Q3 2024 Earnings Summary
- 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.
- 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.
| Metric | YoY Change | Reason |
|---|---|---|
Gathering & Processing | –16% YoY | Lower realized commodity prices overshadowed rising inlet volumes, leading to lower segment revenues. Higher operating costs from system expansions also weighed on margins. Going forward, a shift toward fee-based contracts is expected to reduce commodity price exposure and support more stable cash flows. |
Logistics & Transportation | –6% YoY | Despite higher pipeline transportation and fractionation volumes, narrower marketing margins and reduced spot opportunities suppressed overall growth. Market conditions with fewer seasonal optimization advantages also played a role. Forward-looking, export expansions and further capacity additions may improve volumes and margins. |
Natural Gas Sales | –72% YoY | A steep decline in natural gas prices drove sales lower, despite increased volumes from new plants in the Permian. Company efforts to expand gathering infrastructure help support volumes, but price volatility remains a key risk factor. Future contract transitions to fee-based structures could help mitigate price swings. |
NGL Sales | +12% YoY | Higher NGL prices and increased throughput drove sales growth, though unfavorable hedge impacts partially offset gains. Market fundamentals like rising petrochemical demand boosted NGL pricing. Looking ahead, expanded fractionation capacity and strong Permian volumes are likely to support further NGL sales growth. |
Midstream Services Fees | +21% YoY | Higher gas gathering and processing fees and strong export volumes resulted in robust fee income, offset slightly by lower fractionation fees. The company’s ongoing expansions in the Permian and export infrastructure are expected to sustain elevated fee-based revenues. |
Operating Income (EBIT) | $728.2 million (up from –$308.4 million) | The move from a negative EBIT to a positive $728.2 million reflects reduced mark-to-market losses, higher fee revenues, and the benefit of growing volumes. Company-led expansions and cost controls helped reverse the prior-year loss. In the future, further system optimization and higher utilization could bolster profitability. |
Net Income | $447.9 million (+133% YoY) | Primary drivers include improved operational performance, better fee-based margins, and lower commodity derivative losses relative to the prior year. Higher volumes across gathering, transportation, and fractionation also contributed. Continued focus on cost efficiency and strategic expansions may sustain upward momentum in net income. |
EPS (Diluted) | $1.75 (+70% YoY) | Stronger net income and share repurchases boosted EPS, while interest expense and higher operating costs tempered gains. Future volume growth and capital discipline could further support EPS, given the company’s emphasis on expanding fee-based services and managing leverage. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted EBITDA | FY 2024 | $4 billion | Exceed $4.05 billion | raised |
Net Growth Capital | FY 2024 | $2.7 billion | Modestly exceed $2.7 billion | raised |
Net Maintenance Capital | FY 2024 | No prior guidance | $225 million | no prior guidance |
Dividend | FY 2025 | No prior guidance | $4 per share | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Permian volume growth | Mentioned in Q2 (+5% vs. Q1), Q1 (record 5.4 Bcf/d), Q4 2023 (record volumes, 5.5 Bcf/d in December) | Record 6 Bcf/d (+5% vs. Q2, +18% YoY), continued robust growth | Recurring; consistent strong growth |
Expansions | Q2: Greenwood II, Pembrook II, Roadrunner II, fractionators Train 9–11; Q1: Greenwood II, Pembrook II; Q4 2023: Greenwood, Wildcat II | Multiple new plants (Greenwood 2, Pembrook 2, East Pembrook, East Driver) and fractionator Train 11 | Recurring; continuous build-out |
Delaware Basin expansions (Lucid, sour gas) | Q2: Lucid strengthened Delaware position; Q1: Only general Delaware expansions noted (no Lucid, sour gas specifics); Q4 2023: Additional treating facilities and Lucid’s fee-based contracts | Highlighted Lucid acquisition’s significant footprint; sour gas treater (800 MMcf/d) online early 2025 | Recurring; sour gas handling emphasized |
Acceleration of high-return projects | Q2: Fractionators Train 10–11 and Blackcomb pipeline mentioned; no explicit Falcon 2/East Driver mention; Q1/Q4: No mention of Falcon 2 or East Driver | Accelerated Falcon 2 (Q2 2026), East Driver (Q3 2026), Train 11 (Q3 2026) | Newer detail; expansions accelerated |
Capital expenditures & free cash flow | Q2: 2024 CapEx $2.7B, free cash flow remains robust in 2025; Q1: $2.3–2.5B in 2024, step-down in 2025; Q4 2023: $2.3–2.5B in 2024, $1.4B in 2025 | $2.7B+ in 2024 net growth CapEx; expect meaningful free cash flow inflection in 2025 | Recurring; consistent message on inflection |
Return of capital to shareholders | Q2: Record $355M buybacks, new $1B repurchase program, dividend policy to grow; Q1: 50% dividend increase to $3/share; Q4 2023: 50% increase in 2024 dividend, continued buybacks | Dividend expected to increase to $4/share in 2025 (+33%), opportunistic buybacks | Recurring; steady increases |
Greenwood plant fire | Q1: Fire in April 2024, $10M in repairs, no injuries, expected back online by end of Q2 2024 | No mention in Q3 | Previously discussed; no recent mention |
Cash tax obligations after 2027 | Not mentioned in Q2/Q1; Q4 2023: They expect to pay the statutory rate in 2027 after using NOLs | Expect to be a full cash taxpayer in 2027, no details beyond | Recurring mention; no new info |
45Q tax credits | Q2: Potential benefit from CCUS, relatively small; Q1/Q4 2023: No mention | Will start accruing in Q4 2024, not materially impacting cash taxes | Newer detail; modest impact |
Lower-margin contracts rolling off | Not mentioned in Q2/Q1/Q4 | One lower-margin G&P contract rolls off in Q4 2024, contributing to muted growth | New topic; slight negative volume impact |
Weaker gas prices outside Permian | Q2: No direct mention; Q1: Weaker gas prices curbed activity outside Permian; Q4 2023: Acknowledged year-over-year price weakness but limited trough impact | Some ethane rejection noted outside Permian; Targa in full recovery | Recurring theme; limited impact on Targa |
Supply chain constraints | Q4 2023: Longer lead times, proactively ordering equipment; Q1/Q2: No specific mention | No mention in Q3 | Mentioned earlier; not discussed now |
Slower volume growth & margin changes Q4 2024 | Q2/Q1/Q4 2023: No explicit mention of Q4 2024 slowdowns | Expect muted growth vs. strong Q2/Q3; rollover of a lower-margin contract | Newly emphasized shorter-term slowdown |
Build multiples around 5.5x for expansions | Q2: 5–6x multiple for expansions; Q1: No mention; Q4 2023: 5.5x was a conservative assumption | Falcon 2 & East Driver in line with 5.5x build multiple | Recurring; consistent multiples |
Tight residue gas takeaway in Permian | Q2: Emphasized planning (Blackcomb pipeline), tight residue market; Q1: Matterhorn to bring relief in 2024; Q4 2023: Not specifically mentioned | Tight capacity noted, Targa helped customers avoid disruptions | Recurring; expansions address constraints |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
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