Q4 2023 Earnings Summary
- Targa Resources is experiencing robust growth in the Permian Basin, outperforming expectations, with December 2023 being the highest month, setting up for strong year-over-year growth in 2024 and beyond. They have a strong outlook for continued growth in both the Midland and Delaware Basins.
- Targa expects significant EBITDA growth in 2025 and beyond, with capital expenditures decreasing significantly, creating flexibility for meaningful increases in shareholder returns, aiming to return 40–50% of cash flow from operations to shareholders through increased dividends and share buybacks.
- Targa has a history of achieving higher returns than projected, with build multiples closer to 4x over the past five years, lower than the targeted 5–7x, due to strong volume growth and quicker asset utilization. Current projections may be conservative, indicating potential upside in future EBITDA growth.
- Supply chain issues are causing delays and uncertainties in project timelines, particularly for Frac 11 and compression equipment, which could impact Targa's ability to meet growth targets. , ,
- Extreme winter weather impacted Q1 results, and 2023 volumes came in lower than initial guidance for the full-year average, indicating potential vulnerability to weather disruptions and possible underperformance.
- The company anticipates higher cash taxes starting in 2026-2027, moving to a full statutory tax rate, which could reduce free cash flow available to shareholders.
-
Capital Allocation in 2025
Q: How will you allocate capital with lower 2025 CapEx?
A: With a $1 billion reduction in CapEx in 2025, we're excited about significantly increasing free cash flow to meaningfully boost common dividends and continue opportunistic share repurchases. We plan to return 40% to 50% of cash flow from operations to shareholders, providing substantial incremental capital to them. -
Permian Production Growth Outlook
Q: What's your expectation for Permian production growth?
A: We're seeing robust growth in our Permian assets, outperforming initial expectations by year-end 2023 despite a slower start. Even with recent winter weather impacts, we expect high single-digit to potentially 9% growth, setting us up well for 2024 and 2025. -
EBITDA Growth and Investment Multiples
Q: Can you elaborate on EBITDA growth and investment multiples?
A: We're anticipating significant EBITDA growth in 2025 and beyond, with CapEx of $2.3 to $2.5 billion this year. Historically, we've achieved investment multiples closer to 4x, outperforming our 5–6x target. There's potential upside if commodity prices provide tailwinds. -
M&A Impact on Growth Expectations
Q: How do recent M&A activities affect your growth outlook?
A: We don't see material differences with new M&A announcements. We have meaningful positions and long-term contracts with all parties involved, and we expect consistent growth across combined companies. In some cases, there may even be incremental growth on our Midland assets. -
Fee-Based Contracts and Fee Floors
Q: How are you increasing fee-based revenue and fee floors?
A: We've increased our fee-based contracts through acquisitions and restructuring existing agreements to include fee floors. This provides us with greater downside protection and incentivizes continued capital investment, with 90% of our business now fee-based. -
Operational Challenges and Gas Quality
Q: How are you managing operational hiccups and gas quality issues?
A: We're investing in additional treating facilities to handle CO₂ and H₂S, positioning us to manage sour gas effectively and grow at a higher clip than the basin. Our operations teams have swiftly responded to extreme weather, and volumes are returning to prior levels. -
Compression Lead Times and Impact
Q: Are compression equipment lead times affecting operations?
A: Yes, lead times remain long, but we've gotten ahead by ordering equipment well in advance. We approved a $400 million compression order to ensure we're prepared for future growth, minimizing operational constraints. -
LPG Export Capacity Increase
Q: What's the impact of lifting daylight restrictions on LPG exports?
A: The lifting of daylight hour restrictions has provided a 5% to 10% increase in export capacity. With over 13 million barrels per month exported in Q4, we view this change as long-term and expect continued optimization around nighttime transits. -
Potential Export Expansions at Galena Park
Q: Are there plans to expand export capacity at Galena Park?
A: We have opportunities to expand Galena Park, including adding refrigeration, pipelines, and potential docks. While we have runway with existing assets, we're evaluating the timing for future expansions to accommodate growth from our gathering and processing business.
Research analysts covering Targa Resources.