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    Targa Resources Corp (TRGP)

    Business Description

    Targa Resources Corp. (NYSE: TRGP) is a leading provider of midstream services and one of the largest independent midstream infrastructure companies in North America. The company is primarily engaged in gathering, compressing, treating, processing, transporting, and purchasing and selling natural gas; transporting, storing, fractionating, treating, and purchasing and selling natural gas liquids (NGLs) and NGL products, including services to LPG exporters; and gathering, storing, terminaling, and purchasing and selling crude oil . Targa operates in two primary segments: Gathering and Processing, and Logistics and Transportation (also referred to as the Downstream Business) .

    1. Natural Gas Liquids (NGLs) - Involves transporting, storing, fractionating, treating, and purchasing and selling NGLs and NGL products, including providing services to LPG exporters.
    2. Natural Gas - Engages in gathering, compressing, treating, processing, transporting, and purchasing and selling natural gas.
    3. Crude Oil - Focuses on gathering, storing, terminaling, and purchasing and selling crude oil.
    4. Midstream Services - Offers gathering and processing, NGL transportation, fractionation and services, storage, terminaling, and export services.

    Q3 2024 Summary

    Initial Price$129.98July 1, 2024
    Final Price$150.58October 1, 2024
    Price Change$20.60
    % Change+15.85%

    What went well

    • Targa Resources is experiencing stronger than expected growth in natural gas volumes, with Permian volumes up 18% year-over-year in Q3 , leading to record volumes and the acceleration of infrastructure investments.
    • The company's expertise and significant investments in handling sour gas in the Delaware Basin provide a competitive advantage and position Targa well for continued growth, as handling sour gas is more complex and others are less equipped to manage it.
    • Targa is accelerating the addition of new processing plants, such as Falcon 2 and East Driver, due to higher anticipated growth, with attractive economics of around 5.5x build multiple, demonstrating strong demand and confidence in future returns.

    What went wrong

    • Higher Capital Expenditures May Pressure Free Cash Flow: Targa Resources is seeing its growth capital expenditures move higher than previously anticipated due to increased infrastructure spending to handle higher-than-expected growth ( ). This elevated CapEx could potentially pressure free cash flow and affect shareholder returns.
    • Operational and Execution Risks in Sour Gas Expansion: The company is investing heavily in sour gas infrastructure in the Delaware Basin, including an 800 million cubic feet per day treater and additional wells ( ). Handling sour gas is complex, and this expansion poses operational and execution risks that could impact performance.
    • Weak Ethane Prices Could Affect Margins: Ethane prices have been weak lately, around $0.18, leading to potential rejection economics in certain areas ( ). While Targa remains in recovery mode to feed its system, continued low ethane prices could negatively impact margins in their NGL segment.

    Q&A Summary

    1. 2025 CapEx Outlook
      Q: How long will accelerated growth endure and how high could 2025 CapEx go?
      A: Management highlighted that the accelerated growth is expected to continue into 2025, with higher capital expenditures due to increased activity in gathering and processing, additional pipelines, compression, and acceleration of plant timing, including the Falcon 2 and East Driver plants. Although they did not provide specific CapEx numbers, they plan to give more details in February.

    2. Volume Growth Expectations
      Q: What's the outlook for volume growth, especially with producers in the basin?
      A: Targa is seeing significant growth on the gas side, surpassing expectations due to more productive wells and higher volumes. The company remains bullish on natural gas growth across its footprint, particularly benefiting from the integration of Lucid assets in New Mexico, positioning them well to capture strong activity.

    3. Permian Basin Activity
      Q: What is the Permian Basin activity outlook and assumptions behind associated gas forecast?
      A: One out of every three rigs in the Permian is running on Targa acreage, indicating robust activity on their footprint. They are seeing increased activity from various producers and new formations, some very gassy, leading to significant gas growth across both Midland and Delaware sides of the basin over the next 24 to 36 months.

    4. NGL Pipeline Expansion Plans
      Q: Will NGL pipeline spending be accelerated into 2025?
      A: While volumes have increased, Targa is utilizing operating leverage and third-party agreements to defer major NGL pipeline capital expenditures, such as looping the 30-inch line. They will continue to evaluate the timing as they move into 2025 but believe they have the benefit of time due to current agreements and capacity.

    5. Future Capital Spend and M&A Impact
      Q: Could potential acquisitions delay the 2025 free cash flow inflection?
      A: Management expects significant free cash flow in 2025, despite not providing firm capital numbers yet. They continually evaluate bolt-on acquisitions but set a high bar for these opportunities, prioritizing organic growth and execution on existing projects.

    6. Share Buyback Approach
      Q: Is the share buyback approach ratable or still opportunistic?
      A: Targa continues to be opportunistic with share repurchases, considering various factors in their activity. They emphasize their unchanged capital allocation priorities and see repurchases as an important tool to return capital to shareholders, but expect variability moving forward.

    7. LPG Export Expansion Plans
      Q: Will you consider third-party LPG capacity to defer spend, or is own export capacity preferred?
      A: Targa prefers to handle its own exports and is evaluating the timing and size of the next LPG export expansion, likely including pipeline and additional refrigeration totaling around $350 million. They are planning for future expansions to accommodate their volume growth rather than relying on third-party capacity.

    8. Sour Gas Business Growth
      Q: How much can the sour gas business grow and what CapEx is associated?
      A: Targa has decades of experience handling sour gas and is ramping up spending to manage increasing sour volumes in the Delaware Basin. An 800 million cubic feet per day treater is coming online at their Bull Moose complex, with additional wells being drilled, giving them an advantage for long-term growth.

    9. Impact of 45Q Credits on Cash Taxes
      Q: Will 45Q credits significantly offset future cash taxes?
      A: While 45Q credits are a nice complement to their business, they are on the margin and do not meaningfully change Targa's outlook for cash taxes. They still expect to be subject to the AMT in 2026 and become a full cash taxpayer in 2027 after utilizing existing NOLs.

    10. Marketing Performance
      Q: Was strong Q3 marketing performance due to LPG exports or Permian gas optimization?
      A: Targa had a strong marketing year across NGL, natural gas, and exports, contributing to outperformance, driven by the vastness of their footprint and high volumes moving across their systems. They expect to continue identifying marketing opportunities as they move forward.

    11. Downstream Throughput Outlook
      Q: What's the forward outlook for downstream throughput trends?
      A: After rebounding from Q2 disruptions due to vessel inspections, Targa expects Q4 volumes to meet or exceed Q3, benefiting from demand in propane and butane markets. Moving into 2025, they anticipate similar trends with continued vessel additions and low freight rates facilitating global supply.

    12. Impact of Matterhorn Pipeline
      Q: Has the Matterhorn pipeline increased production or are flows just moving around?
      A: For Targa's customers, production was already flowing with sufficient takeaway capacity. Matterhorn has provided more capacity basin-wide, but Targa did not expect an outsized quarter-over-quarter volume increase solely due to its startup.

    13. Ethane Recovery and Daytona Volumes
      Q: What are the ethane recovery trends and how will Daytona volumes evolve?
      A: Despite weak ethane prices, Targa remains in full ethane recovery mode to feed their integrated system, particularly in the Permian where gas prices support recovery. The Daytona system provides operational efficiency and leverage, enhancing capacity into their 30-inch pipe.

    14. Falcon 2 and East Driver Plants
      Q: Why proceed with Falcon 2 and East Driver plants, and what are the economics?
      A: The acceleration is due to increased volumes across the Delaware and Midland basins, leading Targa to announce these plants sooner than expected. The economics remain consistent with previous projects, with an organic build multiple of around 5.5x.

    15. In-basin Demand Impact
      Q: Could in-basin industrial demand growth impact the gas egress picture?
      A: While there is significant interest and discussions around in-basin consumption growth, the actual impact depends on what projects get built and permitted, which remains uncertain.

    16. Future Gas Egress Needs
      Q: What's Targa's view on future gas egress needs and involvement?
      A: Targa is excited about their partnership with Blackcomb on a pipeline project and supports additional egress out of the basin. With increasing gas production, they anticipate a faster need for more gas pipelines and welcome other projects to alleviate capacity constraints.

    17. Badlands Crude Volume Uptick
      Q: Is the crude volume uptick in the Badlands system sustainable?
      A: The uptick resulted from increased activity due to permits being granted and producers resuming drilling after inactivity. Targa expects continued good activity levels but doesn't anticipate sustained robust growth at the same rate.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Matthew J. MeloyChief Executive Officer and DirectorMarch 1, 2020Matthew J. Meloy has served as the CEO and a director since March 1, 2020. He was previously President from March 2018 to March 2020 and CFO from May 2015 to February 2018 .
    Patrick J. McDoniePresident – Gathering and ProcessingMarch 2018Patrick J. McDonie has served as President – Gathering and Processing since March 2018. He was previously EVP – Southern Field Gathering and Processing from November 2015 to February 2018 .
    D. Scott PryorPresident – Logistics and TransportationMarch 2018D. Scott Pryor has served as President – Logistics and Transportation since March 2018. He was previously EVP – Logistics and Marketing from November 2015 to February 2018 .
    Robert M. MuraroChief Commercial OfficerMarch 2018Robert M. Muraro has served as Chief Commercial Officer since March 2018. He was previously EVP – Commercial from February 2017 to February 2018 .
    Jennifer R. KnealeChief Financial OfficerMarch 2018Jennifer R. Kneale has served as CFO since March 2018. She was previously Vice President – Finance from December 2015 to February 2018 .
    Gerald R. ShraderExecutive Vice President, General Counsel, SecretaryDecember 2023Gerald R. Shrader has served as EVP, General Counsel, and Secretary since December 2023. He held various positions within the company's subsidiaries starting in March 2015 .
    G. Clark WhiteExecutive Vice President - OperationsSeptember 2020G. Clark White has served as EVP - Operations since September 2020. He was previously EVP - Engineering and Operations from November 2015 to September 2020 .
    Julie H. BoushkaSenior Vice President and Chief Accounting OfficerMarch 2019Julie H. Boushka has served as SVP and Chief Accounting Officer since March 2019. She was previously Vice President – Controller from February 2017 to February 2019 .
    William A. ByersChief Financial OfficerJuly 22, 2024William A. Byers serves as CFO, having joined the company in this role on July 22, 2024 .
    J. Christopher EklofSenior Vice President and Chief Accounting OfficerMarch 1, 2025The documents do not provide any information about J. Christopher Eklof or his role as Senior Vice President and Chief Accounting Officer at Targa Resources Corp. (TRGP) [N/A].

    Questions to Ask Management

    1. Given your expectation to become a full cash taxpayer by 2027 despite accruing 45Q tax credits starting in the fourth quarter, could you elaborate on why these credits are not meaningfully changing your cash tax outlook, and what steps you are taking to mitigate upcoming cash tax liabilities?

    2. With the acceleration of plant timing and additional investments in Permian infrastructure leading to higher anticipated capital expenditures in 2025, how are you balancing this increased spending with your capital allocation priorities, particularly regarding shareholder returns and maintaining a strong investment-grade balance sheet?

    3. Considering the current weak ethane prices and potential ethane rejection in outlying areas, how is Targa managing ethane recovery across its systems, and what impact do you expect this to have on your NGL transportation, fractionation volumes, and margins moving forward?

    4. As new pipelines like Matterhorn come online and the basin experiences maintenance and disruptions affecting Waha prices, how is Targa positioned to navigate these market dynamics, and what strategies are you employing to ensure that your customers' production growth translates into increased volumes for Targa?

    5. Given the increasing gas production and the potential need for additional gas pipeline capacity out of the Permian Basin, can you discuss Targa's plans or willingness to participate in future gas egress projects beyond your partnership with Blackcomb, and how delays or constraints in gas takeaway could impact your growth projections?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateMay 2023 July 2024
    End Date/DurationOngoing Ongoing
    Total Additional Amount$1.0 billion $1.0 billion
    Remaining Authorization Amount$0.1 billion $1.0 billion
    DetailsPart of strategy to return capital to shareholders Part of strategy to return capital to shareholders

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EBITDA: Expected to be above the top end of the range $3.95 billion to $4.05 billion .
      2. Net Maintenance Capital Spending: Estimated at $225 million .
      3. Net Growth Capital Spending: Expected to modestly exceed $2.7 billion .
      4. Free Cash Flow Generation: Anticipated meaningful inflection in 2025 relative to 2024 .
      5. Dividend: Expected recommendation for 2025 annual common dividend to $4 per share .
      6. Capital Allocation: Plan to return 40% to 50% of adjusted cash flow from operations to shareholders in 2024 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Adjusted EBITDA for 2024: Midpoint estimate of $4 billion .
      2. Growth Capital Spending for 2024: Approximately $2.7 billion .
      3. Capital Spending for 2025: Estimated at $1.7 billion .
      4. Free Cash Flow: Similar estimate for 2025 as in February 2024 .
      5. Return of Capital: Plan to return 40% to 50% of adjusted cash flow from operations to equity holders .
      6. Volume Growth: Low double-digit percentage growth in the Permian for 2024 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EBITDA: Estimated between $3.7 billion and $3.9 billion .
      2. Growth Capital Spending: Estimated between $2.3 billion and $2.5 billion for 2024; approximately $1.4 billion for 2025 .
      3. Net Maintenance Capital Spending: Estimated at $225 million .
      4. Dividend: 50% increase to $3 per share for 2024 .
      5. LPG Export Capacity: Increase by approximately 650,000 barrels per month by the second half of 2025 .
      6. Liquidity and Leverage: Available liquidity of $2.6 billion; net leverage ratio of 3.6x .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EBITDA for 2024: Estimated between $3.7 billion and $3.9 billion .
      2. Growth Capital Spending for 2024: Estimated between $2.3 billion and $2.5 billion .
      3. Net Maintenance Capital Spending for 2024: Estimated at $225 million .
      4. Leverage Ratio: Expected within the range of 3 to 4x .
      5. Dividend Increase: 50% increase to the annualized 2024 dividend .
      6. Permian Gathering and Processing Volumes: Expected growth of about 9% .
      7. Hedging and Commodity Price Sensitivity: Impact of commodity price changes on EBITDA .
      8. Free Cash Flow in 2025: Expected significant generation .
      9. 2025 Growth Capital Spending: Estimated at about $1.4 billion .
      10. Return of Capital: Plan to return 40% to 50% of cash flow from operations to equity holders .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Major interstate and intrastate pipeline companies
    • Master limited partnerships
    • Oil and gas producers
    • Midstream providers with NGL transportation capabilities
    • Fractionators in the Mont Belvieu region
    • Fractionators in Conway, Kansas
    • Decentralized, smaller fractionation facilities in Texas, Louisiana, and New Mexico
    • NGL marketing companies
    • Trading organizations
    • Petrochemical operators
    • Large crude oil, natural gas, and NGL companies with greater financial resources