thanks for your time I appreciate it.

Okay. Thanks, Ron Thank you one moment for our next question. Please.

Okay.

Hello moment, please relevant technical difficulties from this side.

Alright, and our last question for today will be from Sunil Sabal with Seaport Global. Please proceed.

Yes, hi, good morning, everybody.

Hey, so I wanted to.

Just wanted to get a little bit of clarity on the returns on investment.

Thank you.

Two years back you had talked about five to seven the next kind of EBITDA multiple.

Gathering and processing.

Capital spend I was curious how that has changed.

The current environment.

Turns improve just as a result of utilization as we tried to get plants constructed as quickly as possible, but as Pat mentioned, sometimes have to operate the system overcapacity prior to a new plant coming online and more utilized third party offloads that means that once the new plant is online it tends to be very highly utilized.

Or at least that has been our very recent history and so I think thats driving returns lower on that side of the business returns higher on that side of the business of multiples lower sorry, yes.

Just to add to that I think as we think about going forward five to seven is still kind of what we think about how.

How we would articulate returns we were able to execute better than that if you look back over the last five years closer to four times and also part of that is we were successful at investments like for example, Gtx, we invested and we saw that at a significant multiple of capital of a really good return for us and that kind of nets into the Capex number. So we had some one time.

Items like that which also helped drive that higher but I think five to seven is a good kind of planning case, and we'll of course try to beat that through optimizing.

But five to seven is a good planning case.

Okay. Thanks for that and then one clarification I think.

In the past you've talked about.

Spend on the comp.

Compression and pipeline being minus two one but the new build cost.

Assessing plant cost so I think on the previously in the call you said $175 million is what the new typical processing plant disgusting. So is that one has to untangle is still good.

The capital to fill up the plant.

Yes.

I think.

Over time, that's a reasonable assumption I would say now what we have been seeing recently is potentially even a little bit more capital efficient than that so maybe maybe a little bit last night. Some of our producers are being more efficient with where theyre drilling so.

But it can vary from year to year. So I'd say, that's not an unreasonable assumption maybe I'll take the under on that maybe it's a little bit less gathering and compression first the 175 to fill up a client, but it can vary from year to year as well.

Got it thanks for that and congratulations on a good print.

Thanks, Okay. Thank you.

Thank you ladies and gentlemen, this concludes our Q&A session I will turn the call back to Sanjay Lad for final remarks.

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

Thank you and everybody. This concludes today's conference call. Thank you for participating and you may now disconnect.

Q4 2022 Targa Resources Corp Earnings Call

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