The operator introduces the Targa Resources Corp. Fourth Quarter 2023 Earnings Webcast and Presentation. The Vice President of Finance and Investor Relations, Sanjay Lad, welcomes participants and introduces the speakers, including the Chief Executive Officer, Matt Meloy, and the Chief Financial Officer, Jen Kneale. The speakers will discuss Targa's fourth quarter earnings and provide a forward-looking statement. Other senior management team members will be available for the question-and-answer session. Matt Meloy thanks employees for their hard work and dedication in achieving another record year for Targa.

In 2023, the company achieved record safety performance and volumes in the Permian region, as well as record adjusted EBITDA of $3.53 billion. They also completed major projects on time and on budget, and ended the year with a high percentage of fee-based or fee floor volumes. Despite lower natural gas and NGL prices, the company's business was insulated and they saw strong volume momentum in the Permian. They expect another year of record financial and operational metrics in 2024, with a significant increase in adjusted EBITDA driven by higher volumes and growth expectations for Permian-associated gas.

In 2024, the company plans to install over 400 million cubic feet per day of compression and spend between $2.3 billion and $2.5 billion on growth projects, including two Permian plants, three fractionators, and an NGL pipeline. They also plan to increase their common dividend per share by 50% and continue their share repurchase program. In 2025, they anticipate spending about $1.4 billion on growth projects and generating significant free cash flow. They also provided an illustrative multiyear average spending estimate of $1.7 billion per year.

The company expects high growth in gas volume in the Permian, leading to a $300 million increase in EBITDA and free cash flow, allowing for more capital to be returned to shareholders. Around $300 million will also be spent annually to maintain current volumes. The company's large Permian footprint and integrated NGL system position it for high return investment opportunities, with an average of $1.7 billion annually and $300 million in EBITDA growth. Inlet volumes in the Permian reached a record 5.3 billion cubic feet per day in the fourth quarter of 2022, an 11% increase from the previous year.

During the fourth quarter, the company saw a 5% increase in volumes thanks to significant compression efforts in the Midland and Delaware systems. The new Greenwood and Wildcat II plants are already highly utilized, and the upcoming Greenwood II, Roadrunner II, and Bull Moose plants are expected to help meet the growing demand. In the Logistics and Transportation segment, NGL pipeline transportation and fractionation volumes were at record highs, with increased supply from the Permian systems and third parties. The Daytona NGL pipeline expansion is on track to begin operations ahead of schedule, and the Train 9 fractionator is expected to be highly utilized when it comes online in 2024.

In the fourth quarter, Targa reported a 14% increase in adjusted EBITDA, reaching $960 million. This was due to higher Permian volumes, resulting in increased system volumes across the company's integrated NGL business. For the full year of 2023, Targa had record financial and operational metrics, with approximately $2.2 billion spent on growth capital projects and $223 million on net maintenance capital. In November, the company successfully completed a $1 billion offering of senior notes, allowing them to reduce term loan borrowings and improve their liquidity position.

The company had $2.7 billion in liquidity at the end of the fourth quarter and their net consolidated leverage ratio was within their target range. They have been upgraded by S&P and expect an 8% increase in adjusted EBITDA for 2024. First quarter 2024 may be lower due to weather and expenses, but quarterly EBITDA is expected to increase throughout the year. They plan to spend $2.3-2.5 billion on growth capital and $225 million on maintenance in 2024, and their leverage ratio is expected to remain within their target range. They are well hedged and have a stable cash flow from hedges and fee-based margin.

Targa Resources has set fee floors in their G&P business to support their ability to invest and benefit from higher commodity prices. They expect strong growth in Permian volumes, which will drive investments in downstream assets. However, as these projects come online and benefit from operating leverage, growth capital spending will moderate. In a downside scenario, Targa's free cash flow generation and strong balance sheet will leave them well positioned. They plan to allocate capital towards maintaining volumes and have set aside approximately $300 million for this purpose.

The company's priorities include maintaining a strong balance sheet, investing in high-return projects, and returning capital to shareholders. They plan to recommend a 50% increase in the annual dividend and continue to execute share repurchases. They expect to return 40-50% of cash flow to equity holders and may be subject to taxes in 2026 and 2027. The company believes they offer value to shareholders through growing EBITDA, dividends, and reducing share count. The team is focused on executing strategic priorities and operating assets safely.

The speaker is excited about the possibilities for Targa and their shareholders in 2025, with a significant decrease in CapEx and the potential for increased free cash flow. They plan to continue their current framework of returning 40-50% of cash flow to shareholders through dividends and share repurchases, which will be a key factor in the company's success in the future.

In the fourth quarter, Targa saw a significant increase in LPG exports due to the export expansion project and the lifting of nighttime transit restrictions. The company estimates that this provided a 5% to 10% benefit, and they are grateful to the Houston pilots and Ship Channel for making this change safely and efficiently. This not only benefits Targa, but also the wider economy.

The company views the current trial period for nighttime transits as a long-term change and hopes to find ways to optimize it in the future. They have seen some benefits from it in the fourth quarter and expect a 5-10% upside, but it is still early. There may be a slower start to Permian production in the beginning of the year, but overall there is expected to be robust growth on their assets.

The speaker discusses some important points from scripted comments, including exceeding expectations for growth in 2023 and experiencing extreme winter weather that will impact Q1 results. They also mention their track record of outperforming expectations for Permian Basin gas growth and their strong outlook for continued growth. The speaker also mentions that they are not providing EBITDA for 2025, but provide some tools to help think about it, including significant growth and $300 million of annual EBITDA growth with $1.7 billion of spending.

The speaker discusses the company's EBITDA growth in the years 2023-2024 and mentions that they spent over $2 billion in each of those years. They believe that achieving over $300 million in EBITDA growth in 2025 will be easy, but they do not want to get ahead of themselves. They feel confident about their position going into 2025 and believe there will be significant EBITDA growth in that year and beyond. They mention their average investment multiple of 5.5 times and how it is a multiyear average, not a set amount for one year. They believe this will set them up for a strong 2025. When asked about their EBITDA guidance for 2025, they decline to give a specific number but point to their historical spending and volume trajectory as indicators of a strong 2025. The speaker also mentions that in the past three years, some projects have come in at lower multiples, but this may be due to conservatism or the commodity market. They do not rule out the possibility of upside to the EBITDA build multiple.

The company has historically targeted a 5 to 7 times build multiple, but in the last five years, they have been closer to a 4 times build multiple due to strong volume growth and the Permian filling up quickly. There is nothing fundamentally different in their current investments compared to the past, but there may be some conservatism in their projections. The finance team is happy with the high utilization of their assets, but it may be challenging for the operations and engineering teams to plan.

The company expects high single-digit growth in the Permian region, with December being the highest month. They feel confident about their production growth for the year and are well-positioned for the next few years. The recent M&A activity in the region has not affected their outlook, as they have strong relationships and contracts with the companies involved.

The speaker discusses the potential impact of recent mergers on their expected growth levels and mentions that their assets in the Midland side of the basin may see incremental growth. They also mention their investments in treating facilities to handle CO2 and H2S in the Delaware Basin, positioning them well for future growth. The speaker also mentions that volumes have rebounded after the recent winter storm, thanks to the efforts of their operations teams.

The speaker apologizes for his voice and praises the company for providing details on their capital expenditure sensitivity. He asks about the flexibility in their 2025 outlook and how they plan to adjust spending if production levels change. The company mentions long lead time for Train 11 and potential for additional plants in the future. The main sensitivity for their capital expenditure is on the downstream side, particularly in terms of transportation and export projects. The speaker thanks the company for their response.

Matt Meloy, CFO of a company, discusses the company's progress in increasing fee-based components in their G&P segment. He notes that there was a significant increase in the number of contracts renegotiated in 2023, resulting in a step-change in their overall downside risk profile. As a result, they now estimate that 90% of their business is fee-based, with minimal sensitivity to commodity price fluctuations. Theresa Chen asks if the mix of fee-based and POP contracts with fee floors has changed within the 90%, to which Meloy responds that the increase in fee-based contracts was primarily due to renegotiating POP contracts with fee floors, rather than exchanging legacy fee-based contracts for POP contracts.

Jen Kneale explains that the increase in fee-based contracts in Targa's G&P business is largely due to their acquisition of Lucid. The commercial team has also worked with producers to demonstrate the need for fee floors in order to incentivize Targa to continue investing capital even in a low commodity price environment. This has been a successful effort and has allowed Targa to maintain a good rate of return while still leaving room for potential upside if commodity prices rise.

The company has acquired fee-based assets and restructured contracts to generate returns and support producers. The long-term CapEx will increase from 1.4 to 1.7 primarily due to downstream spending, including multiple fractionation facilities. The company also has plans for a new NGL pipeline, but the timing and amount of spending will depend on the growth rate in the Permian.

The company is considering options for transporting their products, including building a new pipeline or using excess capacity from competitors. They have shown that they can operate above their current capacity and have a lot of operating leverage. The majority of their CapEx budget will go towards downstream projects, leaving about $300 million each year for transportation and exports. There may be potential for expansion at Galena Park, but there may also be oversupply in the NGL pipeline market. The company is confident in their ability to maintain pricing power.

The speaker discusses the use of third-party pipes for volumes coming into their Belvieu facility and the potential for utilizing industry pipes to bridge them to a loop around their existing system. They also mention potential expansion projects at Galena Park and the growth of their G&P business. The speaker notes that their company is not representative of the overall Permian basin and that they have room for expansion at their existing assets.

Matt Meloy, responding to a question about producer activity in the Permian basin, states that there is growth in both the Delaware and Midland basins. Neel Mitra asks about expected volumes on the Daytona pipeline in 2025, to which Scott Pryor responds that it will be primarily driven by their G&P footprint. Jen Kneale clarifies that they may be subject to the AMT in 2026 or 2027 and will be fully subject to the statutory tax rate in 2027.

The speaker discusses the potential impact of the existing bill on accelerated bonus depreciation and how it may delay things for a year. They also mention the potential for export expansions and their strategy to ensure they have the capacity to handle volumes from their G&P footprint. They have recently completed an expansion and are already looking at scoping for future projects.

The timing for projects involving refrigeration, pipelines, and docks is still uncertain, but they are more focused on debottlenecking rather than large-scale projects. The company has caught up on compression and has ordered more to stay ahead of potential volume growth. Lead times for compression have not decreased.

The company is still facing long lead times, but they are working on addressing the issue. There has been no update on the Apex Permian gas pipeline, but the company is actively exploring other options for getting gas out of the basin. The $1.7 billion run-rate does not include the Apex project, and any future projects will be evaluated for potential partnership and financing.

During the Q&A session, the Targa Resources team discussed the potential for project financing, stating that any equity investment would be small and not included in their outlook. They also mentioned spending some capital on intra-basin Permian residue and that any future spending on this would be included in their $1.7 billion multiyear outlook. They also mentioned that they have not defined a timeline for the in-service date of Frac 11, but are taking steps to ensure it is on schedule. The call was then concluded with closing remarks from Sanjay Lad.

This summary was generated with AI and may contain some inaccuracies.