Targa Resources Corp (TRGP) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Targa Resources first quarter 2016 earnings webcast.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Chris Mc Ewen, Vice President and Treasurer. Sir, you may begin.

Thank you, Crystal. I'd like to welcome everyone to our first-quarter 2016 investor call for Targa Resources Corp. Before we get started I would like to mention that Targa Resources Corp, Targa, TRC or the Company, has published its earnings release which is available on our website, www.TargaResources.com.

We will also be posting an updated investor presentation to the website later today. I would also like to remind you that on February 17, 2016, Targa Resources Corp closed its acquisition of all the outstanding public common units of Targa Resources Partners, LP, TRP, that it did not already own. So on this call we will be discussing results as one entity - Targa Resources Corp. Please note that we will occasionally refer to the term TPL to refer to Targa Pipeline, the rename of former Atlas assets because our reported financials show comparisons back to Q1 of 2015, when we only owned TPL for one month.

Any statements made during this call that might include the company's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the Company's annual report on Form 10-K for the year ended December 31, 2015 and quarterly reports on Form 10-Q.

Joe Bob Perkins, Chief Executive Officer and Matt Meloy, Chief Financial Officer will be our speakers today. Other members of the management team are available to assist in the Q&A session. With that I will turn the call over to Joe Bob Perkins.

Thank you, Chris. Good morning, and thanks to everyone for participating. Does not seem that long ago that we were reporting fourth-quarter results, but a lot has changed in the short two months since the last call for Targa and for the entire energy industry.

For Targa, we hosted our fourth-quarter call shortly after closing the buy-in of the MLP and also shortly after announcing a $500 million preferred private placement. Since then, we announced that we upsized the private placement and had raised an attractive $1 billion of capital in total that we used to reduce indebtedness. We also just completed a first quarter that we are proud of. With continued strong commercial and operational performance, and focus on savings that resulted in adjusted EBITDA of $265 million and a 1.2 times dividend coverage.

More broadly, let's discuss the commodity, equity and debt market volatility that we have seen through the first four months of this year. Since early first-quarter lows, and based on yesterday's close, crude prices have rallied more than 75%. NGL prices have increased more than 55%, and natural gas prices have increased about 10%.

However, the uncertainties for our industry remain high. Significant price uncertainty remains. And since our last earnings call just a couple of months ago, the domestic land rig count has continued to decrease, from 489 to 405. As audience on this call today undoubtedly knows, E&P companies are still figuring out what they will do for the rest of the year. We are trying to stay close to our E&P customers, but they do not really have much new information to share with us since this time two months ago when we told you they were still reeling from three instances where crude oil had dipped below $30 a barrel.

Just as the commodity price has improved, so have the capital markets improved over the last two months since our last call. Again, based on yesterday's close, the Alerian MLP Index went from 244 to almost 300, reflecting an improving outlook for the broad MLP sector and for the midstream industry, even though Targa is no longer in the index. Targa's common stock price went from $22.13 to yesterday's close of $38.71.

At the same time, our senior notes went from trading in the 70s to trading at about par. Of course, these improved levels are a good thing from our perspective, and from our perspective it's been a welcome change to see the commodity and capital markets recently rally versus the first-quarter lows. But as I said, there continues to be uncertainty for our entire industry.

All of the significant next steps that we have taken since the commodity prices started to fall in November 2014, position Targa to be successful in almost in any environment. Those steps, of course, include our reduced CapEx spending, our significant OpEx and G&A savings, commercial initiatives to improve our margins, the MLP buy-in and its benefits, and $1 billion of preferred equity issuance. In the face of continued uncertainties we have positioned Targa to succeed in almost any environment and we will continue to work to improve that position.

Turning now to our first-quarter results. We reported first-quarter adjusted EBITDA of $265 million, modestly higher than last year's reported adjusted EBITDA, which included only one month of TPL volume and margins. Year-over-year headwinds resulted from reduced commodity prices and challenging market conditions.

Our Logistics & Marketing segment produced quarterly reported operating margin of $157 million, versus $191 million for the previous year. Lower as a result of the partial recognition last year the renegotiated commercial arrangement related to our crude and condensate splitter project with Noble, lower fractionation margin, and lower export margin. We reported approximately 5.5 million barrels per month of LPGs for the first quarter of this year, which positions us well to meet or exceed our previous stated expectation of at least 5 million barrels per month for 2016.

LPG exports have been a particularly popular investor topic over the last month or so. As more bullish domestic NGL sentiment has begun to emerge, and the potential impact on domestic propane supply and exports has been hotly discussed. While Mont Belvieu LPG prices are obviously key drivers for export demand, a number of other important variables must also be considered, including global LPG demand, global LPG prices -- particularly in the Middle East where LPG supply is declining -- global shipping rates, local global shipping rates, locational advantages of US Gulf Coast supply, especially for the Americas markets, and infrastructure growth throughout the world.

Commercially, the pace of dialogue around long-term contracts is picking up again. Perhaps largely as a result of market perception that shipping rates are bottoming out. As evidenced by the large majority of ships leaving from Targa's facility and staying in the Western Hemisphere, Targa has advantages in exporting LPGs to Latin America, South America and the Caribbean. And those markets tend to be priced on US LPG prices. Our facility has proven customer flexibility due to our multiple docks, which service a variety of vessel sizes and will simultaneously load propane and butane products. These attributes are valued by existing and potential new customers.

Another recent topic of interest is ethylene exports. Targa does not currently export ethylene, and we only provide ethylene loading or unloading services for one customer. We have an arrangement with CPChem, whereby we operate assets owned by CPChem at our Galena Park facility, and CPChem exports ethylene from one of our docks. Targa receives a fee in exchange for operating the assets and providing access. While perhaps well-positioned, we do not currently have any plans for expansion of our ethylene services.

Moving to field G&P. For field G&P, which is now subdivided as Permian, Central and Badlands, we expect average 2016 natural gas volumes to be about flat versus average 2015 natural gas volumes. For natural gas, we continue to expect Permian natural gas volumes to be up year-over-year, offset by declines in the Central, with Badlands also about flat. We also expect the Badlands crude volumes will be about flat for 2016 versus 2015.

Distributable cash flow for the quarter was $180 million, and quarterly dividend coverage was approximately 1.2 times, based on our first-quarter declared dividend of $0.91 per common share, or $3.64 on an annual basis. This was the second consecutive quarter where we maintained Targa's quarterly dividend at $0.91 per common share, and our rationale for our recommendation to the Board this quarter was very similar to the last quarter.

From our perspective, we have taken some very important steps to strengthen Targa and those steps mean that we have the luxury to be able to continue to monitor commodity and financial markets, the actions of our customers, and the actions of our competitors. Just as it didn't make sense last quarter, growing our quarterly dividend this quarter in the face of continued uncertainty also didn't makes sense to Management or to our Board. Similarly, making a rash decision to meaningfully change our quarterly dividend didn't feel appropriate to us or the Board.

Consistent with how we always approach quarterly dividend declarations, our ongoing analysis involves multiple commodity price and volume scenarios within a multiyear framework. We decided to stay flat. We have recently seen a number of midstream companies take steps to resize their payouts and that trend may continue. For Targa, we will continue to assess the environment and opportunities in front of us. We will continue to examine our place in the world as a midstream C Corp. Remember, that Targa is a midstream C Corp that does not currently pay taxes and is not expected to pay taxes for the near and medium-term. We have time to be patient and thoughtful, with our first priority obviously being the health of our balance sheet.

That wraps up my initial comments. I will hand it over to Matt.

Thank you, Joe Bob. I would like to add my welcome and thank you for joining our call today. Before we turn to discussing our first-quarter results in more detail, I would like to describe some changes that we made to our reporting, which you may have noticed in our press release this morning.

We now report our results in two segments: Gathering & Processing and Logistics & Marketing. As Targa has increased its scale geographic presence and diversification of operations, we have reevaluated our financial reporting segmentation and believe that this two segment convention is more appropriate. Gathering & Processing now includes both our field G&P business unit and our coastal G&P business unit. Our Logistics & Marketing segment, which we also refer to as downstream, includes both the former logistics assets and marketing industries and segments. We will continue to provide some operation -- operational information at the business unit level, or grouped business unit level.

Within the Gathering & Processing segment, we are continuing to report the same individual system operating results, but you'll notice that we have added some logical groupings. SAOU, WestTX, Sand Hills and Versado are collectively described as Permian, and collectively I believe they represent the best position Permian Gathering & Processing business in the industry. We have completed initial interconnections of SAOU, WestTX and Sand Hills, improving our capabilities to operate efficiently and provide our producer customers with flexibility. Our operations personnel have also realigned responsibilities across these three business units to improve efficiencies and service for our customers. SouthTX, NorthTX, SouthOK and WestOK are collectively described as Central, and Badlands and Coastal remain as standalone reporting systems in the aggregate of Permian, Central and Badlands will continue to be characterized as field gathering and processing.

For downstream, we collapsed logistics assets and marketing and distribution into one reporting segment which we believe should be helpful. For example, in the previous state we had export margins split across the two reporting segments.

Now turning to quarterly results. As mentioned, reported adjusted EBITDA for the quarter was $265 million, compared to $258 million for the same period last year. The modest increase was driven by the addition of TPL volumes and margin, offset by lower commodity prices, lower fractionation and export margin, and by the partial recognition last year of our renegotiated commercial arrangements related to our crude and condensate splitter project with Noble. Overall reported operating margin was approximately flat for the first quarter, compared to the first quarter last year. Reported net maintenance capital expenditures were $13 million in the first quarter of 2016, compared to $19 million in the first quarter of 2015.

Turning to the segment level, I will summarize the first quarter's performance on a year-over-year basis, starting with the downstream segment. First-quarter operating margin decreased 18% compared to the first quarter of 2015, as a result of the partial recognition in 2015 of the renegotiated commercial arrangements related to our splitter project with Noble, lower fractionation margin and lower export margin. As Joe Bob mentioned, we loaded an average of 5.5 million barrels per month of LPG exports for the quarter, compared to 5.8 million barrels per month during the first quarter of 2015. Fractionation volumes decreased by 13% in the first quarter of 2016 versus the same time period last year, as a result of lower supply volumes at Mont Belvieu and some contract roll offs in 2015, none of which has occurred thus far in the first quarter of 2016. Related to future contract rollovers, we want to reiterate what we said last quarter. Which is that over the next three years, less than 5% of Targa's fractionation contracts expire, and less than 10% expire over the next five years.

Logistics & Marketing segment reported operating expenses decreased by 3% in the first quarter of 2016 versus the same time period last year, as a result of both continued cost-saving efforts and lower fuel and power costs.

Now turning to the Gathering & Processing segment. Reported operating margin increased by 33% compared to last year, primarily because last year's results include only one month of volumes and margin from TPL operations, versus a full quarter contribution this year. Plus a full quarter of operations of our Little Missouri 3 natural gas processing plant in the Badlands, which came online in the first quarter of 2015. First-quarter reported 2016 natural gas inlet volumes for field Gathering & Processing were a little over 2.5 billion cubic feet per day.

For the Gathering & Processing segment, condensate prices were 37% lower, natural gas prices were 34% lower, and NGL prices were 29% lower compared to the first quarter of 2015. Crude oil gathered increased to 105,000 barrels per day in the first quarter, a 4% increase versus the same time period last year. Quarter over quarter Badlands crude oil volumes were down about 3%, largely a result of producers shutting in existing production to frack new wells or for workovers. And as Joe Bob mentioned, we expect volume to be flat versus -- for 2016, versus average 2015.

Related to operating expenses, we continue to focus on cost reductions across all of our assets. Excluding the additional operating expenses from the TPL acquisition and system expansion, most areas were significantly lower than last year due to a focused cost reduction effort. In the fourth quarter of 2015, we benefited from some one-time reported reductions to OpEx, but through our continued cost reduction efforts we were able to replicate a similar OpEx number for the first quarter.

Let's now move to capital structure and liquidity. On March 16, we announced that we closed on the sale of approximately $1 billion of 9.5% series A preferred stock, issuing 965,100 newly authorized shares of series A preferred stock, and also issuing 13.55 million warrants with a strike price of $18.88 per common share, and $6.5 million warrants with a strike price of $25.11 per common share. The proceeds were used to reduce overall indebtedness of Targa and importantly positions us in a time of opportunity to be able to execute on impactful projects.

As of March 31, 2016, we had no borrowings under TRP's $1.6 billion senior secured revolving credit facility due October 2017. With outstanding letters of credit of $12 million, availability at quarter end was approximately $1.6 billion. At quarter end we had borrowings of $150 million under our accounts receivable securitization facility.

On a debt compliance basis, TRP's leverage ratio at the end of the first quarter was approximately 3.5 times, versus a compliance covenant of 5.5 times. As of March 31, 2016, TRC had $275 million in borrowings outstanding under its $670 million senior secured credit facility that matures in February 2020. The balance on TRC's term loan facility that matures in February 2022, was $160 million. We mentioned this on our last earnings call, and have provided detail in our leverage picture in our investor presentations but I also want to reiterate there is no maintenance covenant related to consolidated leverage in our credit facilities.

Our fee-based operating margin for the first quarter of 2016 was 77% and we continue to expect operating margin to be more than 70% fee-based during 2016. Turning to hedges, for non-fee-based operating margin, relative to the partnership's current estimate of equity volumes from field Gathering & Processing, we estimate we have hedged approximately 50% of remaining 2016 natural gas, 50% of remaining 2016 condensate, and approximately 20% of remaining 2016 NGL volumes. For 2017 we estimate we have hedged approximately 35% of natural gas, 35% of condensate, and approximately 10% of NGL volumes.

Moving on to capital spending, we estimate $525 million or less for net growth capital expenditures in 2016, and $110 million of net maintenance capital expenditures for the year. As it relates to taxes, our expectations is that Targa will not be paying cash taxes for at least five years, as we benefit from depreciation associated with a step up in basis from the Atlas mergers and the buy-in of TRP. It is our expectation that Targa dividends for 2016 will likely be classified as a return of capital, possibly as much as 100% return of capital. That concludes my review and I will now turn the call back over to Joe Bob.

Thank you, Matt. I will now provide some additional color related to growth capital projects, and then we will wrap it up so that we can have some Q&A. First, our primary 2016 growth capital projects - the ones listed in our recent investor presentations - are proceeding well. Downstream, train 5 is in startup mode at this time, consistent with our original timeline and we expect train 5 to be fully operational by the end of the second quarter. As mentioned previously, train 5 was underwritten by our own needs for additional fractionation capacity, based on projected equity volume growth from our field G&P operations. And we expect that train 5 will fill up more slowly than initially expected.

We recently executed an EPC contract for our crude and condensate splitter project at our Channelview Terminal and now expect total growth CapEx for the project to be approximately $140 million. The splitter will likely be operational in the first quarter of 2018.

In our Gathering & Processing segment, our 200 million cubic feet a day Buffalo plant in WestTX is also in the final stages of startup, providing much-needed processing capacity and increasing system reliability and operational flexibility. We expect it to be fully operational within the next couple of weeks.

As part of our joint venture with Sanchez Energy in SouthTX we also completed the Carnero pipeline in March, which facilitated the first quarter volume growth that we saw in SouthTX. As volumes from Sanchez Energy flowed from the Carnero pipeline to Targa's existing Silver Oak facilities. Volumes in SouthTX increased by about 25% in the first quarter, versus the fourth quarter to more than 175 million cubic feet per day, as we received additional volumes from Sanchez earlier than we originally expected. We expect that volumes will continue to increase over 2016.

Construction on the joint venture's new 200 million cubic feet per day Raptor Plant in La Salle County is underway, and we expect it will be operational during the first quarter of 2017. When we announced our joint venture with Sanchez in October 2015, we announced that Sanchez was underwriting the joint venture projects with a minimum volume commitment of 125 million cubic feet per day that begins in the first quarter of 2017 and lasts for five years. This is the only material non-investment grade minimum volume commitment across our Gathering & Processing footprint.

Using that as a segue to another important topic on investors' minds, we continue to closely monitor our customer credit exposures on a customer by customer and contract by contract basis. Of course we are operating on high alert related to customer credit exposure, and continue to believe that we are well-positioned to manage through the risk associated with potential counterparty default or bankruptcy. We will continue to stress our forecasts, stress our analysis, with full consideration to credit risk in the lower commodity price environments. Just as we constantly try to assess the volume implications of those same price scenarios. Over the fourth -- first four months of this year there have been some announced bankruptcies, rating agency downgrades and other material E&P announcements. But for Targa, none of the announced situations has had or is expected to have a significant impact on us.

Moving onto some closing remarks. I continue to be incredibly proud of our employees and our accomplishments through challenging times. Our finance team, with help from many other parts of the company, raised $1 billion of capital through a preferred plus warrant structure that they designed with the fundamental view that Targa was undervalued and that there were investors that would partner with Targa, sharing that same fundamental view, which would allow us to raise attractive capital. It did. And we welcome those investors.

Our engineering and operations team have continued to identify and share best practices to reduce cost and manage dollars spent without sacrificing safety or the integrity of our assets. Our commercial teams have also continued to identify and share best practices related to contract re-negotiations and additional opportunities across and between the businesses. And as expected, despite uncertainties we are continuing to work on attractive potential projects across all of our business areas, leveraging our strengths and our positioning and demanding attractive returns.

Every employee at Targa has had a hand in responding to the challenges of this energy cycle. And trying to rise to the occasion in their own way, and their own role, to position Targa for success. The collaboration that I've seen throughout the company has resulted in better bottom line results than expected, and has better positioned Targa for the future. In the face of uncertainty, those employees have demonstrated a focus and resiliency at all levels of the company and it makes me proud. And I would like to take the opportunity to thank each and every one of our employees for their continued efforts.

So with that, we will open it up to questions. I will turn it back to you, operator.

(Operator Instructions)

Brandon Blossman, Tudor Pickering Holt Company.

Good morning, Brandon.

Good morning, everyone. Good morning, Joe Bob. I will kick it off with an LPG question, probably on top of everybody's mind, as you pointed out.

In a world that may have increasing demand globally and decreasing supply, probably globally, and in the US, how do your terminals fare and what is that look like on the ground in terms of contracting? Both contract roles and pre-contracting at those historic rates.

Thanks for the question, Brandon. Adding some color to our carefully prepared remarks, we feel good about our position. You are asking about our position in that global market.

The supply-demand variables that I talked about -- Targa is well-positioned for Gulf Coast propane and butane supply, and we think that Targa and a very few others are well-positioned in that market, are well-positioned for the global economy. You will see in our investor presentation that over the last 12 months, three quarters of our LPGs are going to Latin America, South America and the Caribbean. That's driven by factors different than some of the variables that people spend a lot of time looking at.

We feel good about that for the near-term and the longer term. We feel good about our position of Mont Belvieu-related LPGs and our natural share of that.

Okay. Fair enough. Any thoughts about where current spot rates are for LPG terminals?

Its a dynamic market. We said publicly at the last call that spot rates were certainly lower than the spot rates enjoyed a couple of years ago. I think other people in recent calls have made the same comment, but they are not unattractive and the products, services, flexibility that we are providing our customers have continued interest for spot but also continued interest for term contracting.

Okay. Switching topics, Matt, it looks like you timed the debt buybacks very nicely here. What's the expectation on a go forward basis? Was this opportunistic or is there something structural going on here?

With the $1 billion proceeds we received, it just made sense for us to go out and repurchase our notes. It's more attractive than just paying down a revolver and we ran out of revolver capacity, so it made sense for us to do that. We also have the $1.1 billion maturity out there in January 2018, so we wanted to begin repaying that to reduce that size some.

And so we started doing that really late last year through the first quarter, and we've actually continued doing some of that in April this year, too. And we repaid and you will see it in the press release another -- repurchased another $96 million post quarter end of those notes. And the balance on that $1.1 billion is now about $840 million. So we feel good about where we are.

Okay. And we'll just see what happens going forward?

Yes that's right.

Thank you guys.

Thank you, Brandon.

Thank you.

Darren Horowitz, Raymond James.

Good morning. Joe Bob, my first question within the comments that you made around the field G&P volumes -- and I recognize, as you said, that customers don't have any much more to tell you relative to what they told you a few months ago.

But -- if we look across the forward curve and for a second think the commodity prices materialize consistent with what that outlines -- if you think about the different drivers within field G&P, of where do you think there could be a bit more volume upside? Is it specifically within West Texas around the Permian, around Versado or across the Midland system? Or do you think that maybe the magnitude of Central and Badlands volumes declined isn't as steep?

There is a good question, Brandon, we obviously feel better about the forward curve today than we did two months ago. It is and it really was just two months ago we had our last earnings call that always surprises me in the first part of the year.

Customers are looking at those forward curves, too. They know their economics very well. It wouldn't surprise me if some of this is being locked in by customers for future drilling -- that happened about maybe two months later this time last year.

And I shouldn't be speaking for those producers, but we try to stay in very close contact with them. You asked about where there may be more upside, based on today's forward curve, and I would add -- or based on some positive movement of that forward curve in the near future.

Yes, Permian Basin has some very sweet spots in it and we are across some of those sweet spots. Probably would see the most activity increase around the West Texas system as well as further west around Versado that core Delaware. It is a sweet spot.

Secondly, you pointed to the Badlands -- makes a significant difference if you can get that forward curve or a little bit better in how they will feel about the activity and then I guess I would go to the SCOOP. Across that spectrum there are several places where there's some drilled in and uncompleted wells.

Which we made benefit from, and additionally, what I like is how producers right now are high grading their drilling powers. Drilling close to their own assets, which means close to ours. Upside can come without a whole lot of capital expenditures if it follows the pattern we would expect it to.

Okay, and then, I appreciate the color, my final question. If you could just -- I would love your thoughts with regard to ethane recoveries. This theory that there is going to be composite NGL barrel price improvement, specifically the ethane market tightening.

Opportunities for you guys from a recovery perspective, certainly, on, if you will, the non-fee-based business or what could be the potential for uplift in the back half of this year in terms of POL and POP contract exposure?

I think it's a question of when and not if, you get ethane price recovery -- been pretty bad on the [whens], in my career. All of the factors that are well discussed, we agree with. We try to model as well.

You described towards the end of the year. I don't know the timing. It could be then.

It certainly has to occur sometime after then. It is just the dynamics of supply and demand and to help the we will get from exports.

Thank you.

You are welcome, thank you Darren.

Our next question comes from TJ Schultz from RBC Capital Markets.

Good morning, TJ.

Good morning, thank you. I guess just first -- since the move in the commodity, and your improved cost of capital and balance sheet obviously -- has any of that accelerated discussions on projects in your longer-term backlog? Both as we think about what could potentially be flexed higher in the 2016 bucket, above that [$525 million]? And then as you think about moving to approval for projects a bit further down the road?

I hear you, TJ. It has been a pretty good movement in the last two months, on commodity prices and our equity price and improved cost of capital, but we're taking a longer-term view on our cost of capital. Took that longer-term view and [made a shift] to preferred.

Our project development continues, and not just projects that we've talked about in the past. I did say, and I said it intentionally, because I'm proud of the efforts -- across our business areas, call them small projects a larger projects not announced or they would be out there on that announced project page.

Our businesses are working that pipeline. They are working it based on leveraging our asset position, leveraging the strong position we have relative to our financial ability to execute, but also demanding attractive returns. Its just necessary.

Because of the uncertainties, we want to make sure we are getting large bang for our buck, and that it has attractive spread over a longer-term view of cost of capital that includes the fact that we've put $1 billion on our balance sheet of that preferred. The good news is those projects and opportunities exist. It's kind of a timing issue -- customer uncertainties, et cetera, but we're working on the pipeline.

Okay, thank you. And then I guess in that vein, you touched on ethylene exports, no plans now. You self admittedly are well-positioned. Is that something you may consider down the road as a potential project?

Certainly. Actually the reason for putting the comment out there is we've gotten the question so many times.

I wanted to sort of clarify the facts. We don't have it in investor presentations and certainly don't write much about it because it's not a big material portion of our business but it is an important part of our relationship with CPC.

That relationship is a one company relationship right now. They have some assets and we have some assets that support that ethylene business and we did want to clarify that we don't have a project currently planned. Your question is -- would we ever consider it -- we consider everything.

Okay, makes sense. Just lastly to follow up on some of the volume discussion, if you could expand a little bit on South Texas -- what you are seeing there? As you bring those Sanchez volumes into the system -- sounds like they came a little sooner -- and then the pipeline in March? Just your expectations, as you look at the run rate in the first quarter -- kind of what we should expect through 2016?

Sure, first of all the coming a little sooner is sort of a specific shout out to the -- congratulations, I'm giving all our employees for execution. We got it done sooner than we thought we were going to, and congratulations to that team -- but there many efforts like that going on. And getting it done sooner brought the volumes to us sooner.

Sanchez continues to be very good at drilling and completing those wells, and we expect additional volumes. I do understand that the Eagle Ford has rolled over for others, and it's not really a growth picture for others, but as we announced, when we announced the project, that it does kind of make the tied for Targa look better in South Texas. It doesn't fix all of South Texas, but standalone it's very attractive.

Standalone it makes the system better with a plant on the west and a plant on the east. And we are already flowing all the way from the west to the east now with Sanchez volumes. That's all a good thing for the long-term.

Okay, thank you.

Appreciate it, TJ.

Faisal Khan from Citigroup.

Hi, Faisal.

Thank you, good morning. All right just want to ask a couple questions -- first off with all the uncertainty you talk about in the market, how are you looking at your dividend coverage ratio? Is there a long-term goal that you sort of envision in this sort of volatile commodity market that works for you?

Faisal, I don't have an announced long-term goal for the dividend coverage ratio right now. Probably the best way to think about Targa is how we've behaved in the past and that we are working very hard to think about the future.

I like our track record. I like the current coverage ratio. And we're going to try to be thoughtful and continue to analyze what other companies are doing, what the investment community is saying and reflecting, and what is going on with our customers.

Okay. Understood.

In your prepared remarks, you discussed that there are long-term contracts for LPG export capacity being discussed again? So could you go a little bit more in depth in what you mean by that? Are customers coming back to the table to discuss long-term capacity, or is this a one-off?

I believe either in the script or in the Q&A on the last earnings call, I just reflected the color that while counterparties were interested, and had needs for long-term LPGs, two months ago it appeared that they were waiting to figure out what was going to happen with shipping rates. Shipping rates have been on a pretty significant trend.

Depending on what shipping rates you are looking at, that trend may have bottomed out -- and I don't want to pretend to be the expert on that. It may have bottomed out. And with that -- if we are not at the bottom, we are close to the bottom or we bottomed out.

Sentiment coming from our contacts in the industry, from existing and potential new customers, we've seen an increased interest to go ahead and do term deals again. They didn't want to do that when they weren't prepared to do the term shipping deals. Don't mean to overstate that, but it is different today than it was two months ago, in dialogue and interest and pace.

Okay. Makes sense. And one of the other prepared comments that you said is that you evaluate your place in the world as a C Corp?

Can you go into a little more depth on what you mean by that? Clearly you've collapsed the structure, you are more simplified now, so is there something else that you are contemplating with regards to structure?

I think that also came out of -- we're not in the Alerian index anymore. I pointed to the Alerian index even though we are not in it. We are a C Corp.

We have tools to take care of our balance sheet and we want to take care of our balance sheet. However, we're a C Corp that doesn't pay taxes, which makes a real difference for our investors. And you heard Matt's comments about what that return of capital treatment would look like for 2017.

All of that factors in to what we are trying to deliver to our investors, and how we are trying to deliver it. That is the color around my statement.

Okay, understood. Are you happy being a C Corp, or do you want to be something else?

(Laughter) Oh yes, we're going to switch again. (Laughter) I'm very happy with the moves we've made, and how that positions us for the current environment in the range of environments that could occur over the next several years -- very important.

I may have misspoke on the year a little while ago, and I apologize. 2016 versus 2017 -- I did, I said 2017. For the return of capital, Matt only described it for 2016.

I've been distracted. Did I answer your question?

You did. Thank you. I am all set.

Okay.

Jeff Birnbaum from Wunderlich.

Good morning everyone.

Good morning.

Just a couple of questions for me. So one, just kind of bigger picture, as you said you would, sounds like you that it's a more hedges since the fourth quarter call. Just big picture, philosophically, with the roller coaster we've been on the last couple of years I was wondering if you are thinking about hedging policy sort of any differently going forward then perhaps you have in the past?

Yes, our targets are give or take 75%-ish or so year one, 50% year two and then 25%-ish year three, and then ranges around those. We did add some hedges here recently. We are still well under those targets, so as we are adding some hedges, we are not yet going out and adding to try and catch up to get to those target levels or exceed them.

Adding those hedges is really more keeping up with those targets so we don't fall further behind. So that's really relates to the hedges that we put in place over, really, the fourth and first quarter.

And you asked for policy. I don't mind describing thinking, because it's not a policy. Those are targets and goals we've had for a long time.

The hedge committee of our Board and Management are on the same page in that we do believe there is more upside than downside for most of the commodities that we hedge and do not see us trying to catch up while that is still the case. Keeping up is prudent.

And that is our current thinking. That thinking could change. But we don't think about it differently than we thought about it over the entire history of Targa, and we've got some experienced people helping the Management team experience just to stay disciplined -- watch it, track it, discuss it, at least once a quarter.

And add onto that, Joe Bob, to the hedges we've added in primarily on the condensate and on the natural gas side of things. NGL, as you can see we're still well under our targets.

And that was part of the discussion I think.

It all makes sense. One more for me quick. The potential exercise of the warrants -- just want to ask how you are approaching that?

Obviously the stock prices had a very nice run here. I was just wondering, is that something that you see likely when the owners have the right to do that?

Or are you thinking about your capital deployment leverage, things like that? All with that timing in mind?

Sure. So it is our option to settle those warrants, either in cash or net settle them in shares. So it is our option. They cannot be exercised for six months, so they are still some time before those could even be exercised.

And those are -- good question on when they will be exercised. Those are seven-year warrants, so it will be up to those individual holders whether they decide they want to go ahead and exercise, or if they want to keep the time value. Good question, but we can always net settle in shares, so if we didn't want to pay cash, we didn't want add leverage to the balance sheet, we could net settle that.

Perfect. Thanks Matt. And last one for me.

With liquidity pretty strong here, I was curious -- Joe Bob, you touched on how you are thinking about pursuing new projects and things like that. I thought I would ask a question on M&A that doesn't get asked quite as much anymore.

Are you still out there interested in additional assets? And are you seeing any changes in the bid-ask spread with the improvement in liquids prices or are perhaps sellers digging in a bit more?

It is only been a couple of months since I commented. I don't think it is changed a lot today versus a couple of months ago on the M&A front. We will still look, just as we are being very disciplined around the organic projects -- one business area at a time.

Making sure we get attractive returns, and the way we do that is leveraging our assets, leveraging our position. An acquisition that would really get on our radar scope would need to look the same way. Leveraging our assets, leveraging our position.

We're not going to be -- we're spending almost no time looking at the opportunity to increase footprint. It's just not that time for us right now.

Yes. Okay. Thank you and congrats on the quarter.

Thanks.

Jerren Holder from Goldman Sachs.

Hi, good morning. Just want to start off -- how sensitive is Latin American or Caribbean demand for US LPG exports -- in your view -- to higher US prices?

It has been a short history, but it hasn't been very sensitive based on US pricing today. It is a demand that needs to be met and it's being met from obviously a very close source of supply and not that we are transacting with the customers in those markets but is our sense from our customers that's based on US LPG pricing. That removes some of that sensitivity.

That's probably the best color I have to it, and we certainly will see over the next year or two what that is going to be, because we've had prices move all over the place. (multiple speakers) -- we were still shipping. Our percentage share increased over the last 12 months in the price environment that you saw.

So we feel good about it. We feel good about our position and our mix of existing customers and the opportunity with potential new customers.

Thank you. And how do you think about re-contracting risk, given that there is increasing competition from other US Gulf Coast LPG facilities?

The competition we feel the most are the ones who have been there for a while. And that competition should sort of become a natural market share around the butanes and propanes that flow to the systems. A facility further away trying to get propanes or butanes from Mont Belvieu hub, have is not particularly advantaged for doing that.

And so I probably don't worry about that competition as much, and we try to be very competitive and pretty discreet on how we are working with our customers and potential customers here in this market.

Great. Thank you.

Thank you.

Chris Sighinolfi from Jefferies.

Good morning. How are you doing?

Good. Good morning.

Thanks for taking my questions. Just wanted to I guess first, circle up on the fracs if I could. It seems like sizable decline in volume, both on a quarter and year on year basis? Matt, I realize what you said in regard to the contract positions on those.

So I was just wondering if that decline in volume -- was it tethered to an isolated area, was it doing something specific, or was it just a function of reduced [NGL] volumes flowing that way?

Its a combination of all of those things. It is a reduced volumes flowing in from our volumes and others. But there were some contract roll-offs late in 2015, which when you look at sequential quarter to quarter, you will see some difference from Q4 to Q1 that happened in the fourth quarter.

Okay and your earlier point was -- from here, there is very limited contract change over the next three years? Got it.

That's right.

Okay and then with regard to Train 5, I appreciate the color in the prepared remarks regarding the timeline for in-service. I think you had mentioned -- or Joe Bob mentioned, you are expecting now a slightly slower ramp on that facility than original expectations? So could you remind us how much of that facility is contracted?

It is largely for our own needs. We haven't described how much it would be for third parties and to some extent recognize that it's not one train at a time even though we can contract it that way. We had volumes in Louisiana that needed to be fracked at Mont Belvieu, not in Louisiana -- that will be back in Train 5, for example.

I think that's all of the specifics we provided on it. But we've got space in Train 5, if anyone is interested in contracting for it -- at the right rate, at the right terms.

Okay. And then I guess a final question from me. Joe Bob, you had addressed the ethylene volumes through Galena with CPChem, and I know you spoke to TJ about it in the Q&A.

And I get that you are not actively pursuing any expansion in that line of business right now, and maybe this is just a question borne from my own ignorance. But what would have to happen to get you to move forward with something? Where I'm going is -- there is a view out there that there may -- we've long thought of Galena as an LPG facility because that's what you been doing there. But to the extent that perhaps there becomes some underutilized capacity that you might be able to re-purpose to an alternate use -- how do I think about that decision tree?

Well I would say that first of all, look at our history over multiple years with that facility. When we acquired it we thought of Galena Park as an import facility doing a little bit of export of ethylene. We are economic animals, and we will try to respond to the needs of the market.

Ethylene's an interesting equation. I've gotten lot smarter over it recently, trying to answer people's questions. And that will be driven by the petrochem customers linked in the ethylene market in this area, and how long that is likely to continue.

Our repurposing of facilities is really a way to describe it because we would not have to cannibalize any of our existing facilities. We've got ways of getting a little bit more out of this, that, and the other piece of equipment, and if we need -- wanted to increase ethylene we would do so without repurposing. We can move more ethylene from that dock, for example.

We might add some refrigeration for ethylene so that it didn't get in the way of propane or butane loading. Before we would repurpose anything, we would want to make it additive.

That's not saying I'm doing a project. Didn't mean to imply that, but CPC has a need, we are going to try to fill it. And if another counterparty believes that we can effectively service their ethylene needs we may do that.

Okay. I was maybe misinterpreting, so all you were saying before is there nothing active right now, but there is no active opposition to anything should there be a market need?

Please, sometimes when I'm working on prepared remarks I can be unclear. I was not trying to say opposition. I was trying to get the facts out there for people.

Right. The clarification is helpful, because I didn't know if it was -- okay, we're going to do this and that's going to make it less possible to do what has been a core function of that facility. It seems like from what you just said you can readily do both.

Yes.

Got it. Thanks a lot for the clarity. Appreciate the time and good luck.

Thanks.

John Edwards from Credit Suisse.

Hi, John.

Good morning everybody. Just a couple housekeeping items. Maybe you said this or I missed it but, any change -- or what is the EBITDA guidance now? And what is the sensitivity now to commodity price changes?

The commodity price changes -- we will have that in our updated investor presentation, but I actually don't think its changed from our last. We have the $0.05 NGL move, I think its about $25 million of EBITDA -- $20 million? Sorry, $20 million, but it will be in our investor presentation for crude gas and NGLs. And then --

And we did update it.

And we did update it. And then for EBITDA guidance we have not provided or updated 2016 EBITDA guidance other than what was just previous EBITDA numbers that are out there, forecast information that's out there. So we have not provided new EBITDA guidance on this call.

Okay then, no new guidance on that, okay. And then I was curious - maybe its just a timing issue, but your maintenance capital dropped quite a bit sequentially. Is that just a timing issue?

With the [$110 million] you are guiding to, we should be thinking about significantly higher numbers? Is it going to spread pretty much equally across the quarters or is there already seasonality embedded in that?

The maintenance CapEx, if you go back and look, it can be pretty lumpy. Q1 does seem to be a bit lower than the other quarters, and you look last year was relatively low too. I think [$110 million] for the year is still a pretty good number.

Could we come in a little bit lower? Sure, but I think it's still probably a decent number.

Okay is that going to be relatively equally balanced, then for the rest of the year you think?

We usually spend more in Q4, but it will depend on activity as well.

Okay that's it for me. Thank you.

Thanks John.

Sunil Sibal from Seaport Global Securities.

Hi, good morning, and congratulations on a good solid quarter. Couple of questions for me -- going back to your prepared comments regarding repairing balance sheet remaining a top priority of Management team? Apparently you made a lot of progress there, and I was just wondering with the $2.1 billion of liquidity that you have, how should we be thinking about the next use of that liquidity?

Yes I think I got that. We want to have a lot of liquidity in this environment, in an uncertain environment. Whether or not the capital markets or the high-yield markets are open and shut, they've -- in the last six months I've got pretty much closed and now they are pretty open.

So we want to operate with a lot of liquidity. We don't necessarily think of that liquidity as just usage to go out and buy things necessarily with it. We are focused on keeping liquidity and were also focused on our leverage ratio.

We want to keep our leverage ratio as strong as possible in this environment, too. So I view having that liquidity as providing additional flexibilities for CapEx and timing of when we raise additional capital, but also for refinancing and taking care of our other debt obligations.

Okay. That's helpful. And then one housekeeping for me. It seems like your cash G&A has been understandably quite [winnowing] in the last couple of quarters? How should we be thinking of that now that you've [collapsed your structure], and on a go forward basis?

Yes, the G&A has moved around a little bit over the last couple of quarters. Fourth quarter of last year, it was kind of a catch-up for the remainder of the year, it was relatively low. This quarter's G&A is a better kind of indication of closer to a run rate number so I would focus more on the Q1 kind of G&A number than I would look at necessarily a fourth quarter.

Okay got it. That's [a lot]. Thank you guys.

Okay thank you.

Bo McKenzie from Seaport Global.

Hi, thank you. What are your competitors' reported attractive levels of LPG export volumes going to Asia? I know with your mix of Latin America, South American, Caribbean, there is a decent amount of seasonality.

Are you seeing within that 30%, other parts of the world enough incremental volumes -- given the shipping prices right now to offset some of the seasonality?

There is some -- I use the term seasonality broadly. Not every month is the same, based on our short history of exports, so I understand what you are saying. What our published LTM will show that it is 75% Latin America, Caribbean and South America for Targa now.

We believe that there is sufficient business for that 75%. That's why it grew in shares, attractively. And the 25% is also attractive.

I mean people are looking at this over the long term and not just over the short term. That 75% share, I'm reminded, is going to soon benefit from the Panama Canal, which the sooner -- the closer and closer you get to their best estimate of when it's supposed to be complete, the less they will be wrong about it. But it will soon be open.

And it will make a difference, or at least some of our customers believe it will make a difference. We like our position to that market. And we like the mix.

So if your nameplate capacity -- I'm looking at the Q4 presentation on the website. 9 million barrels a day -- a month, excuse me, and operating is 6.5 million to 7 million barrels. At what point, given that the rest of the world given some long-term contracting do you have to evaluate the potential expansion?

I know by saying this, I'm going to be asked more and more for details and numbers, but I'm not going to give them. (laughter) We have improved our ability to operate that facility since we last put numbers out with creative and operationally experienced solutions to the bottleneck.

A second ago, we talked about the ability to continue to utilize our facilities without having to make choices about repurposing something. And we will keep doing that. If there is additional demand for our assets, we are to figure out how to squeeze more out of our assets.

When I say we, I should take me out of the equation. It's a bunch of talented engineers and operations folks. But I'm proud of that and I know that we will continue to get benefits from that kind of work.

So you're basically talking about squeezing, instead of 75% of operating capacity on nameplate, something in the 80% or better for less turnarounds or more efficient turnarounds or whatever? Getting closer to that time?

Those are examples of it. We also said we could do an ethylene project without really cannibalizing what we're already doing or could see we could do in the future.

We've got an ethane project that we could add to the facility without cannibalizing or reducing what we think we could do in the future on propane and butanes. So it's a very good facility and we've tried to think about the future for it.

All right. And then the fractionation volumes -- I know you've got another competitor to talk about part of that decline had begun, at least for them, have been impacted by blending opportunities. I assume you have seen the same thing?

At what point in the commodity price spectrum that those opportunities return to the market?

I think I know what you are referring to. Part of their margin was impacted by blending opportunities, because you have less volume and different blending opportunities coming off the fracs. Less blending opportunities hit us, too, but it doesn't impact the front end volume going through the frac, just the profitability coming out of the frac.

Okay. All right. Thank you.

That's the way I've read their comments also.

Danilo Juvane from BMO Capital.

Good morning.

Good morning.

Most of my questions have been hit. I have one quick one -- Joe Bob you've mentioned that you definitely see constructive ethylene fundamentals, that you guys are modeling that internally? Can you quantify the potential impact, positive impact that you see from ethane re-injection to the gas stream?

Our modeling has quantified that impact under multiple scenarios, and I'm not going to provide a public number of that -- plus I just don't know what the right inputs are at this point.

Okay, okay, that's it for me. Thank you.

Thank you.

Our final question comes from Helen Ryoo from Barclays.

Thank you, good morning.

Hi, Helen.

Just follow up on the ethane recovery -- in a scenario where we have to recover all the ethane, given the cracker [de-vent]? Trying to look -- think about the upside to Targa? Obviously the NGL, the PLP margin is going to do better. But on your frac plans, the surplus capacity that exists today, is that all economic upside if you were to fill all that capacity? Or are you currently collecting some [NVC] volumes on capacity that's not being used?

Yes, that is, we think of that is pretty much upside. There may be some small NVC makeups, but I think it would pretty much be upside to our volumes if we were to start recovering more and having more ethane going through our fractionaters.

And what about on the marketing side of the NGL downstream business -- if NGL price shoots up, driven solely by ethane, does the marketing segment also benefit or is that more driven by propane and butane?

Yes. There will be some benefit there as well. There will be some there as well.

Okay. And then just lastly, your SouthOK NGL production dropped steeply, and I was wonder if there was a one-time effect or if it reflects some changes in the wetness of gas there?

Pat McDonie?

We go in and out of recovery at those facilities, based on economic benefit and some of our contractual requirements downstream in the facility. So you will see variation in those volumes throughout different quarters because of the contractual structure that we have at that facility -- those facilities.

Okay, so it is not something -- a permanent level we are see going forward?

No. Nothing has changed as far as the gas quality coming into the plants. It will -- the way the contracts work, it will be intermittent.

It won't be consistent throughout the quarters. We will have periods will we will have higher recovery that during other periods.

Got it, all right, thank you very much.

Thank you. Thank you, operator. (multiple speakers)

If anyone has follow-up questions, please feel free to contact Chris, Jen, Matt or any of us. We appreciate your interest this Friday.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect and have a wonderful day.