Operator:

Good day, and welcome to the Targa Resources Corporation Second Quarter 2024 Earnings Webcast and Presentation. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Sanjay Lad, Vice President, Finance and Investor Relations. The floor is yours, sir.

Matt Meloy:

Thanks, Sanjay, and good morning to everyone. We had another record quarter across multiple fronts. But before we get into all the good things happening here at Targa, I would like to first recognize all our employees impacted by Hurricane Beryl. We prepared for the storm, weathered the storm and performed across a difficult period to safely keep volumes flowing, providing best-in-class service when many of our employees were also managing without power and had damage to their homes. The hard work and dedication demonstrated during the storm is really something to be proud of. So I'd like to say thank you to the Targa team for all the extra effort. The storms reduced our volumes for only a short period, so we expect the impact on the third quarter to be minimal as there was no material damage to any of our assets. I would also like to welcome Will Byers, Targa's new Chief Financial Officer to our call this morning. Will officially joined us on July 22, and we're excited to have him as part of the Targa team. We'll add a lot of depth to our organization, given his 20-plus years of midstream finance experience, including serving in CFO roles over the last 10 years. As part of Jen's continued development, she has now transitioned into the role of President, Finance and Administration and will continue to increase her role and responsibilities. Turning now to our second quarter results, it was another strong quarter of performance across our organization, which sets us up well for the balance of this year and beyond. Record volumes in the Permian drove record NGL transportation and fractionation volumes downstream and record quarterly adjusted EBITDA. We brought our Train 9 fractionator in Mont Belvieu and our Roadrunner II plant in Permian Delaware online, on time, on budget. And given increasing volumes across our systems, they were both very much needed. We also executed on a quarterly record $355 million of common share repurchases which is reflective of our performance and strong conviction and the outlook for our business going forward. We also just announced our participation in a joint venture supporting the next natural gas pipeline from the Permian Basin. We provided a meaningful volume commitment to support the project, and this provides for a 17.5% ownership interest in the Blackcomb pipeline. Blackcomb will be a 42-inch pipeline transporting gas from the Permian to South Texas. The pipeline is expected to be project financed, so Targa's capital investment should be less than $200 million. Now let's talk a little more about our Permian position and the good things happening there. Activity in the Permian remains very strong, supporting our view of continued long-term growth from the basin. Our Permian volumes during the second quarter increased about 275 million cubic feet per day over the first quarter, which is a full plant. And year-over-year, our volumes in the Permian are up more than 600 million cubic feet per day. And currently, our volumes in the Permian are up another 200 million cubic feet per day compared to the second quarter. We expected strong growth from our Permian assets, but the growth we have seen this year has exceeded our expectations. We now expect low double-digit percentage volume growth this year, which sets us up well for meaningful growth in 2025 and beyond. This higher growth rate is driving incremental EBITDA and requiring additional growth capital investment. These volumes are core to our business, and we benefit across the integrated NGL value chain, driving higher margins into our downstream business and generating strong ROIC. Given higher-than-anticipated Permian volumes and an outlook for continued strong activity across our Midland and Delaware footprint, we announced our next two plants in the Permian, one in the Midland Basin and another in the Delaware Basin. Some spending for these plans was included in the forecast we provided back in February, but the timing and cadence of spending has accelerated. To support our higher volume and higher EBITDA profile, we are updating our estimate for growth capital spending for 2024, so approximately $2.7 billion. This increase or the increase in growth capital spend from our previously provided range is attributable to the acceleration of timing of plants in the Permian, incremental field capital compression and gathering lines the acceleration of downstream infrastructure connections and other opportunities like spending on enhancing residue gas takeaway. Similarly, we expect stronger than previously estimated Permian volume growth next year and are updating our 2025 estimate for capital spending to $1.7 billion, driven by a similar acceleration of plant and field capital and our investment in Blackcomb. We included a bridge on Slide 5 in our Q2 earnings supplement presentation for our updated estimates for 2024 and 2025 growth capital. The strength of our first half 2024 performance and continued strong outlook going forward driven largely by higher Permian volumes and higher volumes through our integrated system means the updated midpoint estimate. For our full year 2024 adjusted EBITDA is $4 billion, which is a $200 million or 5% increase from our previous estimate. We now expect higher adjusted EBITDA in 2025 and a similar free cash flow estimate to when we compare our outlook -- to when we provided our outlook in February, with 2025 representing an important inflection for our company as our meaningful free cash flow generation positions us to continue to return an increasing amount of capital to our shareholders, while further strengthening our investment-grade balance sheet. We believe that we are uniquely positioned for the short, medium and long term as an already strong outlook for Permian Basin volume growth from best-in-class producers continues to get stronger, which benefits our entire integrated value chain. Our contract structures support us continuing to invest on behalf of our producers, benefiting from cash flow stability and lower commodity price environments and upside as prices rise. And we are delivering record financial performance despite a weak commodity price backdrop. Before I turn the call over to Jen to discuss our second quarter results in more detail, I'd like to extend a thank you to the Targa team for their continued focus on safety and execution, while continuing to provide best-in-class service and reliability to our customers.

Sanjay Lad:

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and reenter the lineup if you have additional questions. Sheri, would you please open the line for Q&A?

Jeremy Tonet:

Hi. Good morning.

Pat McDonie:

Good morning.

Jeremy Tonet:

I just wanted to touch on the guidance raise here a little bit. Especially the free cash flow inflection and just wanted to understand that a little bit better, whether that is absolute dollars or rate of change or just any other, I guess, way you could bracket what that means?

Jeremy Tonet:

Got it. That's helpful. Thank you for that. And then looking across, it seems like the implied GPM across the processing fleet stepped up quite nicely in 2Q. Just wondering how much of that was tied to better ethane extraction economics in the quarter? How sustainable is the volume uplift in downstream? Just trying to understand that better, particularly, I guess, with Daytona tracking well, it seems?

Pat McDonie:

No, they are. I mean we had some periods of ethane rejection in the first quarter. That, coupled with some weather issues at times, and we've been in full recovery during the second quarter.

Jeremy Tonet:

Got it. And just the last part with Daytona, if that's tracking early, any impact there, I guess?

Jeremy Tonet:

Got it. That's very helpful. I'll leave it there. thanks.

Operator:

Thank you. One moment for our next question and that will come from the line of Spiro Dounis with Citi. Your line is open.

Matt Meloy:

Yes, sure. I'll start, and then Pat, you can hop in. I mean, we've over the last several years, have really outperformed the basin. Our team has done a really good job at servicing our existing customers, but also having commercial success really across the Delaware and the Midland. We also have our assets, well, we have a wide -- kind of a wide area that we cover. We are in the best spots of the Midland, and we're in the best spots and most active spots in the Delaware as well. So, I think we benefit from that. We've seen this year continued strong activity from producers, but we've also seen revisions from our producers of the forecast they've given us. And the level of volumes that they're expecting to come across our system for 2024 and 2025. I'd say this year, we've seen more positive revisions than we have in other years. So, we've just benefited more from that. Maybe just goes to Targa's overall positioning and strong user activity. You have anything to add to that?

Spiro Dounis:

Got it. And as you think about the cadence for that next frac pipeline expansion, is that still kind of far enough out? Or does that seem like that's accelerating too?

Spiro Dounis:

Great. That's helpful color. One just quick follow-up on Blackcomb. So pretty small capital investment out of the gate. But I know in the past, you've never really looked at residue gas pipeline as kind of core to your portfolio. So curious, at some point, this become a monetization candidate or too early for now?

Spiro Dounis :

Great. I’ll leave it there. Thanks for the color everyone.

Jen Kneale:

Thank you.

Theresa Chen:

Good morning. On the underlying growth across your system, Matt, to your comment about low double-digit net volume growth in 2024. Can you just give us some more color on your view quantitatively for 2025 in led? And what are some of the puts and takes that underlie that view based on your discussions with your producer customers?

Theresa Chen:

Understood. And was there anything in particular that drove lower quarter-over-quarter OpEx on a unit basis despite higher volumes in L&T?

Jen Kneale :

Theresa, so we also generally hire ahead of assets coming online. So you would have seen an increase in OpEx prior to Train 9 coming online, as we essentially got ready for it. So then when we get the volume associated with the asset essentially being full. When it does come online, that may be one of the reasons that the unit margins improved in the second quarter.

Theresa Chen:

Thank you.

Operator:

Thank you. One moment for our next question. And that will come from the line of Michael Blum with Wells Fargo. Your line is open.

Bobby Muraro :

Yeah, Michael, this is Bobby. I think we disclosed what we're going to disclose in the press release last night and then our earnings this morning. But when we think about getting gas takeaway out of the basin, we're excited to get this done, and bring in Targa's volumes to the table, it got it across the line to go FID obviously, last night and get supply for takeaway in -- out of the Permian for 2026 done and launched. I think we'll defer to white water on how much they share overtime. But I think at FID returns and the returns it fills up, I think it's going to be a great deal for Targa and all the partners that are investing in it.

Jen Kneale:

We believe it is, Michael. The $1.7 billion multiyear outlook that we put out earlier this year is really predicated on a high single-digit Permian growth scenario. So as we said this morning, to the extent that we see an acceleration of volume growth beyond that in 2026 and beyond, that could change that growth profile. And then the other element that we've pointed to since we put that slide out is that, our downstream capital spending is lumpier generally than our discrete projects on the gathering and processing side to the extent that we need to add fractionation or in particular, transportation, that can change the complexion of how that outlook plays out for a given individual year. But I think over a multiyear horizon, it still very much holds again, largely dependent on what the assumption is for underlying Permian growth volumes.

Jen Kneale:

Thank you.

John Mackay:

Hey. Good morning, everyone. Thanks for the time and congrats to Jen and Will. …

John Mackay:

I wanted to go back to something we've asked about a couple of times here, but maybe just about a finer point on it. When we're seeing this Permian growth expectations continue to move up. I guess, I'd just be curious, if you could piece a little more out of that. Is it hey, these customers are actually expecting to bring in more rigs and crews back half of the year? Is it, hey, actually, productivity gains are a lot higher than we've expected? Is it all in the GOR side? Anything there you can kind of break out for us would be helpful.

John Mackay:

Yeah. That's really clear. I appreciate that. Maybe just shifting to return of capital, buyback number was great. I guess I'd just be curious to your guys' latest thoughts on the buyback versus the dividend, given the recent run in the stock?

John Mackay:

Thanks for the time.

Operator:

Thank you. One moment for our next question. And that will come from the line of Manav Gupta with UBS. Your line is open.

Matt Meloy:

Sure, yes. Yes, we indicated kind of our investment multiple going forward about 5.5 times, call it, five to six times EBITDA. And I think you've seen our track record over the last several years. EBITDA multiple has even been perhaps a little bit stronger than that. We're investing in the same kind of projects that have delivered return -- strong returns for us over the last several years. It's investing in our gathering and processing business and then expanding our downstream NGL infrastructure to accommodate those volumes. So we're really sticking to our core business. We expect the returns to be very good. That 5.5 is kind of what we indicated would be a pretty good base case, what we think we can do. I hope we can beat that. But if we do 5.5, it will be a really good return profile for us.

Matt Meloy:

Okay. Thank you.

Keith Stanley:

Hi, good morning. First, I wanted to start with a follow-up just on 2025 CapEx. Are you baking in any NGL pipeline spend in there or you're comfortable third-party contracts are giving you enough visibility that you don't need to invest in more pipeline capacity yet next year?

Keith Stanley:

Great. Thanks. Second question, with volumes coming in a lot higher than expected, is it fair to think you're offloading a lot more to third parties this year than normal? And then we think about growth into 2025 and new assets coming online, should we expect some additional financial tailwinds just from bringing volumes back onto your system in '25 that maybe you're offloading this year?

Pat McDonie:

We'll looking around who's going to answer this.

Keith Stanley:

Thank you.

Operator:

Thank you. One moment for our next question. And that will come from the line of Sunil Sibal with Seaport Global. Your line is open.

Matt Meloy:

I would say, on average, our plants are around $200 million on the G&P side of things for a new 275 plan. Some have been a little bit cheaper, some have been a little bit more depending on what kind of inlet compression you're doing in, some of the other bells and whistles or sweet sour, but it's around 200 for the plants we have announced.

Matt Meloy:

How much field capital? Well, that's also one where it varies from year to year, how much pipeline compression you're going to need? Is it more high pressure, is it more low pressure. So you can see more variability on that. So there are times we're also ordering more compression. We're trying to build some inventory because we see strong growth in the next year. So that has moved around quite a bit, I don't know. Pat, add any other color we want to give?

Matt Meloy:

And we haven't really seen, I'd say, a material change. It varies from year to year, but we haven't seen a trend of getting more expensive or less expensive. It's been operating within a band that we've seen year in, year out.

Jen Kneale:

We're not going to break it out separately, Sunil. What we have said is that we expect to be in a position to potentially benefit from 45Q credits later this year. We have a number of projects that we're commercializing in the Permian Basin that's very much core to what we do and what we are good at. So it's small enough that it doesn't make sense for us to break it out separately, but I'd say the returns are consoserate with what we're seeing across the rest of our investment opportunities across the portfolio.

Matt Meloy:

Okay. Thank you.

Operator:

Thank you. One moment for our next question, and that will come from the line of Tristan Richardson with Scotiabank. Your line is open.

Bobby Muraro:

This is Bobby. Yes, as we build our portfolio to transport, we obviously market a ton of gas for our producers across the Permian Basin. And as we look at the portfolio of takeaway, we've talked about it before in tight markets, we spend a lot of time to make sure that all the gas moves out of our plants. Some of that is long haul out of the basin, like our Blackcomb deal. And but I'd tell you, a majority of it is within basin and tailgate sales to people that have transport. So we manage that all together. And then as we think about making sure there is egress from the basin on pipes. That's when we step out on things like this Blackcomb deal to make sure that a pipe gets built, timely enough such that the basin doesn't have more material issues than it already has. So when I think about what we put on a pipe like Blackcomb, it is a very small subset of the amount of gas we market across the basin. So it's not a needle mover relative to the amount of gas we market but it is part of the science we go through every year thinking out one year, thinking out two years, thinking out three years and how we're going to make sure all the gas moves through our plant so that the NGLs get out and our producers can produce their oil.

Jen Kneale:

In the second quarter supports why the fee floors are so important to us. When you think about the amount of capital that we spent in the quarter, now moving forward with two additional gas processing plants to support our producers with the backdrop of negative Waha prices and low NGL prices, yes, you can assume that the fares -- the fee floors were very much important to us in the second quarter. And really have been in play for a substantial number of months over the last, call it, 1.5 years or so. And that again is really what's allowed us to invest through what is a low commodity price cycle right now and what is allowing us to continue to invest looking forward as well.

Jen Kneale:

Thanks, Tristan.

Operator:

Thank you. I would now like to turn the call back over to Mr. Sanjay Lad for any closing remarks.

Operator:

This concludes today's program. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by, and welcome to the Targa Resources First Quarter 2021 Earnings Webcast and Presentation. [Operator Instructions] As a reminder, today's program is being recorded.

Sanjay Lad:

Thanks, Jonathan. Good morning, and welcome to the First Quarter 2024 Earnings Call for Targa Resources Corp. The first quarter earnings release, along with the first quarter earnings supplement presentation for Targa that accompany our call are available on our website at targaresources.com in the Investors section. In addition, an updated investor presentation has also been posted to our website.

Our speakers for the call today will be Matt Meloy, Chief Executive Officer; and Jen Kneale, Chief Financial Officer. Additionally, the following senior management team members will be available for Q&A:

Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer.

Matt Meloy:

Thanks, Sanjay, and good morning. We are proud of our first quarter results as we continue to execute across the organization to deliver another quarter of record adjusted EBITDA, Permian volumes and LPG export volumes, along with a 50% increase to our common dividend per share and $124 million of common share repurchases. For the quarter, we really benefited from strong back half of the quarter Permian volume growth. January was impacted by operational upsets associated with harsh weather. From there, volumes significantly increased throughout the quarter, which helped drive record results and sets us up well looking forward.

Sanjay Lad:

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and reenter the lineup, if you have additional questions. Jonathan, would you please open the line for Q&A?

Michael Blum:

I want to start with the LPG volumes, it seems like still had really strong volumes in the quarter. It seems like the Panama canal issues while the global shipping volatility is not really impacting U.S. cargoes or your cargoes. So I wonder if you could just speak to what you're seeing in the global markets and then how you see the rest of the year shaping up.

D. Pryor:

I think we alluded to the fact that last quarter that we saw it probably in the range of, call it, 7% or something like that. I would actually suggest to you that we've actually seen better percentage benefit to us. It really just allows us to operate our refrigeration units at a higher utilization rate with those nighttime transits. So we're getting significantly above, say, a 10% type improvement over -- in our overall operating rates.

Theresa Chen:

Maybe turning to the upstream side of things. Just given the strength of the inlet volumes in Q1, which arguably was higher than many expected, given the weather impact this year, and I appreciate the intra-quarter commentary, Matt. But how do you view the cadence growth for the remainder of 2024, taking into account the Waha egress issues?

Theresa Chen:

Got it. And great to see the CapEx unchanged while taking into account the new projects as you previously telegraphed, with the backdrop of the free cash flow inflection next year as CapEx [ that's lowering ], returning more cash to shareholders, you hit a decent run rate. And I was wondering what is Targa's next area of strategic focus from here?

Jennifer Kneale:

And Theresa, this is Jen. I would just add that I think that's part of why we're so excited about the short, medium and long-term outlooks for Targa. When we think about the millions of acres that are already dedicated to us in the Permian, where we've got a great set of producers that have been so successful with their drilling activity. It feels like we just have an excellent runway in front of us over that short, medium and long term to just continue to do what I think we've put up a very credible track record around doing successfully, really for as far as the eye can see.

Jeremy Tonet:

Just wanted to see how you're thinking about taking stock of results so far, in the plant, seems like that's a minor issue there. Do you see yourselves within the guidance range that you reaffirmed? Do you see itself tracking towards the higher end or the lower end? Or how do you see, I guess, factors that could drive upside versus the downside at this point of the -- within the range?

Operator:

And our next question comes from the line of John MacKay from Goldman Sachs.

Jennifer Kneale:

John, this is Jen. I think you've got a lot of the pieces already, which is with the Greenwood fire, Matt quantified that we see about $10 million of additional expense. Some of that will be in capital in terms of the repairs that we need to make, but some of that will be in operating expenses as well. We'd also expect OpEx to rise Q2 relative to Q1 as we do have new assets coming into service. And we do have a lot of seasonality in our businesses that generally tend to result in weaker second quarters versus certainly the fourth or the first quarters of the year. So I think as we look at all of that, it's just playing some conservatism through our minds that we really just want to get through this quarter, continue to put up strong growth numbers in the Permian that will result in more volumes through the rest of our integrated system. We are very happy that Train 9 is starting up. That is very much needed at this point in time.

John Mackay:

Appreciate that. And maybe if we just zoom out a little bit, taking into account the kind of some of these infrastructure issues we've seen in the first half and also the fact that most of the producers are talking about second half weighted activity levels for their Permian plans overall. Are we seeing any shifts in producer activity? Or does it feel like that second half ramp that we're expecting for the Permian more broadly, that's still in hand.

Operator:

And our next question comes from the line of Spiro Dounis from Citi.

Matt Meloy:

Yes, sure. Yes. So the Pembrook II and Train 11 were both contemplated and in our base case multiyear plan. As we look forward, we're always assessing when we're going to need additional plants in the Gathering and Processing, especially out in the Permian. So we had other plants in there. So I'd say we're kind of tracking towards what we had expected when we initially came with that guidance. And I'd say, yes, we have some room to handle some incremental growth in our business, kind of through '25 as planned. And I already mentioned, we're already evaluating when we're going to need another Delaware plant. So we're looking into that. I wouldn't think those are going to have a material impact on our outlook for capital for 2025.

Spiro Dounis:

Understood. [indiscernible] color there. Switching gears a bit, maybe just to go back to capital return. Some meaningful step up quarter-over-quarter in the buyback despite some of the really strong stock performance. So I suspect you still see a lot of value of your stock here. So curious -- maybe just comment on thinking through the rest of the year. Maybe one we could see you start to track closer to that 40% to 50% payout target.

Operator:

And our next question comes from the line of Neil Dickman from Truth Securities.

Patrick McDonie:

What I would say is that it's pretty consistent across all our producers, I mean, certainly, some have more rigs running and they're a little more of a greater percentage increase than others. But activity level across our entire producer base is pretty robust. It's across the Delaware, the Central and the Midland Basin. It's not area specific. It's not producer specific. It's really strong, steady activity across the producer base, across the entirety of the Midland Basin. So right now, we feel really good about the way our producers are performing. And frankly, we're getting, like I said earlier, infrastructure in place to be ready to handle it.

Jacob Nivasch:

Sure. And then just a follow-up here. With regards to capital spending, I guess, in 2025, I guess, how sticky is that growth CapEx number that you guys are looking at that $1.4 billion? And the reason I ask is, I guess, you're talking about investing more organically and see some additional opportunities out there. And I guess, how do you balance that between an inorganic growth, acquiring something? And is this all accounted for in that $1.4 billion, these organic projects? Or do you think there could be some more upside here?

Indraneel Mitra:

I was looking at the year-over-year bridge on the G&P segment, and one of the tailwinds in the quarter was higher fees. I was just wondering if you could explain what that is? Is it moving to more fixed fee contracts, escalators or higher fee floors. Just trying to understand what that comment is and what the driver looks for the quarter?

D. Pryor:

Yes, Neel, this is Scott. When you look at the first quarter relative to fourth quarter of last year, yes, our frac volumes were down, but our fractionators were full in the fourth quarter, they were full in the first quarter, but just limited in terms of availability of space because of the downtime that we had that was scheduled as well as some of the impacts of the harsh winter weather that we had in January as well. .

Keith Stanley:

So I know the company is more fee-based than well-hedged this year, but I want to make sure with Waha prices being pretty extreme here that there's no meaningful impact from prices themselves on the company this year. And then related to that, just given Permian gas supply continues to beat expectations kind of over and over. At what point do you start to feel more pressure to move forward on a gas pipeline project like Apex? Is it -- do you need to see something happen by the summer, the fall or how you're thinking about that overall?

Robert Muraro:

Yes. So a couple of things relative to what Matt said, not use a phrase, it's [indiscernible] right? So every couple of years, we see Waha get crushed. We have those really defined forecasts relative to the wallet connection. So we're always planning, and Pat mentioned it earlier, with both our producers that market their own gas and taking kind and producers that we market for it. We are ahead of this and planning to make sure we can move all the gas that comes out of our plants. So the immediate issue is ignoring issues on pipes that aren't expected. We're always set up to be ready for this because this happens every 2 years.

Tristan Richardson:

A lot has been asked and answered. But maybe just one for me on the CapEx side. I think last quarter, in [indiscernible] call, you offered that illustrative annual spending example [ one ]. And if we look at '25, it seems like with another Midland plant and another frac announced today, 2025 will look a lot like what you've laid out in that hypothetical, but the '25 guide is quite a bit below, 20% below. So just thinking about maybe where we're deviating from some of that illustrative example. And just maybe where you're seeing actuals in '25 looking better than some of that illustrative spend that you guys laid out last quarter?

Jennifer Kneale:

And then the other one would be really low-cost export expansion we have, we've got in that illustrative multiyear guidance spending, for both transport and exports, that we wouldn't expect to need to do in a meaningful way in 2025.

Sunil Sibal:

So I wanted to start off on the infrastructure side in Permian. I think you've previously talked about how you'll kind of debottleneck the Permian portion of Grand Prix through pump capacity additions and all that. Could you talk about where does your kind of current capacity stands there? And obviously, Daytona comes online later this year. How should we think about volume trending on that and competition for third-party volumes per se?

Robert Muraro:

And this is Bobby. Yes, about third-party competition. We've talked about this before. We are a wellhead-to-water company, right? So we build Grand Prix, we build Daytona, we build our NGL structure service our G&P footprint that goes out to the wellhead. A vast majority of the liquids that come out of our plants go down our NGL pipes, and we anticipate that being the same going forward. The third-party business exists within Targa, but that's not the driver of Targa's NGL business. It is our wellhead-to-water starting at the wellhead.

Matt Meloy:

Yes. Most of the activity is obviously around our Permian and related NGL infrastructure. That's where the activity is. That's where the growth is happening. And the other assets, there's not a lot at -- especially with weaker gas prices. When gas prices moved up in '22, we started to see some activity, but you're seeing volumes move off, which is not unexpected. So to the extent there are some opportunities and there are some limited opportunities in the Central region to go get packages of gas and compete, we go do that, and we're looking to grow where it makes sense or get additional packages of gas where it makes sense in those businesses.

Operator:

And for our final question today comes from the line of Zach Van Everen from TPH & Company.

Robert Muraro:

This is Bobby. Yes. No, I think we've reiterated that on multiple calls. We see '26 as the year for a need for another full pipe out of the basin, whether that's earlier in the year or later in the year, we'll be prepared for whatever that answer is, as we move forward in time. And I think, generally speaking, yes, the 24 months from FID is kind of the number that everybody talks about, sometimes you talk about '26, maybe it's '22, maybe it's '28, but '24 is the good guideline that I think the whole industry uses for the construction of that pipe. So -- and yes, I'm fully confident that if we'll go -- something will go FID before the end of the year that solves the '26 basin issue.

D. Pryor:

Zach, this is Scott. We've certainly seen increased production really across the board as it relates to the additive of production coming out of the Permian as a whole from a U.S. production perspective. The draws of late have been relatively weak, if you will. So yes, we're kind of seeing year-on-year similar type inventories. And that's the reason why I think you're also seeing max levels, if you will, or high utilization levels of exports across the dock, whether it's us or even the competition in the marketplace. Some of that's going to get solved by some of the expansion projects that have already been announced.

Operator:

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Sanjay for any further remarks.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Good day and thank you for standing by. Welcome to the Targa Resources Corp. Fourth Quarter 2023 Earnings Webcast and Presentation. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sanjay Lad, Vice President of Finance and Investor Relations. Please go ahead.

Matt Meloy :

Thanks, Sanjay, and good morning. 2023 was another record year for Targa. And I would like to recognize and thank our employees for their focus, dedication and execution throughout the year. Some of our highlights for 2023 include record safety performance; record Gathering and Processing volumes in the Permian; record volumes across our logistics and transportation assets; record adjusted EBITDA of $3.53 billion, a 22% increase over 2022, while also reducing our share count; major projects came online on time, on budget and have been highly utilized since start-up; ended the year with 90% of our G&P volumes fee-based or with fee floor; positive outlook to our current investment-grade ratings with each of the three agencies and the completion of two successful notes offerings; and higher year-over-year return of capital to our shareholders through both an increased common dividend and record common share repurchases. Our performance was particularly strong given Waha natural gas and NGL prices were about 64% and 34% lower year-over-year. And we benefited from margin from fee floors in our Gathering and Processing business across 10 of 12 months, demonstrating our business is more insulated to downside -- to downward commodity prices than ever before. We also exited 2023 with a lot of volume momentum in the Permian. Our December reported inlet averaged 5.5 billion cubic feet per day, a 450 million cubic feet per day improvement from our third quarter average. While our volume ramp materialized later than we forecasted for 2023, we are pleased that we ended the year with December actuals in line with our original guidance expectations for the Permian, providing us with strong momentum in 2024. We expect another year of record financial and operational metrics with full year adjusted EBITDA estimated to be between $3.7 billion and $3.9 billion for 2024. The significant year-over-year increase in adjusted EBITDA is primarily driven by higher expected Permian Gathering and Processing volumes and higher expected NGL transport fractionation and export volumes. Consensus growth expectations for Permian-associated gas in 2024 is about 9%. And given our track record of outperforming the basin, we are installing over 400 million cubic feet per day of compression in the first half of 2024, which will drive increasing volumes through our downstream assets. We currently estimate between $2.3 billion and $2.5 billion of growth capital spending in 2024 as we bring online two Permian plants, three fractionators in an NGL pipeline while also spending on projects that will come online beyond 2024, including additional Permian plants and fractionation trains. Beyond these projects already announced and under construction, we're also ordering long lead time items for our next Permian plants and frac Train 11 to ensure we keep pace with the significant activity we continue to see. Backed by the strength of our outlook and increasing stability of our cash flows we announced in November an expectation of a 50% year-over-year increase to our annualized 2024 common dividend per share. The increased dividend will be recommended to our board in April for the first quarter of 2024 with payment to shareholders in May. We also repurchased a record $374 million of common shares in 2023 and continue to be in position to execute on our opportunistic share repurchase program in 2024. Beyond 2024, we really like our positioning driven by a view of cost-advantaged basins like the Permian continuing to be a key supplier of hydrocarbons for decades to come. As we look to 2025, we estimate about $1.4 billion of growth capital spending burdened by the next major projects that are not currently board approved but would be necessary to support continued volume growth, including Train 11 and additional Permian G&P plants. With increasing EBITDA in 2025 relative 2024 and lower estimated growth capital spending, we expect to generate significant free cash flow in 2025. Also, we included in our presentation slides this morning an illustrative buildup of multiyear average spending that would approximate about $1.7 billion per year. This assumes high single digit gas volume growth in the Permian, requiring us to continue to add infrastructure across our value chain. $1.7 billion of capital spending at a 5.5 times multiple would drive over $300 million of EBITDA growth year-over-year and increasing free cash flow, supporting our ability to continue to return an increasing amount of capital to our shareholders. We also included our estimated spending to maintain volumes currently on our system, which we think is helpful in demonstrating the resiliency of our business. Growth capital spending to maintain existing volumes is estimated at around $300 million annually, which is informed by how quickly we're able to rationalize spending in 2020 and 2021, when we still had strong volume growth across our assets. In a scenario of $300 million of annual growth capital spend, we would be in a position to utilize significant free cash flow to continue to return capital to shareholders while maintaining a very strong balance sheet. As we look forward, our excitement is our -- our excitement and our outlook is driven by a few things. First, we have the largest Permian Gathering and Processing footprint in the industry with several million dedicated acres across Midland and Delaware Basins. That, coupled with an integrated NGL system, positions us nicely to generate high return organic opportunities to invest around $1.7 billion annually over a multiyear average, delivering over $300 million of annual EBITDA growth, driving significant free cash flow and positions Targa to continue to meaningfully increase the amount of capital returned to shareholders and deliver significant value to our shareholders over the long term. Let's now discuss our operations in more detail. Starting in the Permian, activity continues to remain strong across our dedicated acreage. Fourth quarter inlet volumes averaged a record 5.3 billion cubic feet per day, an 11% increase when compared to the fourth quarter of 2022. We brought online significant compression across our Midland and Delaware systems during the fourth quarter, driving a 5% sequential increase in volumes. In Permian Midland, our new 275 million a day Greenwood plant, which commenced operations during the fourth quarter, is already highly utilized. Our next Midland plant, Greenwood II, remains on track to begin operations in the fourth quarter of 2024 and is expected to be much needed when it comes online. In the Permian Delaware, activity in volumes across our footprint are also running strong. We brought online our new 275 million a day Wildcat II plant in late fourth quarter, and it's already highly utilized. Our Roadrunner II and Bull Moose plants remain on track to begin operations in the second quarters of 2024 and 2025, respectively. As mentioned earlier, we are ordering long lead time items for our next Permian plants to support continued production growth across our footprint. Shifting to our Logistics and Transportation segment. Targa's NGL pipeline transportation volumes were a record 722,000 barrels per day, and fractionation volumes were a record 845,000 barrels per day during the fourth quarter. Our Grand Prix NGL pipeline deliveries into Mont Belvieu increased 9% sequentially as we benefited from increased supply from our Permian G&P systems and higher third-party volumes. The outlook for NGL supply growth from our G&P footprint and third parties remains robust, and our Daytona NGL pipeline expansion will be much needed to handle growth from our system. We have obtained all required permits and have commenced construction on Daytona. We now expect the pipeline to begin operations ahead of schedule in early fourth quarter of this year, assuming favorable weather conditions. Our fractionation complex in Mont Belvieu continues to operate near capacity. And we expect our Train 9 fractionator to be highly utilized when it commences operations during the second quarter of 2024. The restart of GCF will also provide much-needed capacity when it is fully online during the second quarter of 2024. Our Train 10 fractionator is also expected to be much needed given the anticipated growth in our G&P business and corresponding plan additions and remains on track for the first quarter of 2025. As mentioned earlier, also ordering long lead items for Train 11 support continued production growth across our footprint. In our LPG export business at Galena Park, our loadings were a record 13.3 million barrels per month during the fourth quarter as we benefited from our recently completed expansion, strong market conditions and the Houston Ship Channel allowance of nighttime transits for larger vessels, providing strong momentum for 2024. Before I turn the call over to Jen to discuss fourth quarter results in more detail as well as our expectations for 2024, I would like to extend a second thank you to the Targa team for their continued focus on safety and execution while continuing to provide best-in-class service and reliability to our customers.

Sanjay Lad :

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow up and enter the Q&A line up if you have additional question. Shannon, would you please open the line for Q&A?

Jeremy Tonet :

Hi, good morning.

Jeremy Tonet :

Just wanted to start off, I guess, with the news about 2025 CapEx stepping down so significantly versus 2024, creating a lot of flexibility there as it relates to return on capital. Just wondering if you might be able to provide a little bit more detail as far as thoughts on capital allocation at that point in weighting dividend growth relative to buybacks. Just kind of any other -- any incremental color would be helpful there with that extra -- with that $1 billion step-down in CapEx.

Jeremy Tonet :

Got it. Thank you for that. And maybe just pivoting towards LPG exports, a good step-up there. Just wondering if you could comment a bit more if the lifting of daylight hour restriction, I think, it is planned and we expect the Port Authority to drop the trial moniker not too far down the road here. I'm just wondering how you think that impacts Targa capacity when the daylight hour restriction is fully removed then?

Jeremy Tonet :

Got it. Okay. So it sounds like there could be upside down the road versus the 5 to 10?

Matt Meloy :

Yeah. It's still early, Jeremy. So I think we're thinking 5% to 10% is a good -- kind of a good range of upside right now, but it's still pretty early.

Sanjay Lad:

Okay, thank you.

Spiro Dounis :

Thanks, operator. Good morning, team. Wanted to go back to Permian production quickly. Jen, you had mentioned maybe a slower start to the year, and I think that's pretty consistent with what producers are saying. Just curious, though, as we think about the year as a whole, can you give us a sense of what Permian production growth is underwriting the guidance? And to the extent that it's back half loaded, what that implies about 2025?

Spiro Dounis :

Got it. Thanks a lot, Jen. Second question, maybe going to 2025. I know you're not providing '25 EBITDA today, but some of the materials did maybe give us some tools on how to help think about that. You guys are pointing to significant growth. You've also talked about in the slides $300 million of annual EBITDA growth with $1.7 billion of spending. So I guess, if I look back at '23-'24, spending over $2 billion in each of these years, it would seem like as we think about the lease of '25, over $300 million of EBITDA growth would seem like an easy hurdle. But I don't want to get too ahead of myself.

Spiro Dounis :

Fair enough. Thanks for that, Matt. Appreciate the time today.

Operator:

Thank you. Our next question comes from the line of Brian Reynolds with UBS. Your line is now open.

Matt Meloy :

Sure. No, good question. I mean, really, historically, you go back years, we kind of said 5 to 7 times build multiple is kind of what we targeted. We've been able to do better than that. I think that was just kind of some cushion in that 5 to 7. If you look back at the last five years, we've really been kind of closer to a 4 times build multiple. We've had really good volume growth across our system. And the Permian, Grand Prix filled up much quicker even than our expectations, which just drove the returns even higher. So I think we've really had some strong performance. But I'd say there's really nothing fundamentally different in what we're investing in this year and next year, go forward than what we invested in, in the past where we did have a lower investment multiple. I'd say perhaps there's a little bit of conservatism put into that number. But it's not -- there's not a large delta from commodity prices one way or the other. I'd say we have more commodity price upside given the fee floors that Jen and we've talked about, which could drive that lower if we get some commodity price tailwinds.

Brian Reynolds :

Great. Thanks. And maybe as a follow-up to Spiro's question on just Permian and the growth. Previously, you kind of gave more of a firm number around 10%. And then the illustrative guide, you kind of talk high single digits. Maybe just talk about that's kind of your base expectation at this point. And then kind of as a follow-up, has any of the M&A -- any updated view on some acquisitions in the Midland impacting your thought process there? And then just on the operational hiccups, are we past that? And as it relates to H2S gas quality issues, how does your system able to manage that sour gas and potentially grow at a higher clip than the rest of the basin? Thanks.

Pat McDonie :

Yeah. There's been a lot of M&A activity over the last three to four years. So it's not something we're unfamiliar with. And frankly, we don't see a material difference with these new announcements as we've seen in the past. Frankly, we've seen pretty consistent growth across the combined companies relative to our position with the individual companies. The new ones that are coming out, we have meaningful positions with all the parties. We have long-term contracts with all the parties. We have great relationships with all those producers. If you look at what's been publicly announced by those parties, you wouldn't expect a significant impact to what their expected growth levels are going to be. Frankly, at least on one of the major -- the bigger mergers, there's -- you could allow that there's going to be an expectation of incremental growth on our assets on the Midland side of the basin. So there is a lot of activity, a lot going on, but we've benefited from it because we've got great assets, we're reliable. We've got good contracts, and we've got good relationships.

Jen Kneale :

And then I think the very last question in your question was around whether volumes had rebounded as a result of the impact of winter storm. And I'm really proud -- I think we're all really proud of the efforts of our operations teams to get volumes back online. So we're close to back to levels that we were seeing before we experienced the extreme weather.

Sanjay Lad:

Okay, thank you.

Tristan Richardson :

Hi, good morning. Jen, pardon, my voice this morning, but really appreciate the CapEx sensitivity you guys laid out and really curious about the flexibility you have in that '25 outlook. Certainly, you talked about that high single digit embedded in that assumption. But can you talk about timing that spend in the event producers deviate from that assumption, whether that is deferring Train 11 timing your plan towards the end of '25? And then also maybe just about does Greenwood II and Bull Moose coming on towards the second half of '24? Is that adequate capacity to support that sort of high single-digit inlet for '25 in the illustrative?

Tristan Richardson :

Super helpful. Appreciate it, Matt. And then just a quick follow-up. Talking about the 90% fee-based now. I mean, I think a substantial move from '23. Clearly, this is a multiyear priority for you guys and has been a game of inches. Are you seeing a big change in '24 really a function of mix? And where -- which of your producers are growing? Or did you see some substantial kind of recuts or recontracting occur throughout '23?

Tristan Richardson :

Yeah, appreciate. Thanks very much, Matt.

Operator:

Our next question comes from the line of Theresa Chen with Barclays. Your line is now open.

Jen Kneale :

This is Jen. It's actually a mixture of what you talked about but for different reasons. You've seen the percent of our G&P business that is fee-based increase largely as a result of acquisition. When we bought Lucid, primarily underpinning the Lucid contracts that we acquired were largely fee-based contracts. And so we saw a big step change in the increase of fees generated from our G&P business associated with that acquisition. But what our commercial team has been really successful at doing, and I would also like to take my hats off to all of them because it's been just a huge effort that I think has very meaningful implications for our company, is they have gone in and worked with producers to really demonstrate that in order to incentivize Targa to be willing to spend capital. And this goes back to 2020. This is an effort that we have been building on -- building momentum on over the last many, many years. But going back to those conversations, in order for Targa to be willing to continue to invest capital, what you've seen us consistently do over the last many years. We need to make sure that we will get an adequate rate of return in a downside commodity price environment. It's simply just the math. And our producers have been very supportive of that construct. So we've gone into existing POP contracts, and we've been able to restructure those to put the fee floors in place that, again, have incentivized us to continue to spend capital even as commodity prices are lower while not giving up the upside to the extent commodity prices rise. And so it's really been a mix of we've acquired a lot of fee-based assets on the G&P side, and then we've gone in and we've either restructured existing contracts or as new contracts have been put in place by our commercial team, they've been put in place with that fee floor structure while also generating returns across our integrated system. And the commercial teams have really just done a very good job supporting our producers with what our producers need but under a construct that also works for us to continue to capital.

Matt Meloy :

Yeah. Sure. Good question. So I would say the primary delta from the 1.4 to 1.7 is downstream spending, having multiple fractionation facilities and that's really more this year. But really the delta between 1.4 and 1.7 is primarily downstream. One of the larger projects that we don't have any meaningful spending on next year is transportation, another NGL pipe. We have Daytona coming on this year. That's going to provide us some good runway. So then how much runway that provides really depends on what the overall growth rate in the Permian and our capture of those NGL barrels to move on to Daytona. So that is something we're thinking about. These pipes take a couple of years to get billed, probably even a little bit longer than that. So we had to look out two-three years and say, when do we need to think about looping that 30-inch segment. There's also available transport out there from some of our competitors. So we can move -- I think we'll move the lion's share of our volumes on our own pipe. There can be transportation agreements that can be had with some of our competitors as well. So really, for us, all options are on the table, whether it's us building a 30-inch down the road or utilizing some excess capacity from some other NGL pipes.

Theresa Chen :

Thank you.

Operator:

Our next question comes from the line of Neel Mitra with Bank of America. Your line is now open.

Scott Pryor :

Neel, this is Scott. I'll start it off and just say that let's -- when we first think about the pipe, recognize that today, we utilize third-party pipes for volumes that are coming into our Belvieu facility today. And when we think about the growth that we have on the G&P side and the Daytona pipeline, we are not out there fighting for fees relative to fill up our existing capacity and our expected capacity that we would have on Daytona. So all of that kind of folds hand-in-hand with the growth that Pat and his team on the G&P side have relative to transportation. Matt alluded to the fact that if there is capacity on industry pipes, we -- again, because we utilize that today, we can always look for opportunities to utilize that to bridge us to whenever we might need to do a loop around our existing system. As it relates to Galena Park, we have a really good idea of what the next expansion project looks like. And it's a variety of factors from adding refrigeration to adding pipe, to adding potential docks and things of that nature. So we're keeping, obviously, a close eye on what that timing needs to be relative to our growth, again, driven by our G&P business. And we'll continue to evaluate that. So I will say, again, the expansion that we had in the fourth quarter that we're benefiting from today, the nighttime transits, both of those really are hand-in-hand expansion projects on their own without having to spend a lot of capital. So we'll continue to look for ways to debottleneck if possible to get incremental capacity as well. So I think we've got a lot of opportunity and some runway with the existing assets that we have. But we do have space available to expand at Galena Park.

Matt Meloy :

Yeah. I mean we see growth in the Delaware, but we see significant growth in the Midland as well. So we see growth across both of our footprints, really active producers in both. So on our footprint, we see growth in the Midland and we see growth in the Delaware.

Matt Meloy :

Thank you.

Keith Stanley :

Hi, good morning. One follow-up on Daytona just thinking to next year, 2025. Do you expect volumes on Daytona to simply tie to Targa G&P volumes? Or are there material third-party volumes that you're expecting to pick up when the pipeline comes into service?

Keith Stanley :

Got it. Thanks. And then, Jen, wanted to clarify on the cash taxes. So expectation, I think you said full 15% AMT cash tax rate in '26 and then statutory 21% tax rate in 2027. And then relatedly, how would that house pass legislation, which brings back bonus depreciation potentially impact that outlook?

Keith Stanley :

Thank you.

Operator:

Our next question comes from the line of John Mackay with Goldman Sachs. Your line is now open.

Matt Meloy :

Yeah. Sure. Yeah. As we think about really from G&P all the way through our dock, we want to make sure we have the capacity to handle the volumes coming from our G&P footprint. And so that's kind of how we think about staging transportation, fractionation. And that goes for export as well. We want to make sure we have a good market for propane and butanes. As Scott mentioned, that's really what we export. So with the expansion that just came on and the nighttime allowance of kind of, call it, 5% to 10%, I think that gives us some cushion as we go forward. And as we see really how much capacity that nighttime opens up for us, that gives us some good cushion before we're going to need another export project. But we are already looking at scoping. And so the timing is kind of to be determined, but do we need refrigeration, do we need a pipeline, are we looking at dock. But those projects are not the really large-scale, I'd say, greenfields or brownfield. I kind of view those as more debottlenecking. You have one pinch point, you spend a couple of hundred million dollars and you get some excess capacity, then you do the next and then you do the next. So those are the things we're kind of looking at over the longer term. But yeah, we want to make sure we can handle the volumes coming across our system.

Matt Meloy :

Yeah. I mean we have the issues we talked about last year was really just kind of being behind on our -- getting the compression all said and getting that done last year. We had a lot of compression come on late last year, and then you saw our volumes in Q4 really move up. We have another talked about $400 million of compression. So we ordered that out about a year right now for compressors. So we tried to get ahead of it as we saw we were getting behind last year. We just approved another AFE the other day to order some more inventory to try and get ahead of it and stay for 2025. So part of that does depend on volume growth. When you see a lot of volumes, if it exceeds our forecast, you can end up having some pinch points. But we're trying to be smart, look at the forecast and stay ahead of it.

John Mackay :

If I could just ask one follow-up on that. Caterpillar announced a capacity expansion on their large engine line, I guess, a week or two ago. Any initial read on whether that should bring that down from a year to something a little better?

John Mackay :

Fair enough, thank you. Appreciate the time.

Operator:

Our next question comes from the line of Michael Blum with Wells Fargo. Your line is now open.

Bobby Muraro :

This is Bobby. We continue to work on all the options to get gas out of the basin, which includes Apex. We've said it before and we'll say it again, our number one priority is that gas continues to flow out of the basin so that NGLs can come out of our plants and go down Grand Prix and go across our docks. Last call, I think I talked about the fact that several other projects that fit the parameters that we would want to -- back have raised their heads. And we're working hard on those along with Apex and everything else. So I am -- every month that passes, I get more encouraged by the work we're doing to make sure that a pipe gets built and comes online '26-ish. And I'm confident that something will get done this year, whether that's an Apex or one of the multiple options that we're looking at to increase egress out of the basin.

Jen Kneale :

And I'd just add one last point that in the $1.7 billion, we have been spending some capital in the last couple of years on what I call intra-basin Permian residue just to ensure we've got really good redundancy on the residue side between our plants. So to the extent that we're contemplating any of that in the future, that will be included in that $1.7 billion multiyear outlook, but no major projects.

Scott Pryor :

Yeah. Hey, Michael, this is Scott. We've not defined what the timing would be for that in-service date. Ordering long lead items gives us some flexibility on what that needs to be out into the future. We're just finding that supply chain planning -- or supply chain issues are creating some issues with certain equipment. And so as a result of that, we can take some small capital dollars to ensure that we can hold whatever date we put out there in the future. So we don't have a defined date at this point, but it's certainly something that we want to keep on our radar and keep ahead of.

Matt Meloy :

Yeah, thanks, Michael.

Sanjay Lad:

Thanks to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. The Investor Relations team will be available for any follow-up questions you may have. Thanks and have a great day.

Operator:

Good day, and thank you for standing by. Welcome to the Targa Resource Corp. Third Quarter 2023 Earnings Webcast Presentation. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sanjay Lad, Vice President of Finance and Investor Relations. Please go ahead.

Matt Meloy:

Thanks, Sanjay and good morning. We are very proud of the efforts of our employees across the third quarter. While battling an extended stretch of hot weather, we continued to operate at a high level, demonstrated by record NGL pipeline transportation volumes, 6% higher sequential adjusted EBITDA and completion of our expansion at our LPG export facility in Galena Park, increasing our propane loading capacity by an incremental one million barrels per month. We also continue to return an increasing amount of capital to our shareholders in the quarter with 132 million of common share repurchases. Since the end of the third quarter, positive momentum continues across our organization highlighted by the commencement of operations, of our new Greenwood plant in Permian Midland ahead of schedule and on budget. The expected rebound in our Permian volumes with current reported inlet about 150 million cubic feet per day higher than our third quarter average, publishing our annual sustainability report, demonstrating our continued progress across ESG pillars as an operator of critical natural gas and NGL infrastructure, receiving a two-notch upgrade in our ESG rating from MSCI to AA and the announcement today that we expect to recommend to our board, an increase to the 2024 annual common dividend to $3 per share, a 50% increase over the 2023 dividend level. The strength of our operational and financial outlook has resulted in consistent questions from investors and potential investors around how Targa will return additional capital to shareholders going forward, which is why, we wanted to provide some clarity today around our expectations for our 2024 common dividend and our current thoughts around our return of capital framework. We believe that we offer a unique value proposition for investors given the strength of our outlook for annual increases in adjusted EBITDA reflective of an excellent integrated asset footprint that will continue to provide high return organic investment opportunities, increasing fee-based margin and cash flow stability from our continued progress around fee floor contracts in our G&P business, a strong credit and ESG ratings profile, demonstrating our commitment to a stable balance sheet and sustainable operations, continued opportunistic share repurchases further reducing our share count, a competitive common dividend with an expectation of meaningful best-in-class annual growth looking forward. And an outlook of significantly increasing free cash flow as some of our large fractionation and NGL transportation projects come online in 2024 and early 2025. Our return of capital strategy is informed by a lot of internal and external information including leverage and balance sheet flexibility, along with our positioning relative to our midstream peers S&P Energy and broader S&P 500. Across our base scenarios we are modelling the ability to return 40% to 50% of adjusted cash flow from operations to equity holders. This is not a target or a bright line as we place a high priority on flexibility, but it is a framework that we believe can be helpful in thinking through our return of capital -- our return of capital proposition going forward. Let's now discuss our operations in more detail. Starting in the Permian, high activity levels continue across our dedicated acreage despite lower-than-expected third quarter volumes largely driven by the extended periods of heat across New Mexico and Texas. We also had about 200 million cubic feet per day of lower-margin high-pressure volumes move off our system in the Delaware Basin. Our Permian Midland volumes increased 2% sequentially and were offset by reduced Permian Delaware volumes resulting in flat Permian inlet volumes. Through the first three quarters of this year average reported inlet volumes across our system have increased over 300 million cubic feet per day in comparison to average fourth quarter 2022. Our Permian volumes are currently operating at about 150 million cubic feet per day higher than our third quarter average, as the growth we expected to see a bit earlier in the year is now materializing in the fourth quarter. In Permian Midland our new 275 million a day Greenwood plant commenced operations in October and is quickly ramping up, a big thank you to our engineering and operations team for bringing Greenwood online safely ahead of schedule and on budget despite challenging operating conditions this past summer. Our next plant in the Midland, Greenwood II remains on track to begin operations in the fourth quarter of 2024 and is expected to be much needed when it comes online. In Permian Delaware activity and volumes across our footprint are also running strong. Our Wildcat II and Roadrunner II plants remain on track to begin operations in the first and second quarters of 2024 respectively and both plants are expected to be much needed at start-up. In our Central region and the Badlands our combined Natural Gas volumes increased 2% sequentially and our systems are performing well. Shifting to our Logistics and Transportation segment Targa's NGL pipeline transportation volumes were a record 660,000 barrels per day and fractionation volumes remained strong averaging 793,000 barrels per day during the third quarter. Our Grand Prix NGL pipeline deliveries into Mont Belvieu increased 6% sequentially as we benefited from higher third-party supply volumes. Our fractionation complex in Mont Belvieu continues to operate near capacity. The restart of GCF will provide much needed capacity when it is fully restarted late in the first quarter of 2024 and we continue to expect our Train nine fractionator to be highly utilized when it commences operations during the second quarter of 2024. Our Train 10 fractionator is also expected to be much needed given the anticipated growth in our G&P business and corresponding plant additions and remains on track for the first quarter of 2025. In our LPG export business at Galena Park, our loadings increased 15% sequentially due to improved market conditions. We loaded an average of 10.7 million barrels per month of LPGs during the third quarter even though our loading capability was reduced for part of the quarter, due to a previously disclosed required 10-year inspection. Our low-cost expansion project to increase our propane loading capabilities by an incremental one million barrels per month of capacity was completed at the end of the third quarter and we expect our loadings to ramp during the fourth quarter providing strong momentum for 2024. We are excited about the long-term outlook at Targa and remain focused on continuing to execute on our strategic priorities. Before I turn the call over to Jen, to discuss our third quarter results in more detail I would like to extend a thank you to the Targa team for their continued focus on safety and execution while continuing to provide best-in-class service and reliability to our customers.

Sanjay Lad:

Thanks Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and reenter the lineup if you have additional questions. Brittney, would you please open the line for Q&A?

Theresa Chen:

Good morning. Thank you for taking my questions. It's great to see a very strong dividend increase in your new capital return framework, really a capital accountability framework if anything. Can you talk about your view of dividend growth within all this, how did you arrive at the 50% increase over 2023? Is there a yield you would like to achieve? And how you generally plan to balance dividend growth with share repurchases within that new 50% cash from ops framework while maintaining a healthy balance sheet?

Theresa Chen:

Thank you. And on the topic of the continued volume growth, just with the recent announcements of upstream consolidation in the Permian, especially the news related to your Midland JV partner and anchor shipper. What do you think this all means for Targa in terms of volume growth trajectory and the duration of the resource underlying your acreage?

Theresa Chen:

Thank you.

Operator:

Thank you so much. One moment for our next question please. All right. Our next question comes from the line of Michael Blum with Wells Fargo. Your line is now open.

Matt Meloy:

Yes. Hey, Michael. Yes, good question. We're seeing strong growth from the Permian. So talking about Midland first and then will get on Delaware. Really the Midland volumes are tracking in line with our guidance that we gave at the beginning of the year. Continued strong growth is really on track and we've seen that even ramp here in the fourth quarter. So it really kind of comes into the Delaware. We did have 200 million a day kind of roll off in between Q2 and Q3 when you kind of look at the averages. Now that was -- we knew that was going to happen so that was factored in to our guidance. But that just does illustrate we had underlying growth in the third quarter. But it's not quite enough to offset the $200 million that was rolling off. We're seeing a lot of activity in the Delaware. We've got a lot of compression that we're adding frankly it's coming in a little bit later than we had thought we were going to have it in place at the beginning of the year. We've got 200 million a day scheduled to come online between now and year-end. So, it's just coming in a little bit later but the volumes are there. We're frankly still a little bit behind and trying to catch up and be there to handle all the volumes. But the underlying outlook I think we're very confident that Permian volumes are going to continue to grow both in the Midland side and on the Delaware side not just for Q4, but as you look out 2024, 2025, and beyond.

Scott Pryor:

And specifically to the Grand Prix pipeline Michael?

Scott Pryor:

Okay. This is Scott. Sorry I just wanted to clarify. When we look the quarter -- the third quarter, we had some volume improvements that came across in the quarter. Those were predominantly third-party volumes. Our upstream volumes as Matt indicated we're relatively flat on the quarter. But we continue to see volume growth overall. As we look into 2024 and really in the fourth quarter and into 2024, we would expect those volumes to continue both from our upstream growth as well as some third-party volumes that will roll on to us as contracts mature into their in the beginning. With Daytona pipeline coming online in the fourth quarter of next year we feel very comfortable with the timing of that relative to the volume growth that we will have and we've seen a number of announcements in the marketplace obviously off late. But the operating leverage that we get with Daytona coming online for our West leg the operating leverage we have on our pipeline moving into Mont Belvieu gives us a lot of runway. That runway will allow us to basically evaluate what it looks like with our volume growth whether or not there's opportunities to move on other people's pipes as our volumes grow. So, we've got a lot of time to evaluate what that looks like over time.

Matt Meloy:

Thanks Michael.

Matt Meloy:

Hey Brian.

Operator:

Hello Mr. Reynolds?

Operator:

Yes, we will. Our next line comes -- I'm sorry our next question comes from the line of Spiro Dounis with Citi. Your line is now open.

Scott Pryor:

Spiro, this is Scott again. We feel comfortable. I would say that from time to time where we've seen maintenance on the pipeline or managing the start-up of our pump stations along Grand Prix on the West side as well as on the south side. We have from time to time taking the availability of industry capacity where necessary to offload. But with the start-up of pump stations those getting fully energized that gives us a long runway going into 2024. We'll certainly, evaluate what that looks like, but we feel comfortable that with the timing of the ramp-up of the volumes how we can facilitate offloads where it may be necessary that we'll look forward to Daytona coming online in the fourth quarter of next year.

Spiro Dounis:

Okay. Yes. So, thanks Matt. That's helpful color. And switching gears a bit to [indiscernible] seems like a real bright spot once again with the ARB open. Just wonder, if you can just give us a sense of what that looks like today for you guys. You're passing inspection now. You've got the new capacity online. I imagine that's going pretty well.

Spiro Dounis:

Helpful color. I’ll leave it there. Thanks, team.

Operator:

Thank you so much. Please standby for our next question. Our next question comes from the line of Keith Stanley with Wolfe Research. Your line is now open.

Matt Meloy:

And I guess, are you referring to the volumes in the G&P side on the Delaware or?

Matt Meloy:

It's I think part of it goes back to when we made the acquisition last year of Lucid, there was a lot of growth on the system. And we were immediately, offloading a lot of volumes on to Targa. And frankly, it was just kind of behind out in the field laying pipelines and getting compression and it's about a year, wait time to get more compression. So we were frankly, just a little bit more behind than we want it to be and those volumes are coming in a little bit later in the year. I don't want to make it sound like come 30 days everything is fixed. We're adding a lot of compression, but we're going to be adding a lot of compression next year too. So we are trying to handle and resolve the pressure issues that we're seeing out in the Delaware, out in the field. We're going to be adding a lot of compression not only in this quarter, but next quarter and throughout next year. So part of that was exacerbated because of the heat and operational issues and upsets that we had. So, we're really trying to address and kind of get ahead of where the producers are going. So Pat, anything you want to add to that?

KeithStanley:

That's helpful. Second I just want to clarify the capital return framework. So 40% to 50% of operating cash flow to equity holders, which could be buybacks and dividends. It sounds like the frameworks effectively allows the company to meet its growth objectives and still keep you in that leverage target of three to four times overall. I'm asking just because it seems -- it just feels like a pretty big step change. You have this 50% dividend hike and 40% to 50% would also imply a pretty big step-up in buybacks as well. So just want to make sure I'm understanding that right.

Keith Stanley:

Got it. Thank you.

Matt Meloy :

Thank you.

Tristan Richardson :

Hey, good morning guys. I may have missed it in the prepared remarks, but can you talk about any updates you're seeing broadly in the market on the gas solutions side maybe how that market has evolved since you first planted a flag with your potential solution? And then maybe any updates on commercial development of your specific project?

Tristan Richardson:

Appreciate that context, Bobby. And then I know we've just now gotten the export expansion online. But as we think about Daytona and third-party volumes coming into the frac, do you see the export market starting to tighten up? And then does your capacity today really allow for headroom assuming a reasonable utilization of Daytona once we've been ramping on that asset late in 2024 and into 2025.

Tristan Richardson:

Appreciate it, Scott. Thank you, guys and congrats on the capital allocation plan.

Matt Meloy:

Thank you.

Neel Mitra:

Hey. Good morning. Thanks for taking my question. Matt, I think, you alluded to 200 million cubic feet rolling off in the New Mexico, Delaware. I know there's another probably smaller contract roll off in 2024. Can you speak to the dynamics in that area just because it's so competitive are competitors kind of undercutting you on price to try to win some acreage dedications? Or is kind of the Red Hills complex just so big that some producers want to diversify away and have a few players versus a very big concentrated player in the area?

Bobby Muraro:

Yes, this is Bobby. For clarity a producer own plant came online and that 200 million a day move to that producer own plan. And when that plant goes up we get more debt. So it's part of our planning all along. And it's -- contracts didn't change, contracts didn't expire, contracts didn't roll off producer plant that takes no third-party gas came online.

Pat McDonie:

And frankly we're backfilling high-pressure low-margin gas with low-pressure higher-margin gas which is kind of what our bread and butter, right?

Matt Meloy:

Yeah, sure. I'll -- let me kind of start here and then if others want to jump in. Yeah, I think Apex or I'd say the next pipe out of the Permian is going to likely be a joint venture between either multiple midstreams, midstream and producers. So there will be a partial ownership so if we participate in something we could have an ownership interest in the JV or we could move volumes on it, and frankly not have an ownership interest if it gets a pipe done. So I'd say, the book-end and the low end, if we could be putting no capital into the next pipeline. I think we'd like to have our options open where we could have an ownership interest. We've seen that that creates value for Targa. GCX is a good example. We own 25% we invested in it and then ultimately monetize it. So I think we're trying to be open to opportunities like that that give us the ability to invest in that project and whether we end up holding it, whether we operate it, what percentage level, those are all discussions and it depends on which pipe ends up going whether it is Apex or it is another pipe led by someone else. As Bobby said, our primary focus is getting a pipe build where our ownership is, and what -- and how we would finance that, if we project finance it, it would be very little capital out the door right? So we have all those options to us. I think as we look forward on our capital spend as Jen has mentioned in the past is, we see 2024 in being kind of in a similar area and we see 2025 spending coming down. I think the trajectory of our capital should be kind of down once we get past 2024, and we'll look to kind of optimize how much spending and how that all works in that framework.

Matt Meloy:

Okay. Thank you.

Jeremy Tonet:

Hi. Good morning.

Jeremy Tonet:

So with the caveat upfront granted you're not giving 2024 guidance here and you've talked about a number of moving pieces talked about, I think some volume trends and maybe the LPG outlook. But just wondering, if there's any other big moving pieces that we should think about when we're shaping our 2024 thoughts from where we sit. And maybe just at a high level how you see Targa's EBITDA growth being able to trend organically from where you are -- would Targa largely track kind of Permian growth trends in general? Or are there other kind of pieces to the puzzle we should think about?

Jeremy Tonet:

Got it. That makes sense there. And you talked about upstream consolidation earlier in the call and just want to shift the focus towards midstream. We have seen a bit of an uptick in consolidation in the industry. And just wondering, from where Targa sits right now do you feel comfortable with, I guess, how the business is right now? Or do you see -- how do you see Targa's rule I guess in industry consolidation going forward at this point?

Jeremy Tonet:

Got it. Makes sense. That’s helpful. I’ll leave it there.

Operator:

All right. Thank you so much. One moment for our next question please. Our next question comes from the line of Sunil Sibal with Seaport Global. Your line is now open.

Pat McDonie:

This is Pat. CO2 wasn't really a major contributor to operational issues for us in the third quarter. We have a lot of capabilities and are adding capabilities to handle CO2 and frankly H2S sour gas. We do see CO2 production growing in the Delaware Basin specifically. There are a lot of producers that do things at the wellhead that are capital inefficient and expensive for them to do. So as we move forward, we are putting infrastructure in place that allows us to handle handling high CO2 volumes, sequestering CO2, dealing with sour gas H2S and other components, but as far as the operational issues I mean, you hit it. It's weather a little late on compression, residue gas pipeline issues which is more felt in the Delaware because we don't quite have the system fungibility in the Delaware that we do in Midland. We're building that infrastructure, as you can see from our capital spend. We've gotten a lot of benefit from integrating our Northern Delaware or Lucid system with our other two Delaware systems. But over time, when we have issues on specific plant sites and/or compressor sites will have that fungibility where we can move gas around and keep production flowing. It's a little more exacerbated right now. And as we move forward that will get better. So that's kind of where we're at right now and it looks better forward.

Sunil Sibal:

Okay. Thanks for that. And then on the capital allocation front, thanks for providing that clarity. I was just curious now that you put some guardrails around that does that impact also your targeted returns on investments? I know previously we talked about 5x to 7x kind of multiples. Does that range change in any way with the guardrails that you're putting around?

Sunil Sibal:

Got it. Thanks for the time.

Jen Kneale:

Thank you.

Jake Nivasch:

This is Jake Nivasch on for Neal. Thanks for the question. I just had one quick one here. Just strategically, I know given how all these fee-based contracts have been ramping up for you guys over the past several years. Just at a high level, I'm just curious do you feel now that you're in a good state as a percent of your contracts being fee-based? Or should we expect a little bit more of a ramp going forward? Have you – if you can quantify that that would be great. But really just thinking strategically, where are we at with that kind of transition here. Thank you.

Jen Kneale:

And I'd just add that our commercial team has done a great job of putting ourselves in a position to continue to invest for producers by getting those fee floors in place. But ultimately, if commodity prices are higher and our percentage of fee margin is going down from our gathering and processing business because commodity prices are higher. I think that will be a huge win for us and our shareholders and that's one of the reasons that we really like the fee floor structure. Ultimately, where we'd like to get to is having fee floors and really all of our gathering and processing contracts or have them be fee-based because that combined with our fee-based downstream business just provides us with a lot more cash flow stability across commodity price environment. So ultimately, that's sort of the direction that we're heading in. And our teams have done a great job of pushing us towards that.

Matt Meloy:

Yes, I mean for the most part those have been ordered. Part of it was delivery delays. So I don't know that the CapEx it shifts – necessarily shift all that much. We're just really constantly kind of buying compressors and adding to inventory. So there's some flex there but it just does take some time there. And then one thing to note too, as we're kind of waiting on those compression delays, we're still coordinated for the most part with our producers such that we can capture the initial production from there. So we're working with them to make sure we're there for the IP and that we're getting that production. So it's not really lost it's just kind of deferred and pushed into other periods.

Jen Kneale:

Take care.

Operator:

Thank you so much. [Operator Instructions] All right. Our final question comes from the line of Brian Reynolds with UBS. Your line is now open.

Brian Reynolds:

Hello. Can you hear me?

Sanjay Lad:

Yeah. There you are. We can hear you.

Matt Meloy:

Yeah. Sure. I mean, I'd say we have a lot of our G&P business is pointing liquids into our downstream business. I don't know that we ever get to 100%. That's not really a goal. There's going to be some amount of volumes that are going on third-party pipes. The vast majority on the Midland side move, but it's not 100% on the Midland side. And in the Delaware, I'd say it's a majority, but because of some acquisitions and just legacy dedications onto other pipes that's going to take time. But as we grow, I'd say, a disproportionate amount of the growth is tied to target. And I think that's going to continue. So I think we have a majority out there. I see that number moving north just as you go -- as we go forward. But I think we're in a really strong position of capturing the majority of volumes across the Permian and moving those into the downstream assets.

Matt Meloy:

Yeah. I think on CapEx we pointed to with Daytona multiple fractionation trains we see 2024 being kind of similar-ish levels which I'd characterize as kind of higher than a normal run rate levels because the downstream projects are a bit lumpier. So that's why we have some confidence as we get into 2025 and beyond potentially having urgent 2025 having it be lower and then maybe a more normalized rate thereafter. As you look at ethane exports there's, a number of expansions and parties that do that. That is something we have talked about in the past. We have the capability to do that. Right now what we're really focused on is increasing our connectivity to the domestic pet chem market and flexibility to other I'd say just other customers for ethane demand. I'd say that's -- it's out there. We don't -- I wouldn't put that on the front of our list of something we are looking at right now but that is on the potential that we kind of keep on the list.

Brian Reynolds:

Great. Thanks. Appreciate all the colour and have a excellent morning.

Jen Kneale:

Thanks Brian.

Sanjay Lad:

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 have. Have a great day.

Operator:

Good day, and thank you for standing by. Welcome to the Targa Resources Corporation Second Quarter 2023 Earnings Webcast Presentation [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sanjay Lad, Vice President of Finance and Investor Relations.

Matt Meloy:

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 to ramp over the balance of the year and we remain confident in our full year 2023 adjusted EBITDA estimate of $3.5 billion 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 II Plant in Permian Midland and commenced operations on our Midway plant in Permian Delaware, and we executed on a quarterly record $149 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 II and Midway Plants provide us with incremental Midland and Delaware processing capacity to handle a continued 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 growth 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 2024 growth capital, we will continue to have spending to complete a number of our major projects already underway, including Frac Trains 9 and 10, the majority of capital on our Daytona NGL pipeline and five Permian gas plants driving expenditures for 2024, which may approximate spending levels similar to 2023. Growth capital spend beyond '24 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 Targa 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 averaged of record 5.1 billion cubic feet per day of reported inlet volumes during the second quarter, increasing 5% sequentially. In Permian Midland, we continue to see strong producer activity and our system continues to operate near capacity. Capacity for our new Legacy II 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. Our 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 Sand Hills facility. These actions will increase operational reliability and enhance plant recoveries for our customers. Our Wildcat II and Roadrunner II 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 horsepower during the balance of the year and are continuing to see strong producer activity 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 in 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. Targa's NGL pipeline transportation volumes were a record 621,000 barrels per day and fractionation volumes were a record 794,000 barrels per day during the second quarter. The ramp in supply volumes from our Permian systems and third parties drove the 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. Our fractionation facilities in Mont Belvieu remain highly utilized and the restart of GCF will provide some much needed capacity when it is fully restarted in the first quarter of 2024, and we expect to continue -- and we continue to expect our Train 9 fractionator to be highly utilized when it commences operations during the second quarter of 2024. Our recently announced Train 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 LPGs during the second quarter. 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 increased 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, growing EBITDA, growing the dividend and reducing share count while maintaining leverage within our target range. Before I turn the call over to Jen to discuss our second quarter results in more detail, I would like to extend a thank you to the Targa team for their continued focus on safety and execution while continuing to provide best-in-class service and reliability to our customers.

Sanjay Lad:

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow up and reenter the line up if you have additional questions. Tes, would you please open the line for Q&A? Tes, we’re ready for the Q&A session.

Theresa Chen:

First, I'd like to touch on the CapEx outlook over the medium to long term. To your comments earlier, Matt, about 2024 being similar to 2023, and then beyond that, the expectations for cap to step down. Do you have a sense of what do you think a post 2024 run rate CapEx could look like? And then on the heels of that in terms of capital allocation, what do you view the split in the return of capital to shareholders between dividend growth and buybacks as that free cash flow generation becomes more visible?

Theresa Chen:

And then looking to the second half of 2023, clearly, there's been a lot of volatility on the NGL side, whether in terms of pricing or volumes or different parts of the value chain across the industry. What is your implied contribution in the second half for NGL marketing to hit your guidance for the year?

Jen Kneale:

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 a required 10 year 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, Acalina Park, and we'll have that inspection behind us. We'll 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 volumes.

Jeremy Tonet:

I appreciate that we are not giving '24 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 post 2023 Targa trajectory could look like, just given the amount of capital being deployed?

Jeremy Tonet:

So is it fair to say the volumes would deliver strong growth year-over-year, this is not like a step down with the hedging book, that's a big offset. Just trying to think gives and takes as we look forward here.

Jeremy Tonet:

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 Targa think about that, what's Targa's role moving forward here?

Operator:

And then we will have our next question, Michael Blum from Wells Fargo.

Scott Pryor:

We continue to see good demand across our dock. Obviously, in the first quarter, we benefited from the outline that Matt communicated earlier and then in the second quarter, we've seen less spot opportunities. Some of that's just been driven by a less arb in the 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 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, the seasonal demand that we typically see in the fourth quarter and first quarter we just really see a good outlook for that. Volumes through our systems will continue to ramp up and we just view that as a very positive for us overall.

Scott Pryor:

I would say it did not impact us negatively. Ethane found itself really in a volatile market during the month of July and some of that was brought on as the market was pinched between weeks of rejection and improved petrochemical operating rates. The petchem operating rates probably were likely just above 90% operating rates in the month of July and along with that, with increased ethane exports. As the price ramped up that improved some of the recovery economics as it relates to ethane rejection recovery, but there's some time lags with that. So I think the market found itself in some opportunities where it spiked in order for folks to cover various positions. For us, as we see those opportunities, 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 suggest that some of that may come later in the year than it would be in kind of 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 around $0.27 per gallon this morning. They feel a little more balanced. 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 have balanced themselves out with the recovery economics improving.

Neel Mitra:

I just wanted to drill down a little bit more on the ongoing CapEx needs and two particular topics. First, it seemed like you were maybe two processing plants behind on leased when you acquired them. Are we trending on that? And then second, when we look at the Grand Prix expansion from North Texas to Belvieu, when would that be necessary from the volumes that you're getting from Daytona and Grand Prix?

Scott Pryor:

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 Mont Belvieu. Recognize that the South Lake has over -- 1just over 1 million barrels a day of capacity moving into Mont Belvieu, in the second quarter, we moved just over 600,000 barrels a day. So we've got a lot of operating leverage as it relates to that South lag. When Daytona comes online, we had announced initially they would have a capacity of roughly 400,000 barrels a day 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 [paths] plants on the Western side in the Permian continue to ramp up over time, the additive of plants over time, but we'll certainly be in a position to expand when it's necessary and evaluate that.

Scott Pryor:

I think what I would allude to there is we saw some opportunities where we actually saw some contango in the marketplace on ethane 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. 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 that's where we get some slight benefits when the market moves in those directions.

Scott Pryor:

I would say not really on our system. Certainly, as we watch the percentage of ethane that's contained and the raw that comes into our Mont 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, probably more on the third party pipes than on Grand Prix. So that is certainly an indicator that industry as a whole is recovering more of the ethane and the field, which should benefit us over time. I think the other thing that you'll see is that given the fact that we've had a couple of industry players have brought on some additional frac capacity, that also lends to calming down, if you will, the spikes that we saw in the month of July on ethane.

Colton Bean:

Just on the G&P segment, a decent drop in sequential processing margins. Can you comment on where Q2 results sit relative to fee floors, and then just any general expectations for margins through the balance of the year?

Colton Bean:

And then shifting over to the Logistics and Transportation segment. You had some very impressive NGL throughput across Grand Prix and the frac fleet, but it looks like the weighted average F&P rate moved lower quarter-on-quarter. Any basin mix shift or recontracting impacts that drove the drop and then again, your expectations for that rate trajectory moving forward?

Operator:

[Operator Instructions] We have Keith Stanley from Wolfe Research.

Matt Meloy:

I think our buybacks have been a part of the way we're returning capital to shareholders. We look at -- really, I'd say it's underpinned by just our really strong outlook for not only the remainder of '23 but as we look out '24 and '25, 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 completed the acquisition of the 25% interest in Grand Prix. So it's kind of a mix of what's 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.

Scott Pryor:

I would say that no, not really. We certainly benefited in the second quarter as we had some of those midterm contracts that had rolled off. I would say that going forward, there's 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 Grand Prix pipeline over time.

Brian Reynolds:

Just a quick follow-up on the CapEx cadence in the outer years with the focus on nat gas takeaway opportunities in [Apex]. Is this natural gas takeaway opportunity included in that kind of outer year CapEx decline and perhaps can you update us on perhaps Targa's equity interest or ability to fund the whole pipe on its own?

Bobby Muraro:

When you look at the parties sitting around the table, both on the producer shipper side and on the market side, it's kind of a who's who and [indiscernible] great parties, which lends itself to what Jen is talking about, the line out the door relative to the ability to raise capital in a multitude of ways to do it.

Scott Pryor:

Currently, today, pricing sits around $0.72 we view the outer months currently today is slight contango. Fourth quarter is around $0.78. First quarter is around $0.79. 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 you're seeing pricing relative to WTI from a percentage basis, down from what you've seen of late. 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 lulls in that. But the PDH plant -- PDH additives that you see in China that you mentioned, obviously, is a big pool of propane over time. So for us, I think it's 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, you're seeing the industry continue to add vessels for LPGs, current fleet size is around 360 VLGCs. With the second half of this year, we're adding another 25 or so vessels and probably in 2024, we'll exceed 400 vessels on the water. So that clearly is an indication as an industry and as a market demand that the market is gearing up for increased demand globally as more markets mature.

Tristan Richardson:

Just a question. You just mentioned on offloading levels that you're seeing now. Should we think of those as sort of normal levels that you would see in any given year, or are those perhaps elevated currently in anticipation of Greenwood, Wildcat, Roadrunner? Maybe just your thoughts on offloading as a part of the portfolio?

Tristan Richardson:

And then just on your point there on customers, just always kind of curious about producer dynamics and customer activity. Like certainly, your view on inlet growth this year hasn't changed and we know your large scale customers are the major drivers. But maybe just anything on the smaller to midsize customers and change in behavior, shifts in activity, et cetera.

Operator:

We have Neal Dingmann from Truist Securities.

Jen Kneale:

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 we'll need to service our Permian customers based on that, call it, medium and longer term growth rate and then what larger assets we’ll 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 in our target story is as we look out to 2025 and beyond, we expect significantly higher EBITDA growth capital coming down. That means that we'll have a lot more free cash flow available to allocate and return more 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 the Lucid assets to perform very well for us on a growth basis as we move forward through really the short, medium and long term. I think that's all setting us up to be in an excellent position looking forward and then we'll have to figure out the ideal mix of increasing dividends and also repurchases. We like the opportunistic share repurchase program right now. I think that it's working for us, particularly as we are trying to manage leverage, a 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 3 to 4 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 in really attractive returning projects and that will help underpin an exceptionally strong balance sheet with the flexibility to return more capital to shareholders across a multitude of ways.

Sunil Sibal:

So I just wanted to understand a little bit better the gas takeaway situation in Permian. So obviously, you're developing your project and you also announced a number of processing additions. So from a gas take rate perspective, when do we need to see new pipelines announced to basically really service this gas out of the basin?

Sunil Sibal:

And then my second question was related to returns. So obviously, I think in the last few years, you've posted 26% of ROIC. I was curious, when you're looking at new investments, you're approving new projects. What's a good way of thinking about your threshold on returns for [proven] projects?

Sunil Sibal:

And just one clarification on that. So the new contracts that you're signing are basically helping you push more towards fixed fee or are they just keep the fixed fee versus the commodity sensitivity constant where it is?

Operator:

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.

Operator:

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

Operator:

Good day, and thank you for standing by. Welcome to the Targa Resources Corp. First Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sanjay Lad, Vice President of Finance and Investor Relations. Please go ahead.

Matt Meloy:

Thanks, Sanjay, and good morning to everyone. This year is off to a strong start at Targa, and we are very proud of our execution across the company in the first quarter. In Q1, we had quarterly EBITDA that was up 50% over prior year with a lower common share count. Record volumes in the Permian, record NGL transportation and fractionation volumes and strong LPG export volumes. We also finished construction and are in the process of bringing our Legacy II and plant fully online. And we are also returning an increasing amount of capital to our shareholders. We increased our quarterly cash dividend by 43% and executed on $52 million of common share repurchases during the first quarter. With a strong first quarter complete and given the strength of the business fundamentals underpinning our assets, we remain comfortable with our full year 2023 adjusted EBITDA estimate despite natural gas and NGL prices being about 30% and 10% lower than the price assumptions underpinning our 2023 EBITDA guidance range. Natural gas volumes across our Permian systems are growing. Our current aggregate volumes are over five billion cubic feet per day of reported inlet and are expected to ramp as we move through the year, driving incremental volumes through our integrated downstream assets. We have four plants under construction in the Permian and are ordering long lead times for an additional two plants. Given our increasing Permian volumes and resulting NGL supply growth, we announced this morning that we are moving forward with a new 120,000 barrel per day fractionator Train 10 and at our Mont Belvieu complex, which is expected to be online in the first quarter of 2025. With the addition of Train 10 and additional spending on long lead items for our next Permian plants, we now estimate full year 2023 growth CapEx spending to be between $2 billion and $2.2 billion. Investing in organic growth projects across our integrated footprint provides Targa 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 averaged a record 4.8 billion cubic feet per day of reported inlet volumes during the quarter. In Permian Midland, our system has essentially been running above nameplate capacity, absent the impact of first quarter winter weather and is currently operating up over 100 million cubic feet per day versus Q1 average inlet. Our new Legacy II plant partially came online in late March, limited by electricity capacity to the site and is expected to be able to be fully available later this quarter. And kudos to our engineering and operations team for safely bringing the plant online ahead of schedule and on budget. Our next Midland plant Greenwood remains on track to begin operations in late fourth quarter of 2023 and is expected to be highly utilized when it comes online. In Permian Delaware, inlet volumes across our system increased 5% sequentially. Activity in volumes across our Northern Delaware footprint are running strong, and we have bolstered our connectivity across our Delaware assets to handle the near-term growth. Our Midway plan is close to completion and is expected to begin operations later in the second quarter. Our Wildcat 1 and Roadrunner II plants remain on track to begin operations in the first and second quarters of 2024, respectively. We continue to expect volume growth across both our Permian Midland and Delaware positions for the remainder of the year and well beyond. 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 items for our next Midland and Delaware plant. To that end, some of you may have seen a filing with the Texas Railroad Commission around the proposed gas pipeline we call Apex. This filing allows for preliminary survey work to be completed on proposed routes. Given how rapid we are growing with over 1 billion cubic feet of incremental residue gas from just the plants we currently have under construction, we continue to work to ensure sufficient residue take-away from the basin. As we have said previously, we remain in position to support as needed residue pipes to get Permian gas to market, whether we are leading those efforts or participating with third parties. The next pipe is needed in both our producers and markets on the Gulf Coast are keenly aware of that need. We are also continuing to add intra-basin connectivity and redundancy in both the Midland and Delaware to move residue gas from Targa plants to enhance flow assurance to get volumes from Targa assets to market. In our Central region and the Badlands volumes were sequentially flat during the quarter. Overall volumes remained steady as we are currently not seeing any material change in activity despite lower commodity prices. Shifting to our Logistics and Transportation segment, Targa's NGL transportation volumes were a record 537,000 barrels per day and fractionation volumes were a record 759,000 barrels per day during the first quarter. With the ramp in supply volumes from our Permian systems and third parties, our Grand Prix deliveries into Mont Belvieu are currently averaging around 600,000 barrels per day with fractionation volumes currently running near capacity of around 800,000 barrels per day. GCF will provide some much needed help when it is fully restarted in the first quarter of 2024 and we expect our Train 9 fractionator to open up highly utilized when it commences operations during the second quarter of 2024. Our newly announced Train 10 with an in-service date of the first quarter of 2025 is expected to be much needed given the expected continued growth in our G&P business. Turning to our LPG export business at our Galena Park facilities, we loaded an average of 11.2 million barrels per month during the first quarter as we benefited from increased demand from stronger global market conditions. Our low-cost expansion project to increase our propane loading capabilities with an incremental one million barrels per month of capacity remains on track for mid-2023. We are well contracted across our export facility and continue to expect that 2023 will be a record year for LPG export volumes. We remain excited about the long-term outlook at Targa. Looking ahead, we continue to execute on our strategic priorities will drive increasing EBITDA, a higher common dividend and reduced common share count while maintaining leverage within our target range. We announced this morning that our Board has approved a new $1 billion common share repurchase program, which provides us with flexibility going forward to continue to be opportunistic on repurchases. Before I turn the call over to Jen to discuss our first quarter results in more detail, I would like to extend a thank you to the Targa team for their continued focus on safety and execution while continuing to provide best-in-class services to our customers.

Sanjay Lad:

Thanks, Jen. For the Q&A session, we finally ask that you limit to one question and one follow-up and reenter the lineup if you have additional questions. Bella, would you please open the line for Q&A?

Michael Blum:

I wanted to ask about frac Train 10. Maybe just walk us through the thought process there. It seems like there's a lot of frac capacity being added to the market right now. And as some people are starting to talk about pressure on rates. So how much of Train 9 is contracting and how much of Train 10 would be contracted or would you need to be contracted to move forward?

Matt Meloy:

And just to add to that, Michael, this is Matt here. We see the underlying growth in our G&P business, and we're pointing that to frac Train 9, 10 and the restart of GCF. So I would suspect others as they're bringing additional fractionation on, they have volumes that they see from their customers and their contracts. We need to make sure we have sufficient fractionation capacity for our underlying G&P business so we can provide an integrated NGL service to our G&P customers.

Matt Meloy:

Yes. Michael, it is a little bit tough to do run rate as it does get lumpy during certain years when you have large long-haul NGL pipes, for example, that can be in and give you more runway. I'd also say when we made the acquisition of the North Delaware assets in the summer of last year, there was not sufficient processing capacity. So we do have a little bit of catch-up here with five plants being kind of brought online and ordering long lead time for two, that's likely a little bit heavy, if you were to do a multiyear model. That said, I think we're going to continue to have strong G&P growth. We're going to be needing to continue to add plants. So it really comes down a little bit to the lumpiness of some of the larger projects and the timing of our processing plants. But with our underlying acreage position and strong producer contracts we have in the Permian as long as they keep growing, which we see for years to come, we're going to continue to invest in gathering and processing plants, expanding NGL transportation, fractionation and export. But there could be some lumpiness from year-to-year.

Brian Reynolds:

Maybe just touch on the return of capital outlook just given the lumpiness in CapEx over the next two years. We saw some buyback in the quarter with likely some dividend increases for the next few years. So just given the rising CapEx and EBITDA outlook for the next few years from these growth projects, was kind of curious if you could discuss how Targa's balance sheet capacity moves over the next few years given that free cash flow after dividends is pretty flattish until '25.

Brian Reynolds:

Great. Appreciate that. And as a follow-up, it just seems like Targa is using -- or going after a little bit more third-party contracts historically, it just seems like Targa was very much historically focused on its internal equity volumes for both the G&P and L&T side. Curious if you could just opine further on some of these new third-party opportunities that you're seeing? Is it specifically on the long-haul side or G&P as well. and whether this is a business strategy shift to win new business? Or is there perhaps just more industry cooperation to maximize asset utilization.

Operator:

Your next question comes from the line of Jeremy Tonet with JPMorgan.

Jennifer Kneale:

Jeremy, this is Jen. We put an ROIC slide in our February materials, partially just to very explicitly highlight just how well, we believe we've been able to invest over the last several years, particularly in projects and opportunities that we consider core. And the spending that we've announced this morning with our frac Train 10 and also additional spending around another Permian gas plant is core. Just like the spending that we're already doing for additional gas plants, fractionation and NGL transportation is core to us. So I wouldn't say that our hurdle rate has really shifted. Continues to be, call it, 5x to 7x. I think that we have been able to execute better than that, partially because our assets are so well utilized when they come online. It feels like we're almost behind every time a new asset comes online. So it's base loaded very quickly, which creates incremental more incremental returns that accrue to us more quickly than maybe before when we grew into our capacity, maybe a little bit more slowly. So I'd say that we continue to look at each and every opportunity and try to really scrub our capital spend plan are in a cycle right now where we are spending a little bit more and partially, that is a result of the lumpiness of some of our bigger projects. But ultimately, it's really across our core value chain, and we believe it's going to generate significant incremental returns for Targa and for our shareholders. To the extent that we get into an environment where we see producer activities slow down, I think we've demonstrated a track record where we've rationalized spending before. When you think about our 2020 spending of $600 million, 2021 spending of just a little bit over $400 million. We clearly have executed previously, where if activity levels are lower, we rationalize our spend. Currently, we just have a lot of expectations given the strength of the producers underlying our G&P systems for significant incremental volume growth. And that's going to necessitate a digital volumes across both our G&P and logistics and transportation footprints.

Jennifer Kneale:

We now have 1 quarter under our belt, so it's always easier to affirm guidance when part of it is already accounted for. And I think Q1 was a really strong quarter for us across the board. Record volumes in a number of different areas, and our employees also did an excellent job of optimizing our assets and generating additional opportunities from our footprint. So as we look out at the rest of the year, prices are lower, but I think we continue to see and expect excellent volume growth, again, really across all of our assets. And that's really what is underpinning our reaffirmation of our guidance despite lower prices.

Tristan Richardson:

Appreciate it, Matt. Maybe just a question on the residue side. You talked a little bit about Apex. Obviously, this is very early days here and really just emphasize the longer-term need for residue at a high level, but maybe kind of curious what this could look like in terms of potential end market destinations. Maybe just a little bit more detail on what the preliminary plans for this look like, maybe timing, capital, et cetera? And just thinking about is this a project that you guys are full speed ahead on or really just exploring potential options?

Robert Muraro:

Yes. So this is Bobby. At the end of day, what we want to see is we want to see all the residue move out of the Permian Basin. So whether it's on a pipeline like Apex or a third-party pipeline or 1 that we're a part of. We'll just be excited to see pipelines go. And then as we think about what Apex could look like if it did go we ultimately have no shortage of residue supply to put to a pipe between us and our customers. And I think everybody knows what's going on with the market down there in that general vicinity of the state with LNG and other demand coming on. So as we think about that, the potential for that project to come together at some point in the future, kind of goes to what happens with other pipes what we end up doing on other pipes versus Apex and then what the market does down there and how it develops. Taking these things all up is a fairly complicated process. And we just want to make sure that there are options out there that we can execute on to make sure the residue flows, whether it's the pipe in '26 that will be needed or a pipe that's needed in '28 as all those facilities down there in the Sabine River corridor come online and have a very strong demand for gas.

Patrick McDonie:

Yes. This is Pat. Really, we haven't had any change in activity. Activity levels remain high. rigs are running on acreage all around our system, on our system. We haven't -- the big guys obviously are disciplined. They tell you guys what they're going to do, and they continue to execute on their plans. Some of them are a little more back-loaded this year than in previous years. But the rigs are running the wells are getting drilled. The little guys, frankly, we haven't seen any change in activity there yet either. They continue to be very active, and we're bringing on a lot of incremental volumes for the median and smaller guys. So to date, we have not seen a change in activity levels are high.

Theresa Chen:

On frac 10, in terms of the time line, that seems to match with when you may be able to move over some of the Y-grade volumes coming off with the legacy loss processing plants onto your own system. Now that you've had these assets under your belt for some time, can you give us a sense of when do you expect that to ramp up higher in the cadence?

Theresa Chen:

Got it. And then in terms of capital allocation and on the buybacks specifically, I understand that you don't have a programmatic approach to this, and it's more on an opportunistic basis. But just given the volatility in the dislocation in the market we saw during the first quarter, was there a reason why you didn't want to utilize this tool kit this tool in your toolkit more?

Operator:

Your next question comes from the line of Keith Stanley with Wolfe Research.

Matt Meloy:

Yes. Sure. Keith, I'd say when we gave our guidance, part of that was already factored in. The guidance was given in February, we already had some of those seasonal opportunities, I'd say, and saw the strong LPG export market. We really had good performance across traditional kind of NGL marketing, gas marketing and LPG exports, part of which was known when we gave the guidance. So that was factored in to some extent. . As we go forward, I'd say we do see kind of a more normalized level as we go throughout the year. That's why Jen kind of pointed to a weaker Q2. So I think Q2 is going to be a little bit weaker. We don't see those kind of outsized opportunities that we saw in but kind of more normalized as we move throughout the year.

Matt Meloy:

Yes. We do have the ability to grow more. So we said we're around 800. We can do low 800s of Y-grade at Bellevue. We also have our Lake Charles frac, which we can push some more volumes over there. And we do have ability to push volumes to other fracs. And in any given month, we're unloading and offloading back and forth between different players in Bellevue for different reasons. So we feel good about being able to handle all of our volumes between now and when GCF comes on the first part of next year, and then we'll get even more relief when Train 9 comes on. But that gives us comfort that we're going to have volumes for our GCF startup and when it comes on.

Colton Bean:

Matt, I thought I heard you reference securing long lead items on two additional plants. So first, I wanted to verify the plural versus singular there. And then any comments on the planning horizon and how you see potential constraints shaping up across your Midland and Delaware footprint?

Colton Bean:

Great. And just in terms of planning horizon, I think the latest dated plant we've got right now is Roadrunner II and kind of mid-'24. So should we think about these as being biased to the back half of '24, maybe early '25?

Colton Bean:

Great. And then just back on the power supply issues you saw at Legacy II. I guess, one, can you expand on that? And then two, do you see any additional timing risk to ERCOT interconnects as you move toward completion on your other plants?

Operator:

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

Matt Meloy:

Yes. So for the plants that we're putting in, we are connecting to various residue outlets to make sure we have transport intra-basin to Waha that we can then get to market from there. So we'll have connectivity within the Permian Basin for those plants. And then it really just goes to the broader basin is their takeaway out of the basin and what does that look like? We have some compression expansions coming on. We have a long-haul pipes coming on mid next year, which should provide some relief. So it feels like when the long-haul pipe comes on next year, we'll have some runway. But that's why, as Bobby talked about, we're beginning -- we've begun work and discussions on Apex and what this next pipeline is after Matterhorn.

Jennifer Kneale:

Sunil, this is Jen. I think that ideally we'd like to be at least a mid-BBB company. And right now, we're sitting one notch lower than that. I think that we have a very strong balance sheet right now. So we're really comfortable with where our leverage ratio is today and the trajectory of that leverage ratio. So ultimately, we believe that we'll continue to execute as we have historically, which is execute across all dimensions of our business plan and then the ratings will be a result of that execution. But I would expect as we continue to manage through this year and into next year and our leverage ratio continues to improve, we'll be looking to inquire about a potential upgrade with the agencies.

Neal Dingmann:

This is Jamison for Neal. Thank you for the questions here. I know we've touched on this a couple of times, but I just want to go back to the EBITDA guide for the year. I know you end marketing specifically. So I know you guys said marketing was, I guess, a little bit stronger than expected to some extent and that is going to be normalized for the rest of the year. And so given the fact that you also said that volume growth is looking strong for the remainder of the year as well. Just trying to figure out, is there -- does this mean there's upside to the maintained EBITDA guide, given that 1Q strength in marketing? And I said that because I see a bullet in the slide deck that cite higher marketing and optimization, which I don't think was there prior. So just trying to get a sense of, I guess, what implications are there?

Operator:

And I see no further questions at this time. I will now turn the call back over to Sanjay Lad.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a good day.

Operator:

Good day, and thank you for standing by. And welcome to the Targa Resources Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] 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 Lad. Please go ahead.

Matt Meloy:

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 multiyear low total reportable incident rate, record gathering and processing volumes in the Permian, record volumes across our logistics and transportation assets, record adjusted EBITDA of $2.9 billion, a 41% increase over 2021 while also reducing our share count. Major projects came online on time, on budget and have been highly utilized since start-up. Execution and successful integration of our Delaware Basin acquisition and our South Texas acquisition, execution of our corporate simplification with our DevCo repurchase and preferred share redemption, successful 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 Targa's to balance and link 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 advantage 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 Roadrunner II 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, higher fees from contract escalators, a full year contribution from our Delaware Basin and South Texas acquisitions, 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 across cycles continues to be a priority at Targa. 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 $1.8 billion 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 9 fractionator and our Daytona NGL pipeline. Along with our partners, we are also in the process of restarting the 135,000 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 4 in our earnings supplement presentation, we generated an attractive 26% return on invested capital since 2017, despite a 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. A strong balance sheet and continued investment in high-return projects positions us to continue to prudently return 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 in May. 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 associated with our increasing size, scale and fee-based margin and Targa's positioning relative to our midstream C-Corp peers [ph], the S&P 500 and cyclical industries within the S&P 500. We also expect to be in a 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 announce 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 full year 2023 financial guidance, a 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 Targa where our commercial teams are working really well with our producers and other customers to maintain alignment to be in a 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 Jen to discuss our fourth quarter and full year 2022 results in more detail as well as our expectations for 2023.

Sanjay Lad:

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and reenter the lineup if you have additional questions. Carmen, would you please open the lines for Q&A?

Jeremy Tonet:

Hi, good morning.

Jen Kneale:

Good morning.

Matt Meloy:

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 don't know, Pat, do you want to give some additional color on what we're seeing in Permian?

Scott Pryor:

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. Our fourth quarter volumes were up. We expect that our first quarter volumes here in 2023 will be up there. And then obviously, with 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 is things like the reopening of the Chinese marketplace. Increased demand for PDH demand in Asia as a result of that. We’ve also seen improvements on the shipping side because we’re seeing new deliveries of VLGCs which is providing more liquidity on the water and certainly some improvements in efficiencies out of the Panama Canal. So I think the combination of all those, which will certainly also benefit with the small expansion that Jen spoke to in her opening comments, that will be online mid-year. That 1 million barrels per month of additional capacity will just complement what we’re doing. And as Jen also mentioned, we continue to be highly contracted while also feeling comfortable about the available space that we would have to participate in a spot market when the market presents itself. So that lends flexibility to our customers, reliability to our customers while also providing economic benefit to Targa when the pricing firms up at times.

Jeremy Tonet:

Got it. Great to hear, strong data points across all three components there. And just one last question, if I could. I want to touch on capital allocation a little bit more, and you gave some thoughts in the prepared remarks and in the PR, but I 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 bookend us to make sure we don’t get off the rails. And as far as capital spend is concerned, is this kind of how – kind of closer to the peak? Or do you expect this level to persist?

Jeremy Tonet:

Wonderful. Thank you so much.

Operator:

Thank you. [Operator Instructions] And it comes from the line of Brian Reynolds with UBS. Please proceed.

Pat McDonie:

I would say that we do have some offloads in the Delaware Basin and minimal on the Midland side because we just brought a plan up, right? 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 will come back on to the system. On the Delaware side, because Lucid was behind in processing capacity, we had some things to do there. We brought up the Red Hills VI plant in September. Frankly, it was immediately full. We had existing connections between the Targa Delaware system and the Lucid system, which we were immediately able to offload 150 million a day into our Far West plant complex is the Peregrine and Falcon plants 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 II plant coming on. Midway will be that – Midway that will be that midway point, basically adding capacity in May. Wildcat II at the end of the year, the very beginning of next year because of the anticipated growth and the Roadrunner 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 Targa North Delaware gas into our Far West plants, which, again, we have available capacity. So over the next, let’s call it, 9 months to 12 months, one will fill up the Midway capacity. We had a little bit of remaining capacity at Wildcat. We have a sweet plant at Loving that’s kind of our swing plant that will fill up. And then we utilize the offload in the Peregrine and Falcon capacity to get us to the Wildcat II plant. And don’t forget, we have the ability to run our plants over nameplate, which can give us another 100 million to 150 million a day of incremental capacity.

Jen Kneale:

This is Jen. 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, you’re 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 DevCo and then the TRC preferred repurchase.

Jen Kneale:

Thank you.

Operator:

Thank you. [Operator Instructions] And it comes from the line of Spiro Dounis with Citi. Please proceed.

Jen Kneale:

Spiro, 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 of today looks very different than the Targa of several years ago. And a big reason for that is the fee floors that we have in place. So we tried to publish was that if you had a significant move downward in commodity prices, 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 floors, 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’s downside exposure is significantly reduced today than what it was previously. And that’s all enhanced by our hedging program that really hasn’t 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.

Scott Pryor:

Spiro, this is Scott. First off, I would say that when we look at Grand Prix, we’ve been – obviously, the success of that is evident. And 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 time frame, we would push our overall capacity up to what we call our nameplate of roughly 550,000 barrels a day just on the West leg alone. We feel comfortable that we can likely operate above that, call it, in the 600,000 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. We’re calling at the end of 2024, but we’ll 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 of plants that are connected to multiple pipelines, and they’re not solely dependent upon just the Grand Prix pipeline. So we feel that we’ve got a lot of flexibility to manage through it. We certainly want to make sure that it’s 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.

Scott Pryor:

Okay, thank you.

Theresa Chen:

Good morning. I’d love to get your take on the frac outlook, given the tightness that we’re seeing evidence in anecdotes of tightness in the Gulf Coast, maybe most recently from the restart announcement at GCF, would you mind giving us an update on your outlook on utilization for the part of the value chain and general demand outlook for the purity product maybe touching on some that LPG export commentary? What are you hearing from your petchem customers? What are your general expectations for demand for ethane and LPGs?

Theresa Chen:

Thank you. And Jen, I wanted to go back to your comments about the breakdown between fee-based versus commodity-based margin. Now that you are 85% fee-based, as you bring online incremental processing capacity embedded with contract escalators over time fee floors, et cetera, how do you think this breakdown evolves? And with the asymmetric risk that you currently see within that 60% band, do you see that becoming more favorably skewed going forward as you layer in more for fee floors and general fee-based margin?

Theresa Chen:

Thank you.

Colton Bean:

Good morning. So the transport and frac unit margins were up materially relative to Q3. Any drivers on that apart from lower OpEx? And was there a mix shift in basin origin or any contracts that moved around and then between the two transport and frac any weighting in terms of the margin uplift?

Colton Bean:

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

Colton Bean:

Great. And then on OpEx. So Q4 was relatively flat for G&P and actually down in logistics. I think previously, you were expecting continued increases as you had a full quarter of Lucid and then higher overall activity. So just – was Q4 more of a structural shift in your outlook? Or should we still expect that step-up in expense levels heading into 2023?

Colton Bean:

Great. Appreciate the time.

Matt Meloy:

Okay. Thanks, Colton.

Keith Stanley:

Hi. Good morning. Thank you. Just wanted to start on commodities and hedges. So if I compare 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?

Keith Stanley:

Okay. So overall, big picture, you’re 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?

Keith Stanley:

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?

Keith Stanley:

Thank you.

Operator:

Thank you. One moment for our next question, please. And it comes from the line of Neel Mitra with Bank of America. Please proceed.

Matt Meloy:

Yes, sure. What’s great about where we’re moving that is it’s connected to our existing footprint, so the Roadrunner II will be right next to the Roadrunner I plant, which was part of the Lucid acquisition. There’s the Red Hills complex and the Roadrunner, which will now be a complex when we add that there. The overall capital fed is about $120-or-so million for that move. So it is capital efficient relative to just doing a new build. The new builds are, say, closer to $175 million, give or take. Those are – the new builds are about $275 million. The Roadrunner move is about, call it, $230-or-so million. So you get a little more capacity on the new build, but 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 tighter on capacity out there. So moving it is quicker than just putting a new build out there.

Matt Meloy:

What’s interesting is what’s the Lucid acreage were started now it’s all Targa and it’s really getting mixed. When you talk to producers, is it – a Targa system, it’s all becoming really quickly all one system out there. And Sorry, Bobby, do you want to add some color on that?

Matt Meloy:

We’re also working to connect Roadrunner and integrate that system into Grand Prix, so we’re building that line now.

Matt Meloy:

Yes. We expect volumes to start moving higher here as we get into the year. What you see there is Grand Prix is mix between Permian and our North leg, which goes up into Oklahoma. We’ve seen continued growth on our West leg. We have seen volumes move South a little bit kind of as we’ve not as much strength there as you’ve seen in the Permian. So it’s looked relatively flat. But we are already seeing it. Frankly, the start of this year we’re seeing volumes move higher, and that’s what we would expect in Grand Prix as we move through the year, pretty strong growth there.

Jen Kneale:

And just so we touch on every quarter of growth for Grand Prix. In the second quarter, we'll have Legacy II coming online and then the additional capacity available at Midway. So those will be nice catalysts in the second quarter.

Neel Mitra:

Got it. Thank you for all the color.

John Mackay:

Hey. Thanks for the time. Wanted to just sit on Permian growth for another half second and clarify one comment from before. Were you saying that – the growth outlook right now is 10% off of fourth quarter 2022 assumes no incremental rate adds off of what we've seen so far through February? That's the first part. And then second, I'd love to just hear how you're thinking about the other basins, relatively less gas-driven exposure, of course, but we're seeing slowdowns elsewhere. So curious what your view on maybe the Barnett and others look like? Thanks.

Pat McDonie:

Sure. We'll start in Oklahoma. We've seen, frankly good activity in both our South Oklahoma and our Western Oklahoma areas. Good activities relative to, let's call it the last three, four years prior to that, obviously, there was a lot of activity. But enough so that we're able to offset decline. Frankly, in Southern Oklahoma, we show where we were 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 in behind. So we are seeing some activity there. North Texas, we have – we've seen volume growth on our system, and we continue to see drilling activity. Certainly, it and frankly Southern Oklahoma are more sensitive to gas prices. So we have expectations at the beginning of the year here that we'll get to incremental volumes. There are planned drilling on our system throughout the year. We'll ultimately see how those pan out dependent upon commodity prices and the decisions of those producers. Our South Texas activity has been very good. The addition of the Southcross assets and the sour gas capabilities there have added a 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 from both of those kind of types of producers. So we feel good about volume growth there, but it's not significant in the overall scheme of things. [Indiscernible] same thing, a good steady pace of drilling. So good replacement of crude oil and natural gas, are we going to say how we're going to significantly grow in that basin. Now are we going to hold our own and see some slight growth probably?

Matt Meloy:

Yes. We are seeing some higher costs, whether it's compression pipelines or just the larger facilities we're putting in place. And I'd say part of the CapEx, too, that included in the 1.8, 1.9 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 I know there's going to be future growth next year because lead times have been extended is pushing some more CapEx into this year as well. So part of it has been inflation, part of it is us trying to get ahead of kind of some of the supply chain disruptions and lead time growth.

Matt Meloy:

Okay. Thanks John.

Sunil Sibal:

Yes. Hi. Good morning, everybody.

Sunil Sibal:

I just wanted to get a little bit of clarity on the returns on investments. I think a few years back, you had talked about a 5 to 7x kind of EBITDA multiple for gathering and processing capital spend. I was curious how that has changed in the current environment?

Matt Meloy:

Yes. I'd say – just to add to that, I think as we think about going forward, 5% to 7% is still kind of what we think about and how we would articulate returns. We were able to execute better than that. If you look back over the last five years, closer to 4 times. And also part of that is we were successful in investments like, for example, GCX. We invested and we sold that at a significant multiple of capital, a really good return for us, and that kind of nets into the CapEx number. So we had some onetime items like that, which also helped drive that higher. But I think 5% to 7% is a good kind of planning case and we'll of course try to beat that through optimizing, but 5% to 7% is a good point in case.

Matt Meloy:

Yes. I think over time, that's a reasonable assumption. I'd say now what we have been seeing recently is potentially even a little bit more capital efficient than that. So maybe a little bit less as some of our producers are being more efficient with where they're 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 million to fill up a plant but it can vary from year-to-year as well.

Jen Kneale:

Thanks Sunil.

Operator:

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

Operator:

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

Operator:

Good day, and thank you for standing by. Welcome to the Targa Resources Corp. Third Quarter 2022 Earnings Webcast and Presentation. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sanjay Lad, VP of Finance and Investor Relations. Please go ahead.

Matt Meloy:

Thanks, Sanjay, and good morning, and apologies for my hoarse voice. Our overall business is continuing to perform well and our strong execution continued across the third quarter, including record high quarterly EBITDA, record volumes in the Permian, record NGL transportation and fractionation volumes, integration of our Delaware Basin acquisition, successfully bringing on two plants in the Permian Basin safely, ahead of schedule and on budget, $73 million of opportunistic common share repurchases, and were also recently added to the S&P 500. Our record third quarter EBITDA was attributable to higher base business volumes, particularly in the Permian, plus a partial quarter contribution from our Delaware Basin acquisition. While commodity prices are significantly lower than the assumptions underlying the updated full year 2022 financial expectations that we provided in early August. There is no change to our expectation to generate full year adjusted EBITDA between $2.85 billion and $2.95 billion. Given the significant growth in volumes that we expect looking forward and to catch up on some of our Delaware Basin infrastructure, we announced this morning that we are moving forward with a new 275 million cubic feet per day gas processing plant in the Permian Delaware, which we are calling the Wildcat II plant. The growth in volumes across our G&P business also necessitated the announcement this morning that we are kicking off construction of the Daytona NGL pipeline, which will transport volumes from the Permian Basin and connect to our existing segment of Grand Prix and North Texas, to move volumes down to Mont Belvieu. The acceleration of these additional projects shift some spending into 2022, but there is no change to our year-end 2022 leverage ratio expectation of about 3.5 times, meaning we continue to have significant financial flexibility looking forward. Before I turn the call over to Pat, I would like to extend a thank you to our employees for their continued focus on safety while executing on our strategic priorities and continuing to provide best-in-class services to our customers. I will now turn it over to Pat, to discuss our G&P operations in more detail. Pat?

Scott Pryor:

Thanks Pat. Targa's NGL transportation volumes were a record 500,000 barrels per day. Fractionation volumes were a record 742,000 barrels per day during the third quarter. Our volumes would have been higher had it not been for some ethane rejection across our system and third-party systems during the third quarter plus some maintenance at our Mont Belvieu facility. Given the anticipated growth from our volume growth from our Permian G&P expansions growth of third-party volumes and volumes we can transport after the expirations of obligations on third-party pipelines our outlook for continued NGL transportation volume growth is strong. Today we announced plans to construct the Daytona NGL pipeline to transport NGLs from the Permian Basin and connect to the 30-inch diameter segment of the Grand Prix NGL pipeline in North Texas. Daytona is expected to be in service by the end of 2024. Targa will own 75% of Daytona and Blackstone Energy Partners will own 25% and with each member funding the respective share of the pipeline's cost based on their ownership percentage. With an estimated project cost of about $650 million Targa's net growth CapEx share is estimated to be approximately $488 million. In Mont Belvieu construction continues on our Train nine fractionator which is expected to begin operations during the second quarter of 2024 with an estimated cost of around $450 million. Turning to our LPG exports. We loaded an average of 8.5 million barrels per month during the third quarter as we were impacted by reduced spot cargo opportunities and some cancellations due to weaker global market conditions. We currently expect fourth core volumes to improve but will be impacted by similar global dynamics and some required maintenance at the terminal. Our low-cost LPG export expansion project to increase our propane loading capabilities with an incremental one million barrels per month of capacity remains on track for mid-2023. I'll now turn the call over to Jen.

Sanjay Lad:

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and reenter the line up if you have additional questions. Gigi, would you please open the line for Q&A?

Matt Meloy :

Good morning.

Scott Pryor:

Hi, Colton this is Scott. We've, obviously, been watching our volumes as it relates to Grand Prix both on the West leg and the North leg that feeds into Mont Belvieu for some time now and clearly watching the cadence of the plants that we've been adding on the G&P side of our business and along with the Delaware acquisition that we made. So we are keenly aware of the volumes that are moving and the timing of announcing Daytona fits with our expectations. We feel very comfortable with the fourth quarter operating that start in fourth quarter of 2024. And again with Daytona when you look at the volume growth that we've got from our G&P business, third-party volumes, expirations the third-party pipe volumes over time. It's a very good project for us. And especially it leverages the capacity that we've got available on our 30-inch pipeline that feeds into Mont Belvieu. So that gives us plenty of room over a period of time. I'd also like to state that when we start up Daytona and how it complements our Grand Prix West leg we'll also get some efficiency on the fuel side of things as we operate. It allows us to better operate pumps that are along the existing West leg in addition to how we would operate the pumps on the Daytona side.

Jen Kneale:

I think based on the view that we had that there was likely to be Waha tightness and potential impacts on prices on the Waha side. We've added additional hedges particularly around natural gas, Colton. So are hedged above the 75% level on natural gas, actually significantly higher hedged than that right now for 2023. Then on the NGL side, we're a little bit higher hedged than the 75% level. Just continuing to watch backwardation of NGL price markets, and to the extent that we get strength we have tried to hedge into some of that strength. And then we've got a little bit of condensate exposure in our well hedged they're well north of that 75% level to. And those hedges are all related to our percent of proceeds contracts. So we do have commodity exposure elsewhere in our business, but have tried to do a very good job of hedging in advance of 2023 to help underpin continued cash flow stability across our businesses.

Jen Kneale:

Yes. We hedge directly to our basis points and certainly have tried to be far in advance of any price risk around Waha in 2023. Our gas marketing team has done a really good job of trying to manage not only takeaway transport but also our hedge exposure there.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Jeremy Tonet from JPMorgan.

Jen Kneale:

Good morning, Jeremy.

Jen Kneale:

I think that we have a pretty good track record of forecasting guidance conservatively, Jeremy, which is part of it. But also the underlying business is just performing really, really well. So when we think about the volume increases that we're seeing across our systems it feels like every quarter we're reporting record Permian volumes even ignoring the acquisition of the Delaware Basin assets, which will bring significantly more volumes to our system and then on the transportation and fractionation side as well. So while prices were weaker in the quarter, we're comfortable with where our guidance is set right now for the rest of the year. We've got only two months to go. And again, I think, that the business is performing so well that we're really setting up nicely heading into 2023 as well.

Jen Kneale:

I think 2022 provides a little bit of a road map for how we're thinking about returning capital to shareholders. We entered 2022 focused on managing our leverage to levels that we are comfortable with and then also simplifying and also continuing to invest in the business and returning capital to shareholders. And I think that we've been able to execute across all dimensions in 2022. So for 2023 thankfully, we've got the simplifications behind us. No more DevCo. No more pros more And so it really allows us to focus on maintaining that balance sheet strength that we've spent so much time over the last several years talking about and then continuing to invest in our business additional organic growth capital opportunities that are very attractive for us like Wildcat II and like Daytona and like all the other projects that we have in progress, and then continuing to return an increasing amount of capital to our shareholders through higher dividend and additional share repurchases. So I think it will be a similar road map in 2023 and we look forward to describing that in February. On the growth capital side there's some lumpiness just related to the types of projects that we spend capital on. So when you think about Daytona and Wildcat II, a little bit of capital accelerating into this year, but a lot of capital on both of those projects will be spent in 2023. And then there's still lumpiness around Train 9 spending. So there's significant Train 9 spending in 2023 as well along with just the natural cadence of plant ads compression ads and gathering line ads. So 2023 capital will be higher and we'll give more visibility to that in February as well. But certainly, we're very comfortable and believe that similar to our spending this year underpinning EBITDA growth 2023 over 2022, the spending that we'll be doing next year is what will set us up for continued EBITDA growth going forward as well.

Jen Kneale:

Thank you.

Brian Reynolds:

Hi. Good morning, everyone. Maybe just to circle back on [indiscernible]. Could you just talk a little bit about the synergies seen so far to capture some of those offloaded volumes. Curious, if you can just talk about how the transaction multiple is being worked out perhaps before all of those volumes fully work its way through the target integrated system in a few years? Thanks.

Brian Reynolds:

Great. I appreciate that. My one follow-up entering 2023 just given some operational issues from some peers. There's various projects that are coming online in 2023 but curious, if you could talk about the GCF frac on iLink [ph] or if there's any desire to simplify that JV over the next year or two? Thanks.

Brian Reynolds:

Great. Super helpful. [indiscernible] and everyone.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Keith Stanley from Wolfe Research.

Jen Kneale:

Keith, this is Jen. In terms of spending we've got a little bit that's coming into 2022. And then we'll have spending of course in 2023 and actually more in 2024 than in 2023 is what we currently have forecasted but we're trying to get Daytona online as quickly as possible. So that may shift between 2023 and 2024, but that's what the spending currently looks like right now.

Keith Stanley :

Thanks for that. My second question is on Permian gas. I guess, first, I'm just curious how -- if you have a view on how much of the weakness we've seen this fall has been due to maintenance versus a tighter-than-expected market. And any updated thoughts on the potential to support a new takeaway project either through contracting or ownership and we might hear more on that.

Keith Stanley :

Thank you.

Theresa Chen :

Hi, there. I wanted to ask on the comments related to the carbon capture opportunities and your anticipation of receiving 45Q credit. Can you provide some more detail on the nature of the economics with these projects in general and your outlook from here?

Jen Kneale :

And then related to timing, Theresa, we said in our script accounts that we thought that we could start getting credits as early as Q4 of 2023.