Q2 2023 Targa Resources Corp Earnings Call
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I would now like to hand, the conference over to your speaker today.
Sanjay Lad, Vice President of Finance and Investor Relations.
Thanks, Ted Good morning, and welcome to the second quarter 2023 earnings call for Targa Resources Corp.
Second quarter earnings release, along with our second quarter earnings supplement presentation for Targa resources 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 looking statements within the meaning of section 20 <unk> 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 or.
Our speakers for the call today will be Matt Meloy, Chief Executive Officer, and Jen Kneale Chief Financial Officer. Additionally, the following senior management team members will also be available for Q&A, Pat Mcdonald, President grabbing gathering and processing, Scott Pryor, President logistics and transportation and.
<unk>, Chief commercial officer, and with that I'll now turn the call over to Matt.
Thanks, Sanjay and good morning, the second quarter results were consistent with our expectations as the strength of our business drove record volumes for the quarter, which really set us up well for a strong year adjusted EBITDA was lower sequentially, given our significant marketing gains in the first quarter, but consistent with previous disclosures we expect.
EBITDA ramp over the balance of the year and we remain confident in our full year 2023, adjusted EBITDA estimate of three 5% to $3 7 billion.
During the second quarter, we had record volumes in the Permian driving record NGL transportation and fractionation volumes downstream, we fully brought online our legacy to plant in Permian Midland and commenced operations on our midway plant in Permian, Delaware and we executed on a quarterly record of 149.
1 million of common share repurchases, which is reflective of our strong conviction in the outlook for our business going forward.
Natural gas volumes across our Permian systems continue to grow and the recent completion of our legacy two in midway plant to provide us with incremental Midland and Delaware processing capacity to handle a continue ramp in inlet volumes driving incremental volumes through our integrated NGL downstream assets given our.
Increasing Permian volumes and consistent with our previous messaging that we are already ordering long lead items today, we officially announced our next plant in the Permian Midland and our next plant in the Permian, Delaware to support the infrastructure needs of our producer customers.
We continue to estimate 2023 gross capex spending of between 2 billion and $2 2 billion.
And all of our previously announced projects remain on track and on budget.
As we think about 2020 for growth capital. We will continue to have spending to complete a number of our major projects already underway, including Frac train nine and 10, the majority of capital on our Daytona NGL pipeline and five Permian gas plants driving expenditures for 2024, which may have.
Proximate spending levels similar to 2023.
Growth capital spend beyond 'twenty four is likely to come down as we will have caught up on the downstream side of the business as those major growth capital projects will be complete.
Investing in organic growth projects across our core integrated footprint provides target with attractive returns and puts us in a strong position to continue to return incremental capital to our shareholders.
Let's now discuss our operations in more detail.
Starting in the Permian high activity levels continue across our dedicated acreage our systems across the Midland and Delaware basins.
Average a record $5 1 billion cubic feet per day of reported inlet volumes during the second quarter, increasing 5% sequentially and.
In Permian Midland, We continued to see strong producer activity and our system continues to operate near capacity.
Capacity for our new legacy to plant became fully available partway through the second quarter and is currently running near full.
Our next Midland plant Greenwood remains on track to begin operations in the late fourth quarter of 2023 and is expected to be highly utilized when it comes online.
In Permian, Delaware activity and volumes across our footprint are also running strong or midway plant commenced operations late in the second quarter and is providing much needed incremental processing capacity midway became fully operational this week and we idled our sandhills facility.
These actions will increase operational reliability and enhanced plant recoveries for our customers.
Our Wildcat too and road runner two plants remain on track to begin operations in the first and second quarters of 2024, respectively and both plants are expected to start up highly utilized given the robust activity across our entire Delaware footprint.
We are currently Offloading, an average of around 70 million cubic feet per day of gas in the Permian and are in the process of adding significant compression horse horsepower.
Horsepower during the balance of the year and are continuing to see strong producer activity across our across our acreage, which gives us the confidence that we remain on track for our average 2023, Permian inlet gas volumes to increase 10% over the fourth quarter of 2022.
In our central region, and the Badlands, our combined natural gas volumes increased 3% sequentially and we are currently not seeing any material change in activity across our producer customers despite lower commodity prices.
Shifting to our logistics and transportation segment targeted NGL pipeline transportation volumes were a record 621000 barrels per day and fractionation volumes were a record 794000 barrels per day during the second quarter the ramp in supply volumes from our Permian systems and third parties drove that.
Record sequential increase in NGL transportation. Additionally, Grand Prix pipeline volumes also benefited from the expiration of certain medium term commitments, we had on third party pipes.
Fractionation facilities in Mont Belvieu remain highly utilized and the restart of gcs will provide some much needed capacity when it is fully restarted in the first quarter of 2024, and we expect to continue.
We continue to expect our train nine fractionator to be highly utilized when it commences operations during the second quarter of 2024.
Our recently announced trained 10 fractionator is expected to be much needed given the expected continued growth in our G&P business and plant expansions and remains on track for the first quarter of 2025.
At Galena Park, we loaded an average of $9 2 million barrels per month of LPG during the second quarter and.
In the third quarter, our loading capability will be reduced for about a month due to a portion of our facility undergoing its required 10 year inspection.
Our low cost expansion project to increase our propane loading capabilities with an incremental 1 million barrels per month of capacity will be complete this quarter and we expect our loadings to ramp after the inspection is complete and through the balance of 2023.
We are excited about the long term outlook at Targa and remain focused on executing our strategic priorities.
We believe that we offer a unique value proposition for our shareholders and potential shareholders.
Boeing EBITDA growing the dividend and reducing share count, while maintaining leverage within our target range before I turn the call over to Jim to discuss our second quarter results in more detail I would like to extend a thank you to the target team for their continued focus on safety and execution, while continuing to provide best in class service.
And reliability to our customers.
Thanks, Matt Good morning, everyone targets reported adjusted EBITDA for the second quarter was $789 million.
The sequential decrease was predominantly attributable to the significant optimization opportunities we benefited from in our marketing and LPG export businesses. During the first quarter higher volumes were offset by lower realized natural gas and NGL prices and higher operating expenses.
As Matt mentioned, we expect adjusted EBITDA to be higher in the third and fourth quarters as we benefit from strong volume tailwind across our Permian and downstream assets and are comfortable with our full year 2023, adjusted EBITDA estimate of between $3 5 billion and $3 7 billion.
We are well hedged across all commodities for the balance of 2023 and continue to add hedges for 2024 and beyond coupled with our seafloor contracts, we have significantly de risked our earnings and cash flow outlook, while preserving the upside when commodity prices increase.
Inclusive of our newly announced Greenwood <unk> and <unk> plants in the Permian. There is no change to our estimate for 2023 gross capital spending of between 2 billion and $2 2 billion.
Our current year estimate for net maintenance capital spending remains a $175 million.
At quarter end, we had $2 2 billion of available liquidity and our pro forma leverage was at the midpoint of our long term leverage ratio target range, which provides us with a lot of flexibility looking forward. We continue to expect year end leverage around the midpoint of our long term leverage ratio target range of three to four times.
Maintaining a strong investment grade balance sheet across cycles continues to be a priority.
Our balance sheet strength remains the foundation that affords us the financial flexibility to continue to execute on our strategic priorities that is investing in high returning integrated projects and prudently returning an increasing amount of capital to our shareholders.
The strength of our balance sheet and outlook were recognized recently by both Fitch and S&P placed targa on positive watch.
We repurchased a quarterly record of $149 million of common shares in the second quarter at a weighted average price of $71 37 per share and have repurchased over $200 million in common stock through the first half of the year.
During the quarter, we exhausted our $500 million share repurchase program and had about $943 million remaining under our $1 billion share repurchase program as of June 30th.
Looking ahead, we have significant flexibility to continue to execute under our opportunistic repurchase framework and further increase our return of capital to shareholders and reduce our share count over time.
Lastly, I'd like to Echo, Matt and extend a thank you to our employees for their continued focus on safety and commitment to Targa.
And with that I will turn the call back over to Sanjay.
Thanks, Ken for the Q&A session. We kindly ask that you limit to one question and one follow up and re entered the lineup. If you have additional questions would you. Please open the line for Q&A.
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Theresa Jang.
From Barclays.
Thank you for taking my questions first I'd like to touch on the Capex outlook over the medium to long term.
<unk> comments earlier not a pilot in 2024 being similar to 2023, and then beyond that expectations for Capex to step down do you have a sense of.
What do you think a post 2020 for graduate Capex could look like and then.
On the heels of that in terms of capital allocation, what do you view the split into return of capital to shareholders between dividend growth and buybacks as that free cash flow generation becomes more visible.
Yeah, sure Hey, Theresa good morning.
I talked about capital for 2024 and pointed to really some of the major project. So let's talk about Daytona most of the spending we're going to have on Daytona is next year. We have two fractionator train nine and trained 10 and were also spending some money this year on gcs so were.
That's not a normal cadence to have that much fractionation being added the lion's share of transportation NGL pipeline being added is kind of higher than normal and now we have a lot of that spending in 2023 too and so that's why when you look at the major projects. Those are the ones. We see in process through 'twenty three and then through 'twenty four once the fracs.
Our nation train nine and 10 in Daytona our online by the end of 'twenty four.
Then we do see a step down kind of thereafter, I don't have that exact what is going to look like.
As a run rate.
What that would be but we do see that stepping down to the lion's share of the spending for those large projects come off and its adding our processing plants.
Some of the other kind of normal course capital that we have and then in terms of return of capital. Our focus has been investing in our core business that gets really good returns for us. So we're going to continue to focus on investing in both the G&P side on the downstream side to take care of.
Volumes for our for our customers.
And then that should provide good EBITDA growth and good ability for us to continue to return capital to shareholders meaningfully increasing the dividend meaningfully buying back shares and so I think it's going to be a little bit all of the above approach investing in our business, increasing the dividend and repurchasing shares and you saw us repurchase a significant amount of shares in the second quarter. So.
I think it is going to be all of those things.
Okay.
Thank you and then looking to the second half of 2023, and clearly there's been a lot of volatility on the NGL side, whether in terms of.
Pricing or volume throughout different parts of the value chain across the industry.
What is your implied contribution in the second half or NGL marketing.
Your guidance for the year.
Yes, we had a really strong first quarter in terms of marketing really across our export business across gas marketing NGL marketing and we have some seasonality in the wholesale marketing business in the second quarter I would say it was.
Relatively modest amount of marketing kind of probably a low point for us if you look at it through the year. So we have some expectation for more normalized kind of marketing as you go into the second and third sorry into the third and fourth quarter, but nothing like we saw kind of at the beginning part of the year, we're starting to see some opportunities for spreads to open up where we can capture.
But theres not.
Any kind of outsized amount baked in for the second half of the year.
And on the LPG export side, you may have heard that we announced on this call that we expect the facility or parts of the facility on the export side to be down for a month as we complete our required 10 year.
A review of the facilities, so that will impact the third quarter.
And to the extent, though that we see good demand internationally in the fourth quarter. We will have completed our million barrel per month expansion at Galena Park, and we will have that inspection behind us we will have a lot more flexibility to move additional cargoes in the fourth quarter on the LPG export side to the extent that there is global demand for additional.
<unk>.
Thank you.
Okay. Thank you.
Thank you one moment our next question.
<unk> Tonet from Jpmorgan Securities.
Hi, good morning.
Hey, good morning, Jeremy.
Appreciate that we are not giving 'twenty for guidance at this juncture, but just wondering if you could help us sketch out the future a little bit more clearly a lot of capital being deployed very accretive terms a lot of growth in the Permian.
But is there any flavor you could give us for what a post 2023 targa trajectory could look like just given the amount of capital being deployed.
Jeremy This is Jen I think that part of our conviction around all things target right. Now is the fact that we do see such a strong multiyear growth outlook on the EBITDA side I don't think we're at a point, where we want to articulate any advanced guidance for 2024 really it will largely be dependent on.
The producer forecast that we receive as we go through our planning forecast. This fall, but certainly we expect the assets that we have in progress right now to be very highly utilized when they come online. That's part of what we said this morning and with that volume growth filling those facilities, we would certainly expect meaningful underlying EBITDA.
<unk> in a commodity environment that looks anything like we've seen this year.
Got it so is it fair to say its volumes.
Deliver strong growth year over year, there's not like a.
Step down with the hedging book, that's a big offset just trying to think it gets and takes as we look forward here.
As I think about hedge prices right now for 2024 relative to where they are this year I wouldnt say that theres a step down.
Both natural gas and NGL prices sort of approximate same prices for 2003 and 2024. So I really think it's the volumes that are going to drive significant underlying EBITDA growth for US begins in the Permian Basin, and then increasing Permian basin volumes of course, moving through our transportation.
And fractionation assets, and then having those volumes available either to sell domestically or into the export market is really what positions us so well not only for 2024, but beyond that and as part of what is driving our conviction in the Targa story.
Got it that's very helpful. Thank you for that and.
Just looking at the midstream industry more broadly we've seen some kind of bigger moves take place some mergers out there and just wondering if we're in the midst of a period of industry consolidation, how does target to think about that whats targets role moving forward here.
Yeah, Hey, Jeremy we are really focused on investing in our core business. We have a lot of really attractive organic growth opportunities with a budget of two to $2 $2 billion. This year and significant capital spending next year as well those are really good projects for us we've seen significant volume growth you saw our volumes really move up.
Cross Permian across the NGL footprint here in the second quarter, we expect continued growth the back half of 'twenty, three and into 24 and 25. So we're really focused on what we can do.
On an organic growth basis, Thats, our focus thats, where were going to get the best returns and so what others are doing and it's interesting we pay attention, but our focus is on is on our core business.
Got it that's helpful I'll leave it there thanks.
Okay. Thanks very much.
Thank you as we proceed to our next question.
Michael Bluhm from Wells Fargo. Please proceed with your question.
Thanks, Good morning, everyone I wanted to just go back to LPG exports for a second notwithstanding the planned downtime in Q3 I was wondering if you could just speak to what youre seeing in end market demand for the balance of the year.
Yes, Michael This is Scott we continue to see good demand across our dock obviously in the first quarter, we benefited from from the outline that Matt communicated earlier.
And then in the second quarter, we've seen less spot opportunities some of Thats just been driven by.
Less of an overall marketplace, we've seen some headwinds as it relates to freight economics that has tightened things up and just when you think about just the overall seasonal demand that we came off of from the first quarter. When we go into the third quarter again, we continue to extend the existing contracts that we have.
Adding contracts excuse me.
Excuse me, adding contracts to our portfolio, especially as we have the expansion project coming on.
During this third quarter, where we are getting some benefit as it relates to that today when we look at the third quarter.
Despite.
The downtime that we were going to have because of the mandatory inspection that we have on some of our vessels at the facility. We would expect our third quarter volumes to be similar or better than what we saw in the second quarter and then as Jen alluded to when we look at the fourth quarter with the expansion online with a ramp up in demand seasonal demand that we typically see in the fourth quarter and the first quarter.
We didn't really see a good outlet outlook for that.
Volumes through our systems, we will continue to ramp up and we.
We just view that as a very positive for us overall.
Got it thanks that's helpful.
So just wanted to ask about this recent spike we have seen in ethane prices.
It's had some impact on some processing plant efficiencies from Frac outages. So just curious if if that impact.
To target all for for Q3, either positive or negative.
I would say it did not impact us negatively ethane found itself really in a volatile market during the month of July .
Some of that was brought on as the market was pinched between.
Weeks of rejection and improved to petrochemical operating rates, the <unk> offering rates, probably we're likely.
Just above 90% operating rates in the month of July .
Along with that with increased ethane exports has the price ramped up that improved some of the recovery economics as it relates to ethane rejection recovery.
But there is some time lags with that so I think the market found itself.
In sum opportunities, whether it's spiked in order to for folks to cover various positions.
For us.
As we see those opportunities we can we can utilize our storage we can take advantage of the storage position that we have so I would say that it was probably a net benefit to us to a certain degree.
But I would but I would suggest that some of that may come later in the year.
Then it would be in <unk>.
The prompt month, so things feel like they're a little more balanced prices have now really come back down to more of a moderate level of around 27 cents per gallon. This morning.
They feel a little more balance September is trading a little bit stronger than August currently which would suggest there may be some mild tightness.
But again I think overall things are balanced themselves out with the recovery economics improving.
Great. Thank you.
Okay. Thanks, Michael.
Thank you and then.
Question.
Neel Mitra from Bank of America.
Hi, Thanks for taking my question I, just wanted to drill down a little bit more on.
The ongoing capex needs in two particular topics first seemed like you were maybe two processing plants behind on <unk>. When you acquired them. How are we trending on that and then second when we look at the Grand Prix expansion from North, Texas to Bellevue when would that be.
<unk>.
From the volumes that youre getting from Daytona and Grand Prix.
Hey, Neil This is Patrick Dan I'll answer the first one.
Lucid was behind and frankly, we're still running hard to catch up obviously, the Red Hills six plants came on shortly after the acquisition we have added capacity at midway.
We're adding capacity pretty quickly with Wildcat two and now.
And road runner and we've made the announcement on bold moves.
All of those things are to get out in front of the activity level, we're seeing from our producers in the Delaware Basin frankly, we have a ton of compression getting set between now and the end of the year, we're still behind a little bit.
We're playing catch up and we expect to get hopefully caught up by the end of the year on that the production's there the drilling activities. There, we just got to execute and get a connected in an online. So the capacity adds you're seeing in the Delaware are really directly.
Related to the producer activity levels that we have direct line of sight too. So we're not caught up but were getting there.
And Neil this is Scott as it relates to Grand Prix and Daytona certainly we welcome the expansion project that we have with Daytona coming online that will complement the western portion of our Grand Prix pipeline that feeds into our south leg moving into Mt. Belvieu Rec.
Recognize that the south leg has over just over 1 million barrels a day of capacity moving into Mount Bellevue.
In the fourth and the excuse me in the second quarter. We moved just over 600000 barrels a day. So we've got a lot of operating leverage as it relates to that south leg. When Daytona comes online we had announced initially they would have a capacity of roughly 400000 barrels a day.
With the with a couple of pump stations that would be a part of that expansion project. So we've got a lot of operating leverage as it relates to that with that said obviously, we are evaluating what is the next step for us.
For additional pipeline requirements, we're certainly going to watch and see how.
Pats plants on the western side in the Permian continue to ramp up over time as the additive of plants over time.
But we will certainly be in a position to expand when it's necessary and evaluate that.
Got it. Thank you and then as a quick follow up on the ethane question.
We were in rejection I guess for most of June so did that impact results negatively for <unk> and then I think I heard that you would benefit later in the year.
From some of the higher ethane prices and I was just wondering.
How you would benefit in some commentary behind that.
Yes, I think what I would allude to there is as we saw some opportunities.
We actually saw some contango in the marketplace on ethane that.
That was priced later in the year and actually into 2024, so utilizing our storage we were able to benefit from that contango market that was presented so I would say that it's.
Moderate levels at this point and that's something that we obviously with our storage have the ability to take advantage of when there is contango plays in the marketplace. Those are not present today per se, but.
But that's where we get some slight benefits when the market moves in those directions.
Got it and was there a negative hit on volumes on your system just.
From rejection that we wouldn't otherwise have seen from the heat in Texas in June .
I would say not really on our system certainly as we watch the.
The percentage of ethane thats contained in the role that comes into our into our Mt. Belvieu facility.
It usually is more impactful in the third party pipelines than it is on the Grand Prix pipeline I will say that we saw in the latter part of July and here in August that the percentage has moved up a little bit.
More on the third party pipes than on Grand Prix.
So that is certainly an indicator of that industry as a whole is recovering more of the ethane and field, which should benefit us over time I think the other thing that youll see is that given the fact that we've had a couple of industry players brought on had brought on some additional frac capacity that also lends to coming its coming down.
Will the spikes that we saw in the month of July on ethane.
Great. Thank you.
Thank you one moment our next question.
Okay.
Colton Bean. Please proceed with your question from <unk> <unk> company.
Good morning.
On the G&P segment, a decent drop in sequential processing margins can you comment on whether Q2 results sit relative to fee floors, and then just any general expectations for margins through the balance of the year.
Glen This is Jim in the second quarter, I would say that our fee floors kicked in.
Reflecting I think the importance of them I think the second quarter.
Is illustrative of how well target can perform even across a lower commodity price environment, where we even sawalha prices first of month in April <unk>.
So again I think it is reflective of the importance to us of the fee floors that we are able to continue to invest because with those floors in place. We can at least get a required minimum rate of return on that invested capital.
But where we sit today, we are seeing improved prices here in the third quarter for full year, I would say that commodity prices on the NGL and natural gas side or call it 5% lower than the guidance that we set out so we'll have to see how the rest of the year plays out and hopefully prices can be more of a tailwind than a headwind given we are very well hedged.
Hedged and given again in the second quarter, we were at <unk> levels.
Got it and then shifting over to the logistics and transportation segment had some very impressive NGL throughput across Grand Prix and the Frac fleet, but it looks like the weighted average S&P rate moved lower quarter on quarter any basin mix shift or re contracting impacts that drove the drop and then again your expectations for that ramp trajectory moving forward.
Yes. So we yes, we had really good volumes across the downstream segment you saw a significant ramp in Grand Prix, which was part of a contract part of it was just the organic growth part was a contract roll off we add on transport and so you saw also really good volume increase on Frac No I don't think there was really.
Mix.
A degradation in our overall margins typically these TNF contracts are kind.
Kind of escalate over time and move up so there might be some.
Volatile with marketing or what all year, including in the overall <unk> margin and how much youre attributing to transport and Frac.
Okay understood. Thank you.
Okay.
Thank you and one moment our next question.
We have Keith Stanley from Wolfe Research. Please proceed with your question.
Hi, Good morning wanted to ask about the big step up in buybacks during Q2.
Should we view that as kind of a unique opportunity because of the stock fell in may and June or.
Is this possibly kind of a normal pace and how you think about buybacks and your capacity to do that going forward.
I think our buybacks have been a part of the way, we're returning capital to shareholders we'd look at.
Really I would say, it's underpinned by just a really strong outlook for not only the remainder of 2003, but as we look out 'twenty four and 'twenty five we look at our overall cash flow profile, our leverage profile outlook for the business. It led us to step up our repurchases for the second quarter. So that was very attractive to us in the past in the first quarter, we had just <unk>.
<unk> the.
The.
The acquisition of the 25% interest in Grand Prix. So it's kind of a mix of what our with our overall spending for the quarter and then what's our outlook and I think we feel very confident in.
Not only back half of the year, but really kind of multiyear outlook for targa and so that led us to step up the repurchases for the second quarter.
Great. Thanks second second question.
Just the Grand Prix volumes are really high as you said in part from a contract roll off on transportation.
Are there any other major contract roll offs coming up I guess through the end of next year that we should be mindful of that could cause another big pop in Grand Prix volumes.
Kate This is Scott I would say that no not really.
We certainly benefited in the second quarter as we had some some of those mid term contracts that had rolled off I would say that going forward. There. There is not really a large step up we will basically benefit from the additive of new plants.
That are going on in the Permian basin for US certainly the next two plants that were announced today are something that will contribute to our to our Grand Prix pipeline over time.
Thank you.
Okay. Thank you.
Thank you within one moment our next question.
Brian Reynolds from UBS. Please proceed with your question.
Hi, good morning, everyone.
Quick follow up on the Capex cadence in the outer years with a focus on Nat gas takeaway opportunities in apex is this natural gas takeaway opportunity included in that kind of out of your capex decline and perhaps can you update us on perhaps targets equity interest or ability to fund the whole pipe on its own.
On the financing side I think we've consistently said Brian that if apex was a project that got commercialized. Its one that lends itself really nicely to bring in JV partners and also to consider project finance. So I think we've been very consistent that if that is a project that does move forward.
Likely outcome is that we would be funding it with a small portion of the equity of the project.
And we then utilize either joint ventures, and our project finance for the bulk of the financing.
And then when this is Bob when you look at it the parties sitting around the table.
On the producer shipper side and on the market side, it's kind of a who's who of an investment grade parties, which lends itself to Biogen is talking about a line out the door relative to the ability to raise capital in a multitude of ways to do it.
Great. Thanks appreciate that maybe just a quick follow up on the NGL market. Thanks for all the all the prior caller, but just.
I'm just curious if you can provide a little bit more color around your propane outlook, we're trading at multiyear historical lows for propane relative WTS, just looking ahead into winter and a lot of the PVH demand that's coming online in China competition with naphtha, just kind of curious of what youre seeing across your system in terms of interest going into the winter time.
Thanks.
Yes.
This is Scott.
Currently today pricing sits around 72 cents.
We are we view the outer months currently today or is slight contango fourth quarters around 78 first quarters around 79.
The challenge that propane has today is that our current inventories stand around 88 million barrels, which is about 25 million barrels above this time last year. So that is part of the reason why youre seeing pricing relative to <unk> from.
From a percentage basis down from what you've seen.
<unk>.
I think really when you look at it production, obviously is moving up I think as overall global demand continues to increase albeit.
There are times, where you see some loans in that but the PVH to plant to plant PVH additives that you see in China that you mentioned, obviously is a big pool of propane over time so for us.
As an industry I think we've got adequate inventory certainly and I think that will provide us the inventories have been higher historically. So this is not like it's a high watermark for us and we've been able to pull the inventories down.
The other thing when you look at it from an export.
Market perspective.
Seeing the industry continue to add vessels for Lpg's current fleet size is around 360, <unk> second half of this year, we're adding another 25 or so vessels and probably in the 2024 will exceed 400 vessels on the water. So that clearly is an indication there.
As an industry and as a market demand that the market is gearing up for increased demand globally as more markets mature.
Great really appreciate it thanks for the time this morning.
Thank you.
Thank you one moment please for our next question.
We have Tristan Richardson Associate bank.
Hey, Good morning, guys. Just a question you just mentioned on off loading levels that Youre seeing now should we should we think of those as sort of normal.
Normal levels that you would see in any given year or perhaps elevated currently in anticipation Greenwood Wildcat Roadrunner.
Maybe just your thoughts on on off loading as a part of the portfolio.
Yes, I think youre going to see it in pension periods right, where we're in the process of adding capacity and we need to move some gas off system until we get our.
Incremental plant started up so I don't know that Theres, a normal cadence to that obviously, we're building a lot of additional plant capacity with the hopes that were out in front of our producer growth and that we're going to be able to take 100% of it but frankly.
Our producers, even though we are robust we have a robust outlook on their growth they've outperformed and it means that we've needed more capacity than we've even built in obviously, we've built a lot. So hopefully our offloads will remain only as needed and for short periods of time in kind of an emergency situation.
Outside of that.
That capacity in place to provide those services on our own.
Yes.
That's helpful. And then just on the on your point there on customers just always kind of curious about that.
Producer dynamics and customer activity certainly your view on and let growth Skus here Hasnt changed.
Your large scale customers are the major drivers, but maybe just anything on the smaller to mid sized customers and it change major shifts in activity et cetera.
No I mean, obviously, you've seen a little bit of consolidation through the acquisition market short term it has no impact and even longer term the impact on growth on our system.
Inconsequential, we really have seen a continued high activity level.
Across both the Delaware and Midland sides of the basin, so no material change.
Thank you guys very much.
Okay. Thank you.
And thank you one moment. Please our next question.
We have Neal Dingmann from trusts Charlie Securities.
Hi. Thank you. This is Jake NEVA, Sean for Neil just a quick one here for me and I know, we've kind of touch on this a couple of times. So if I can tackle as a different way.
Just the capex on the outer years I'm, just trying to get a sense strategically what that implies I guess from a capital allocation standpoint, it doesn't sound like.
Actually the comments today, there is a big M&A appetite.
And given that the Capex spend is coming down.
And the fundamental backdrop that you guys have with cash flow generation, just trying to get a sense of what that means either for the target leverage ratio. If you think maybe bring that down or I guess, even from a buyback standpoint would you consider going into a formulaic program just trying to get a sense of I guess, how you guys are thinking about that.
In general Thank you.
This is Jim I think from our perspective, it really all begins with the Permian growth and the cadence of Permian growth and how much additional infrastructure that will need to service, our Permian customers based on that call it medium and longer term growth rate and then what larger assets will need on the downstream side.
To help manage those volumes through our integrated system, but certainly part of why we've got so much conviction. Our target story is as we look out to 2025 and beyond we expect significantly higher EBITDA growth capital coming down and that means that we will have a lot more free cash flow available to allocate and return.
Capital to shareholders, while also continuing to invest in the business I think that you've heard currently the appetite for M&A is very very low we did two excellent acquisitions last year that are performing very very well for us this year, and we expect particularly in the lucid assets to perform very well for us on a gross basis as we move.
Forward through really the short medium and long term I think thats, all setting us up to be in an excellent position looking forward and then we will have to figure out the ideal mix of increasing dividends and also repurchases. We liked the opportunistic share repurchase program right now.
Think that it's working for us, particularly as we are trying to manage leverage our leverage ratio today of about the midpoint of our long term leverage ratio target range I think we've spoken to our preference to manage our leverage ratio in the bottom half of that long term leverage ratio target range, but we're very comfortable running this business between.
Three to four times and I think again, that's what gives us a lot of flexibility going forward on that all of the above approach that says we will continue to invest in the business and really attractive returning projects and that will help underpin an exceptionally strong balance sheet with the flexibility to return more capital to shareholders.
<unk> across a multitude of ways.
Got you perfect. That's it thank you thank.
Thank you okay. Thank you.
Thank you.
We move to take our final question.
We have Sunil Bob from Seaport Global. Please proceed with your question.
Yes, hi, good morning, everybody. So I just wanted to understand a little bit better the gas takeaway situation.
So obviously.
Good luck in your project.
And you also announced a number of processing.
So from a gas takeaway.
Perspective, when do we need to see.
New pipelines announced to basically really service this gas out of the basin.
So this is Bob.
What I'd say is we are relatively comfortable over the short term short to medium term for gas takeaway you'll.
Do you see something like a pipeline that went down.
Earlier, this week and the weekend.
Tight enough that a whole pipeline going away does not work for the basin, but as you see two expansions coming online in the short term and then Matterhorn coming online next year, we feel comfortable that those will satisfy the needs over the short to medium term dependent depending on how you define those.
And then the way we see it we think another pipe needed to be in service in the 2026 timeframe.
So that probably means early 'twenty four.
Hopefully something else goes up.
We've said it before.
There is a meeting of the minds on the shipper side with the market side on apex and apex ends up being that pipe great.
If it's not as another pipe at the end of the day target just wants to see that infrastructure get built whether it's target led or another party leading it so.
Some time next year, we will be very supportive of our pipe or someone else's by making sure. It goes to make sure that all of that gas is flowing at theres adequate takeaway in that 2026 timeframe.
Got it thanks for that clarity.
And then.
Second question was related to returns.
Obviously I think in the last few years.
Close to a 26% of auto IC.
Curious when youre looking at new investments.
New projects, what's a good way of thinking about your thresholds.
Under Tom's for their clothing projects.
Yes.
The returns have been very good for targa across our integrated foot gas.
Gathering and processing and then following the NGL molecule through Grand Prix Frac and export.
When we put that slide together said, 26% ROIC.
As investment in our core business and that's what we're investing in now so a lot of those contracts are the same contracts really long term 10, 15 year contracts that were doing the very similar kinds of things that we did kind of last build cycle. So we feel good about the returns going forward being well in excess of our of our cost of cap.
Typically in the past we have described organic growth as kind of 5% to seven times multiple.
It was perhaps a little bit of sand in there you saw us do about four times was.
Kind of what we were able to execute on.
No that will hit exactly four times.
Thank you.
If we say five to seven perhaps kind of the lower end of that is something I think we could kind of target and be able to get their part of it will be dependent on when youre investing what are commodity prices doing throughout that time period that can move up can move down that can kind of move that overall multiple but either way, we're becoming less commodity price sensitive with the fee base in fee margins, we have in there.
We see really strong returns for us.
On these projects.
Investing in our core business GMP and then following the NGL molecule to the water.
Got it and just one clarity clarification on that so the new contracts that you're signing.
Basically, helping you push more towards fixed fee or they just.
Keep the fixed fee.
<unk> is the commodity sensitivity constant where it is.
Well on the we're always entering in to new contracts, we're amending or extending entering in a new era.
New contracts on the GMP side and on the downstream side. So it's a constantly moving and changing dynamic, but as we're talking with our producer customers. We have been successful and we're going to continue to push for more fee based components in our gathering and processing contracts, where we had just direct straight exposure.
We are now putting floors in place some of them as they come up we are moving to fee base. There is hybrid it's a mix and so as those come up as we extend as we modify those contracts will be adding more fee based component. So I don't expect that to continue to move more and more fee based as we move forward.
Got it thanks for all the clarity.
Okay. Thank you.
Thank you and I'm now showing no further questions at this time I would now like to turn the conference back to Sanjay Lad, Vice President of Finance and Investor Relations for closing 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 thanks and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.