Targa Resources Corp (TRGP) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Targa Resources second-quarter 2016 earnings webcast.

(Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Jennifer Kneale, Vice President of Finance. Please go ahead, ma'am.

Thank you, Christy. I'd like to welcome everyone to our second-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. An updated investor presentation will also be posted to our website later today.

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.

Thanks, Jen. Good morning, and thanks to everyone for joining. For this morning's call, I'm going to focus on two key areas.

First, at the beginning of the call, describing highlights from our second-quarter results and operational performance, and expectations for the balance of 2016 given the current environment. And then at the end of the call, clarifying our current thoughts about leverage and coverage going forward. In between those areas, Matt will cover our second-quarter results.

As we begin, I want to start with the headlines of business performance that are reflective of our strong positioning for the current environment, and for future environments. At the G&P segment level, Targa's peak gathering and processing natural gas inlet volumes were about 3.5 billion cubic feet per day in the second quarter of 2015. From the third quarter of 2015 through the first quarter of 2016, those volumes declined each quarter, as a result of commodity prices and associated activity levels.

But in the second quarter of 2016, daily inlet volumes increased back to about 3.5 billion cubic per day. These high-level results demonstrate the resiliency of our gathering and processing footprint, as a result of Targa having assets well-positioned to serve some of the best producers. Producers that are active in the most economic oil and liquids-rich areas.

Our gathering and processing operating margin was only 4% lower in Q2 2016 versus Q2 2015. Remember with the backdrop of prices that were down significantly more than that. Natural gas prices down 31%, condensate prices down 22%, and NGL prices down 5%.

In that pricing environment, we were able to substantially offset the significant reduction in commodity prices by increasing the overall profitability of our gathering and processing contracts through improved contracting with added fees. If we look at our results sequentially, field G&P natural gas inlet volumes were up 3%. Field NGL production is up 17%, and fractionation volumes are up 12%, demonstrating that as prices recover domestically, Targa's footprint will be an early beneficiary, as improved commodity prices drive increased activity levels and volumes.

Compared to second-quarter 2015, we reported higher volumes for South Texas, the Badlands, the Permian and Coastal, offset by declines in North Texas and Oklahoma. This is encouraging.

We placed our 200 million cubic feet per day Buffalo plant in service in West Texas in April, providing timely relief to a system that was operating over capacity, and where volumes are still growing in this area, where we have gathering and processing joint venture with Pioneer. In South Texas, our joint venture with Sanchez is going well, and our volume growth this quarter in South Texas is primarily from Sanchez volumes associated with new activity and production, and also from processing additional volumes as Sanchez's contracts with other midstream providers roll off.

Volumetrically, with half of the year under our belt, we continue to expect the average 2016 natural gas inlet volumes in South Texas, the Permian, and the Badlands to be higher than average 2015 volumes, offset by declines in other central region systems. We continue to expect Badlands crude gathered volumes to be approximately flat, average 2016 versus average 2015. And in the Bakken, we're seeing activity around our system and recently started construction on 26 miles of crude oil pipeline that will gather an existing 13,000 barrels per day of crude oil, with more wells planned to connect to that pipe for the rest of 2016 and beyond.

In the downstream segment, for the second quarter in a row, we exported approximately 5.5 million barrels per month of LPGs, an increase of 10% versus the second quarter of 2015. I know there have been recent news stories related to concerns around global LPG demand, that in particular Chinese counterparty risk, and I'd like to share Targa's perspective. We have a very diverse portfolio of counterparties who lift export cargoes from our Galena Park facility.

Similar to past quarters, we provide a snapshot today showing approximately 75% of cargoes leaving our dock over the last 12 months have been to destinations in Latin America, the Caribbean, South America, the Americas. That is up slightly from LTM percentages last quarter, showing a slight increase to those markets.

I talk often about the flexibility of our facilities. Flexibility to serve large, medium, and small vessels, combined with our ability to provide mixed cargoes of propane and butane, and of course, the US Gulf Coast location advantage. These are very good fits for the customers in those Americas markets.

These factors support the sustained level of LPG export activity that you are seeing from Targa's facilities, and are of course, less impacted by the recent dynamics of Asian markets that are being discussed publicly. If 75% of cargoes are traveling to Latin America, South America and the Caribbean, then of course approximately 25% of our cargoes travel beyond the Americas.

As we do across all our businesses, we structure our LPG export contracts for potential increased counterparty risk. And for example, where appropriate, have common requirements such as pre-payments, and postings of letters of credit, prior to vessel loading. The potential risk of non-performance of our customers is always a factor as we assess whether to add a customer to our diverse portfolio, how to contract with them, and how we might forecast their performance.

We do not, never have, discuss specific customer situations, but we can assure you that we continue to feel good about our long-standing guidance, that we will export at least 5 million barrels per month of LPGs for 2016. And we can tell you that we are well-positioned relative to Asian LPG demand fluctuations. As evidence, by our track record, and the fact that three-quarters of our business is focused on markets in Western Hemisphere.

Year to date, we have had three cancellations at our facility. One in June, and two in July. And we were paid cancellation fees.

We also sometimes work with our customers, when necessary, and for additional fees, to mutually agree to defer cargoes to later delivery dates. As such customers defer, this provides opportunities to fill nearer-term available space at our facilities, with incremental export volumes.

Given these current market dynamics, and allowing for potential cancellations and deferrals during the quarter, I believe that LPG volumes in the third quarter could likely be lower than in Q1 and Q2. However, to repeat myself, our volume guidance for 2016 is unchanged, and we expect to export an average of at least 5 million barrels per month of LPGs for 2016. And of course, not all months will be at the same level, and not all quarters will be at the same level.

Now, moving to other areas. Fractionation volumes were higher in the second quarter of 2016, versus the first quarter of 2016. Partially as a result of more volumes coming to Mont Belvieu from increased field G&P volumes, partially due to greater ethane recovery.

We completed and put in service our fifth fractionator at our Mont Belvieu Cedar Bayou facility in May. Given that it is our newest fractionator, and built with the most flexible technology, we are already running significant volumes through Train 5 and benefiting from greater efficiencies. Also, as we've discussed, as a result of Train 5 coming online, we are no longer sending volumes to Lake Charles to be fractionated, and are considering other commercial uses for the facility, which look very promising.

To the extent that we continue to benefit from more ethane being extracted rather than rejected, plus the potential of increased back-half 2016 increases in producer activity levels and volumes, then even greater NGL volumes will flow to Mont Belvieu, and Targa is poised to benefit from that. Of course, the loss of benefit from increased ethane pricing that would come with that, in our POP contracts.

So given the environment, given that this was the second quarter of the year, a year with a very tough start, I feel good. Frankly, really good, about inlet volume trends, contracting trends, NGL volume trends, and continued cost reductions. And that's only the stuff we're reporting.

With that, I will now turn the call over to Matt, to discuss our second-quarter results in more detail.

Thanks, Joe Bob. I'd like to add my welcome, and thank you for joining our call today.

Targa's reported adjusted EBITDA for the second quarter was $257 million, and distributable cash flow was $170 million. Overall reported operating margin in the second quarter of 2016 was approximately 8% lower, compared to the second quarter of last year, and I will discuss in more detail in the segment results in a few moments.

Reported net maintenance CapEx were $19 million for the second quarter of 2016, compared to $26 million in the second quarter of 2015. We had previously guided to $110 million of net maintenance CapEx for 2016. Given we are now halfway through the year and have spent approximately $33 million, we expect net maintenance CapEx to be closer to $90 million for 2016, or perhaps a bit lower.

Now turning to the segment level, I'll summarize the second quarter's performance on a year-over-year basis. Starting with the downstream segment, second-quarter reported operating margin decreased 13%, compared to the second quarter of 2015, driven by the payment of contract renegotiation fees in 2015, related to the Noble crude and condensates splitter, lower LPG export margin, lower fractionation margin, and lower terminalling and storage throughput.

As Joe Bob mentioned, we loaded an average of 5.5 million barrels per month of LPG exports for the second quarter, which was flat to the first quarter of 2016, and an increase of 10% compared to the second quarter of 2015. Fractionation volumes decreased by 8% in the second quarter of 2016 versus the same period last year, primarily as a result of lower supply volumes at Mont Belvieu and some contract roll-offs at the end of 2015.

Downstream segment reported operating expenses decreased by 4% in the second 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. Even with the additional OpEx associated with bringing CBF Train 5 online in May 2016. Turning to the gathering and processing segment, reported operating margin for the second quarter of 2016 decreased by 4% compared to last year, primarily due to lower commodity prices.

Natural gas prices were 31% lower, condensate prices were 22% lower, and NGL prices were 5% lower, compared to the second quarter of 2015. Second-quarter reported 2016 natural gas inlet volumes for field gathering and processing were a little over 2.6 billion cubic feet per day. For the quarter, there was a 10% increase in gross NGL production versus the same time period in 2015, driven primarily from increased volumes in West Texas and South Texas.

In April, our Buffalo plant in West Texas came online, and we immediately shifted volumes from some of our other plants were running over capacity. The addition of the Buffalo plant and continued activity by a number of strong producers in West Texas resulted in an increase in volumes of 14% in the second quarter versus the same time period last year.

Crude oil gathered was 105,000 barrels per day in the second quarter, approximately flat versus the same time period last year, and flat compared to the first quarter of this year. Related to operating expenses for the G&P segment, we continued to focus on cost reduction across all of our assets. Second-quarter 2016 gathering and processing segment OpEx was 5% lower than second quarter of 2015, despite the addition of the Buffalo plant, and an outage for planned maintenance at Sand Hills.

Let's now move to capital structure and liquidity. As of June 30, we have $55 million in borrowings under TRP's $1.6 billion senior secured revolving credit facility, due October 2017. With outstanding letters of credit of $13 million, availability at quarter end was more than $1.5 billion.

We are currently in the process of extending the maturity of our $1.6 billion revolver to August 2019, and Targa continues to benefit from strong support in the bank market. We are now oversubscribed for the full $1.6 billion, and the amendment should be completed soon, subject to finalizing closing documents. At quarter-end we also had borrowings of $225 million under our accounts receivable securitization facility.

This year, in addition to an intense operational and commercial focus, we also focused on continuing to strengthen our balance sheet. We are very well-positioned with a compliant debt to EBITDA leverage ratio of 3.6 times, at the Targa Resources Partners level. This ratio compares very well to our 5.5 times compliance covenant, and that is the only meaningful financial covenant across the Targa family.

Also, in the second quarter and through July, we have raised approximately $250 million in equity through our at-the-market program at TRGP, with net proceeds used to reduce leverage, and now available to fund future capital spending. Our ability to raise a substantial amount of public equity through the ATM program at a reasonable yield, while never representing a meaningful amount of TRGP daily equity trading volume shows some of the benefits of being a C-Corp with significantly higher daily equity trading liquidity.

At the TRC level, we had $270 million in borrowings outstanding under our $670 million senior secured credit facility that matures in February 2020, and the balance on TRC's term loan facility that matures in February 2022 was $160 million. TRC availability at quarter-end was $395 million, including $171 million in cash, total Targa liquidity at quarter-end was approximately $2.1 billion.

Our fee-based operating margin for the second quarter of 2016 was approximately 78%. Given we're halfway through the year, it is reasonable to assume that our operating margin will be more than 75% fee-based during 2016. And if is lower, then we will have benefited from substantially higher EBITDA.

Turning to hedges, for non-fee-based operating margin, relative to the partnership's current estimate of equity volumes from our field gathering and processing, we estimate that we have hedged approximately 70% of the remaining 2016 natural gas, 60% of remaining 2016 condensate, and approximately 20% of the remaining 2016 NGL volumes. For 2017, we estimate we have hedged approximately 45% of the natural gas, 45% of condensate, and approximately 10% of NGL volumes.

Moving onto capital spending, we estimate approximately $525 million for net gross capital expenditures in 2016, and as mentioned earlier, possibly $90 million for net maintenance capital expenditures. Except for CBF Train 5 and Buffalo, which are already completed, and the Noble splitter, this CapEx is pointed to smaller high-impact attractive return projects around some of our best assets. For example, in the Bakken, Permian, and SCOOP.

Furthermore, we are certainly working on project development for the future. Potential new projects, ranging from small to large, that leverage our assets and expertise. Our distributable cash flow for the quarter was $170 million, resulting in dividend coverage of approximately 1 times, based on our second-quarter declared dividend of $0.91 per common share, or $3.64 on an annualized basis.

That wraps up my comments, and I'll hand it back over to Joe Bob.

Thank you, Matt, I like the results. As I mentioned at the outset of our call, I'd like to now provide some additional clarity to our current thinking about leverage and coverage. Sharing the thinking behind our actions, and behind how we are trying to steer the Targa ship.

Through a couple of very important steps, started last year and executed this year, the buy-in of TRP's common units, the preferred offering at TRC, TRC's ATM activity, and other commercial and operational measures discussed today, we have continued to improve our balance sheet, ensuring that we are positioned with financial strength and flexibility, looking forward, for a range of potential industry environments. We currently have approximately $5 billion of total consolidated debt, and our consolidated debt to EBITDA ratio is approximately 4.4 times.

By managing our balance sheet, and by focusing on bottom line cash flow performance, we have continued to provide our shareholders with attractive quarterly cash dividends of $0.91 per common share, or $3.64 per common share annualized. This stable dividend, stable for the last four quarters, also reflects our focus on balance sheet management, and managing Targa's dividend payout prudently in this environment.

At this point, I think we are comfortable sharing the following additional color related to Targa, and how we think about it on a go-forward basis. Although we are comfortable in the near and middle term, with a mid-3 times TRP compliance ratio, and the room that gives us relative to the only impactful compliance test of 5.5 times at TRP, our long-term, longer term consolidated leverage desire for Targa is really unchanged, versus how we operated a few years ago. And how we talked about it, when we had the public GP and a public MLP structure, and targeted a leverage ratio of 3 to 4 times at the MLP, when there really wasn't any debt outstanding at TRC.

We do believe that over the longer term, a 3 to 4 times consolidated leverage ratio target will provide us with an appropriate long-term balance sheet position, to have access to the capital needed to grow the Company, and provide the Company with the ability to pay attractive dividends to our shareholders, while protecting our shareholders from some of the volatility associated with commodity price cycles.

Assuming balance sheet strength and a positive market-based Outlook, we will be able to continue to provide our common shareholders with attractive cash flow in the form of dividends. We will continue to evaluate and evolve to an appropriate long-term target range for dividend coverage or dividend payouts for Targa. We have historically reviewed that with our Board on at least a quarterly basis.

We have previously run higher coverage, when commodity prices and commodity price outlook have been strong and rising, which has provided additional stability and flexibility during the down cycles. Today, as a standalone C Corp during future cycles of strong and rising commodity prices, we may run higher coverage than we did prior to the buy in -- than we did in the lower commodity price environments, which would provide us with benefits during future down cycles.

Remembering our conservative view of coverage looking backwards, coupled with our focus on our balance sheet, leaves Targa well-positioned today during more of a down cycle, and we expect full-year 2016 coverage at the current dividend rate to be at least 1 times. That is very good news. Just as we operate with lower coverage during down cycles and higher coverage during up cycles, similarly, we may operate with higher leverage during down cycles, and lower leverage during up cycles. That is simply how we think about it.

Looking forward, in the context of that shared thinking, we believe that through an investment in Targa, investors will have ownership in a high-performing well-positioned midstream C Corp, that has a premier gathering and processing business, and a leading natural gas liquids business, with some of the following characteristics: Diversified gathering and processing assets in some of the best crude and liquids-rich reasons in the country, highlighted by strong positioning for continued development in the Permian basin, with an outstanding Permian gathering and processing footprint, stretching from the West to the East. With very well positioned exposure to activity in the Midland basin, the Wolfcamp/Spraberry of the Central basin platform and the Delaware basin.

Three of our four Permian multi-plan systems are connected, providing us with operational flexibility, and providing our customers with the reliability of these multi-plant systems, and back up from the interconnected system. Our interconnected footprint makes us very competitive for both new and takeaway gas, and, depending on location, we currently have available capacity to benefit almost immediately from continued and increasing producer activity. Similarly, we are well-positioned in the Bakken, Eagle Ford, and SCOOP, where again, we have available capacity to benefit from continued and increasing producer activity.

And Targa has other options to benefit from E&P activity or activity improvements. For example, leveraging our existing West Coast system to gather and process stack volumes to the south. We have to spend a little money, we are working on the commercial contracts, but we are well-positioned.

As a result of our very well-positioned gathering and processing assets, Targa investors will benefit from even slight tailwinds associated with an environment of improving commodity prices. Especially crude and NGLs. We have worked hard and added these over time to our POP contracts, often improving the overall margin and providing more of a floor. We are certainly not fully hedged, especially on NGLs.

And as a result, to the extent that prices rise, Targa will benefit immediately from higher price realizations from our POP contracts. Targa's investors also benefit from our downstream footprint. In the NGL market hub at Mont Bellevue and at surrounding larger market hubs, interconnected to NGL supply and customers, and to our facilities on the Houston Ship Channel.

And such an interconnected multi-component position would be extremely expensive to replicate today. Our well-positioned Mont Belvieu fractionation and salt dome storage capabilities are connected to an extensive pipeline network, connecting NGL supply and demand.

We are the second-largest fractionator of natural gas liquids, and we'll benefit directly as the world class ethane crackers being built by the petrochemical industry come online over the next couple of years. Ethane prices will probably have to be higher to incent more recovery. Targa will benefit in our G&P business from an increase in ethane prices.

We will also benefit as more ethane volumes flow to Mont Belvieu to support petrochemical growth and exports of ethane from the US. Rising ethane prices will pull some of the other components of the NGL barrel higher, and again, we will recognize immediate benefits. Our fractionation business and associated infrastructure supports our LPG export facility.

We have very flexible export services, and continue to perform in moving propane and butanes across our dock into international markets. We have a demonstrated track record of capturing a significant portion of global demand for the Gulf Coast based LPG exports. Targa has, and over time will continue to improve our balance sheet with manageable leverage that can withstand industry downturns.

That positions us to take advantage of attractive capital investment opportunities that accrue to a well-positioned strategic asset base, and potentially positions us for strategic opportunities in identifying very attractive M&A. Our balance sheet also allows for attractive annual dividends to investors. Our yield based on yesterday's close was 9.7%.

Our second-quarter consolidated leverage ratio was approximately 4.4 times, and we are one of the best positioned midstream companies, able to navigate the choppy seas of the current environment, and poised to benefit as the industry gets some wind in its sails, and prices and activity levels improve. Potentially one of the first to benefit.

Over the next five or more years, Targa does not expect to pay cash taxes. And the only adjustment to our forecasts that will change that expectation is significantly higher EBITDA. Additionally, and perhaps most importantly, an investment in Targa is supported by Targa's employees, who I think are the best in the business.

The last 1.5 years have proved that our employees can manage capital efficiency decisions, reduce costs, and identify growth opportunities, all at the same time. And they just flat out execute in any environment. I think we have a Management team and a Board that has demonstrated a track record of proactively enabling those employees in making decisions to best position the Company for success across all industry environments, a Company I'm externally proud to be a part of.

I believe our results for the quarter speak to the investor themes that I just talked about. Today's results, our prepared comments, the new investor presentation, all show positive trends and positioning for future upside, for example along several dimensions that you are hearing for Matt and me today. Volume growth certainly deserves a nod in the current environment, and we are positioned well.

Growing in the current environment, and better positioned for a recovery environment, especially in Permian, Bakken, and SCOOP, for example. During the presentation, I look at the rig charts as of mid-July in those areas. A little bit surprising, to the upside.

Secondly, improvements in gathering and processing contracting. This is obvious from our overall results, despite year-over-year reduction in commodity prices, and bodes well for performance upside, with some commodity price recovery.

And thirdly, improvements in NGL volumes. They're demonstrated in the numbers, and they're driven by increased volumes at inlet and gas plants, going all the way downstream to our fractionation, and demonstrated by additional ethane recovery, with more upside to come with improved pricing. And of course, continued cost reduction progress is impressive and obvious from the numbers.

So with that, operator, please open up the line to questions. And I thank you all for your patience in our prepared remarks.

(Operator Instructions)

Shneur Gershuni, UBS.

I figured I'd start off with LPG, let's just knock this out. A lot of time spent on LPG exports rather than a lot of the other opportunities you have. I realize that for competitive reasons, disclosing the [MBCs] and the prices and so forth is difficult. I was wondering if maybe we could approach it from a different angle?

I was wondering if you could talk about your customers' intentions at this point right now? Do they have options on contracts that they are thinking about extending? I was wondering if you could give us some color about contract extensions? Could we see something where you continue to have a floor of MBCs, let's say through 2020 or so forth? Any color about those discussions, in terms of extending your relationships with them, I think would be helpful.

This is Joe Bob. I appreciate the high-level nature of the question. I think we'll try to add some color to that. Talking about customers plural, not any specific customer.

Correct.

Which you know we don't do. And what is the mood of the market. I want to start by saying throughout the short history of LPG exports, aided by terrific market dynamics and US exports reaching markets where our supply is necessary to meet their demand, our pattern has been to repeat with our customer base, to extend with our customer base, and to add business with our customer base. Sometimes those discussions are more intense than others, but they're pretty constant, because we have done a good job for those customers, and they continue to have opportunities.

Scott, as you think about my super-high level answer -- Scott Pryor, our Executive Vice President of NGL Logistics and Marketing, runs half our company, is here with us today. I saw you nodding, what would you add to that?

I think some of the first things I would add -- I think it is important to note, especially with some of the things you read in the marketplace today. We have, first and foremost, a number of customers that are performing on their contracts. We are in a variety of discussions with all of our contract portfolio to renegotiate extensions, as well as new customers.

It is a tough market out there, in the environment we're in today. We recognize that. You've heard from other earnings calls that there are challenges. Today, it is our belief that the pricing environment today is not really reflective of what the true supply demand is, especially when you look at production east of the Suez, and what demand looks like both today and going forward in the Asian marketplaces.

What I would tell you is that a number of our liftings, as we have indicated on our reports today, and in the Americas, most of our production, 75% or more, is going to the Americas. And that demand is not wavering, and we believe it is actually continuing to grow. So that will be a focal point, and that will be something that we will provide nearby -- supply to those nearby locations and points of destinations.

That is really helpful color. I really appreciate that. As a follow up, Joe Bob, towards the end of your prepared remarks, you talked about taking a look at the rig activity recently. As you talk with your E&P customers in the Permian, partners is the best way to put that. With the recent rig activity, and their talk about completions and CapEx and so forth, how much capacity do you have in place to handle the growth that Pioneer is talking about, as well as others?

Do you think at some point discussions start to turn towards building new facilities? Do we ultimately end up having to add capacity at some point? Can you add color about that as well, too?

I'm happy to give you color. I'm not going to be the source of information that is not public from Pioneer, but the public information for Pioneer is, of course, consistent with what they share with us. They are a very good partner, and I want to continue to have a great relationship with them.

When you look at the results of their longer laterals, higher IPs, higher EURs, just as presented publicly, consistent with what we've seen privately, that is really good news for Targa. Relative to Pioneer, I love their performance, but they are not the only ones doing that. There are some Pioneer look-alikes in the same basin, doing the same thing. Longer laterals, higher IPs, higher EUR, and that works very well for us.

We have interconnected systems there to provide some capacity backup. We have a small plant, as you know, that is on standby, though we'd have to spend some money on it, and not very long in the distant future, we would need to build another one. I am not predicting when that time is. We put in a plant when we were overcapacity and just about to bust. We are running hard to keep up on compression -- to keep pressures down, so that we get maximum volume from Pioneer and other producers.

It is a growing environment. I'm very happy about that. Yes, there will be a new plant at some point required. And we've got back-up plant interconnects and one spare small mothballed plant that might happen before that. Planning that out carefully with our partner, and working hard to meet the needs of multiple producers in the area.

Great. Thank you very much. Really appreciate the color.

Faisel Khan, Citigroup.

Joe Bob, I am glad you feel good about the current environment.

Wait a second. I feel about our performance in the current environment.

Sounds good. Just some of your comments on the Lake Charles facility. You mentioned there are other uses for that facility. Can you elaborate a little bit more, what you are thinking the future opportunities could be over there?

No. And I don't mean to be rude about it. I had to work hard just to say that much. Scott Pryor is giving me the devilish grin right now.

It's a nice deal. We'll talk about it on the next earnings call when it's completely signed up. For competitive reasons, customer relationship respect, that's all I'm going to say right now.

Okay, fair enough.

Go ahead, Scott.

I'd like to add something to that, though, if I could. As you know in the past, when we have had oversupply for Y-grade in Belvieu prior to our Train 5 coming online, we have used Lake Charles as an overflow point to fractionate those excess volumes. Obviously, we are not in that environment today. The opportunities around looking for -- if you will, enhanced EBITDA, around some things that we can do it Lake Charles, does not take away from our ability to continue to flow barrels over to Lake Charles when we do get back to an access point here in Belvieu, and we believe that at some point, that will come again.

Makes it a really good deal.

Sounds good. We will look forward to that announcement. On the ATM program and the balance sheet, you have the total coverage ratio down to 4.4, and it looks like you're still in the market on the ATM. What should we expect out of that program for the rest of the year? What is the target ratio that you want to get to? Are you happy with your credit raining? Are you aiming for to get back to investment grade, or get to investment grade for that matter?

I think where we find ourselves with mid-3s at the TRP level and 4.4 on a consolidated level, raising the preferred equity we did earlier in the year, we find ourselves really not in an environment where we need to raise additional equity capital. We would like to be in that environment. So then we could just be opportunistic, and if we think it makes sense to raise some more, to keep the balance sheet on the strong side, that will be a subsequent decision. So I think that is why you have seen us be proactive, whether it's doing the preferred offering in the first part of the year, and continuing with the ATM. We're operating so we can continue to fund the growth CapEx, the growth projects that we want to fund, and keep our leverage ratios in line with where we want them to be. But not being in a place where we have to do something.

Okay.

We sure do not want it to sound formulaic. [$1 billion] preferred was a critical move for us that got us in that comfort zone. It really did. It got us in the comfort zone. Look at the metrics right after that was announced.

And raising $250 million of equity, you can think of that as pre-funding some of our CapEx. Because we are going to, as we deploy profitable attractive return CapEx, that is going to be handled with some mix of debt and equity. Once again, we're not trying to drive to a formula. We're going to take care of our balance sheet, and we're going to raise equity as we spend capital.

It sounds like for the rest of the capital program, you'd prefer to use mostly equity to fund it, rather than use the balance sheet. It seems like that is what I'm hearing from you.

It depends on the environment that we are in. It depends on what our growth prospects look like. It depends on what our EBITDA for the current quarter, next quarter, next 12 months looks like. We try and look at multiple -- as we said before, whether we're talking about outlooks for guidance or other things.

We look at multiple environments, multiple scenarios, and say where do we feel comfortable, and then we'll make that decision. So it's not as formulaic as oh, we think we don't, or we think we do need to. We'll see how the rest of the year plays out with EBITDA, crude oil prices, where TRGP is trading and the like, and just make that decision.

Our debt is trading at a reasonable cost of capital. You certainly have the appetite in the bank markets. It's a combination.

Yes.

Okay, I got it. Thanks, I appreciate it.

Brandon Blossman, Tudor, Pickering, Holt.

I'll take advantage of Scott being there, and ask Shneur's question again, in a slightly different way. There is clearly a little bit of a hiccup here on the LPG export story, but I want to put that aside and think longer term, and again ask how your customers are thinking about again longer-dated, we have a little bit of strength in propane pricing here, and perhaps putting the US product a little bit at a disadvantage.

Assuming that changes, and I think at least on our side, we expect that will going forward. Global demand is still strong. US supply plentiful and cheap, relatively cheap, global demand is strong. Talking 2018-plus. Where do you think customers are thinking that terminal fees are going to end up, with the bookends of current spot pricing and historic first out of the gate contracting rates?

First off, I would tell you that I agree with a lot of your intro there, relative to what the market is looking like long-term. In terms of demand, in terms of supply coming from the US. Certainly, pricing is going to have to have an impact. Whether pricing comes up internationally, or prices in the US are lower to stimulate and encourage exports out of the US, because it will happen.

There is no doubt, and I'm going to try to -- I will cover it from a couple different perspectives. First off, the short-term environment we are in today is a challenge, as I said earlier. When you look at that, it is having an influence over how people view the long-term prognosis of adding contracts, on the water. I do believe that eventually, pricing will reflect what a true supply-demand forecast looks like. That is, it's growing in the Americas, it's growing globally in Asia, and as a result of that, and with lower shipping fees today -- when you look at the Baltic rates, are the lowest I've seen probably ever in my current position.

That is all going to help encourage marketers on the water, consumers at the destination points, to take a position on shipping. Today, they are a little reluctant, because they don't know where the bottom is. I think we're seeing where the bottom is. As a result of that, that will stimulate opportunities to have long-term discussions on contracts, that will put us out to long-dated positions.

Again, I think for us, our focal point is going to continue to be what we're doing in the Americas. We've got a nice position there. Our flexibility has been proven. I think if you polled all of our customers, they are very appreciative of how we have worked, with the challenges in the marketplace. I don't think we'll have any issues extending contracts for the long-term.

Okay. I definitely appreciate that color. Switching gears, Joe Bob, you reminded folks that you have real commodity leverage that will show up here fairly quickly. Particularly relative to the peer group. Do you care to update at all, or at least directionally update the commodity sensitivities that you put out last year?

We're taking a look at that. I think in the presentation, we're putting in the updated sensitivity tables. You'll see that in our presentation.

Okay, that's easy. That all for me. Thanks.

We figure if we have it, it wasn't that hard for some people to back into it. We might as well get the math right.

That will be much appreciated. Thanks.

Darren Horowitz, Raymond James.

Joe Bob, if I could for my first question, I want to go back to the comments that you made regarding the field G&P growth expectations. Specifically in West Texas, if this recovery scenario that we're forecasting and you alluded to ends up playing out, how do you think the pace of producer activity, specifically around Versado and your core Delaware assets, results or puts you on a glide path to, with regard to second half 2015 field G&P volumes, versus where you are through the first half?

We had a little bit of lull, we built some facilities. We have got some available capacity in that area. I like the prospects of future glide path, without -- it's up and to the right, without telling you how fast it would occur, because that will be price-dependent. What we've seen as producers position themselves, and we positioned ourselves, for a nice little run there.

If it is on the upside of the range of those runs, we will figure out ways to add capacity. If it's slow and steady, we've got capacity for a bit, and we just have to add a little pipe, and add a little compression. Either way, it's an attractive return for us. We will try to meet those producer needs.

When you're talking to the producers, Joe Bob, has anything changed in terms of the timing or magnitude of some of those drilled but uncompleted wells?

Across all basins?

Specifically in West Texas.

What I find interesting in all basins, and it's true in West Texas too, is that as you are talking to customers, you may have two customers with a similar position on DUCs, in a similar area, and they may be making different decisions. That is a function of different outlooks, different hedges. Whether they've got rigs contracted. Potentially even where they are with their boards.

I think that is understandable in this still choppy environment. We just try to meet each individual producer's needs, keep our thumb on the pulse of what they're getting ready to do. Some of our producers are more open with us than others. And we -- that's our job.

It's not as easy as it has been in the past, sometimes because they change their programs, they change their budgets. But the rigs that are running in the middle of July, are running in the middle of July. Those benefit assets that are available for Targa, longer term, I think that those trends continue with just a little bit of wind in the sails of increased commodity prices.

Last question for me. Back to your commentary around the frac volume upside. How much of that sequential frac volume upside in the second quarter was due specifically to higher field G&P throughput versus incremental ethane recovery? And really more important, how has that composition shifted thus far in the third quarter with this near-term headwind we're seeing on ethane prices likely diminishing recovery incentive?

Thus far in the third quarter. As we've commented in the past, processors in general and whoever is making the election, ethane recovery rejection decisions occur all the time. You should assume that they are driven by economics, and some of those economics for our customers and other processors are for Targa, are driven by what are contractual obligations, and what are the time periods for those contractual obligations relative to cost calculations.

Yes, you can watch the spot prices move, or even estimate the locational spot prices, and that will give you an indication of what is supposed to be happening. Contractual obligations change some of that. We haven't said, and I don't think you can extract from our numbers, how much of that report to report benefit was from increased inlet volumes, and how much was from ethane. Obviously, we have a little bit more information. We are describing it as some of each, and it is not immaterial on either side of that.

And then the last part of your question was looking forward. Directionally, directionally, not for the first partial month of the quarter, but for over the next year or so, or two, we expect more ethane rejection. Sorry, I said it wrong, more ethane extraction. That is supposed to happen to keep up with the increased demand, caused by the pet chems coming up and caused by ethane exports. But any particular month can swing around.

Thank you.

Selman Akyol, Seaport Global Securities.

Just a couple quick ones. One small one. On the Bakken pipeline that you referred to, the 26 miles, when do you expect that to come online, and how quickly do expect that to ramp and fill?

The ramp and fill to the 13,000 barrels per day will be instantaneous. Almost instantaneous. You have to get the [lax] program hooked up and programmed. It is existing production. It's existing production somewhat down the decline curve, so it will be there with lower decline rates. It is available. It has been waiting, it's been waiting on Indian reservation right of way.

Got it.

The project is beginning. It will take long. It will be done before the freeze, but beyond that, I don't think, frankly I don't have Danny here at the table, or we'd be able to tell you the month. It is pretty soon.

Very good. I know Matt said you are committing some capital. Can you talk about or give a little more color of what you're seeing in the STACK and the SCOOP plays?

There's parts of the SCOOP and the Stack that are still pretty active. You can see that from the maps we put in our investor presentation. That's encouraging. Our assets better serve the SCOOP right now.

We have got one large customer who gets their process through bankruptcy, they are likely to be more active. But we're not counting on that until they do, and I wish them luck. Our assets can get to the STACK, and we are in discussions with folks nearby in the STACK.

Pat McDonie is on the line. He is not in the same office due to a conflict. Pat, do want to have anything you want to add to that?

I think, Joe Bob, you have covered it pretty well. I guess I would say, when you say we have assets on the edge of the STACK. We have assets on the edge of the STACK, with recent acreage dedications moving us closer and closer to the core of the STACK. We have picked up some nice acreage covering good rock with good contractual terms with strong producers. Those wells are being drilled, as we speak. And the results are good. We're headed in the right direction with expectations.

Thanks Pat, I didn't give you a proper introduction. That's Pat McDonie, Executive Vice President of our Southern Field Gathering and Processing. That's everything other than the Bakken.

Thank you so much.

Danilo Juvane, BMO Capital Markets.

I wanted to understand one dynamic about LPG exports. Are the volumes going to Latin America actually being consumed in Latin America, or is the ultimate destination still Asia? Do you have a sense of that?

Absolutely, there's not a whole lot of people shipping stuff into Latin America, and then shipping it to Asia.

Okay. That's it for me. Thank you.

Craig Shere, Tuohy Brothers.

Scott, you have mentioned a couple times that you thought that there was a bit of a dislocation in terms of the LPG export pricing versus long-term supply-demand trends. You had mentioned specifically, to Brandon I think, that you saw indications of bottom, or you could see where there was bottom. Is there anything, not specific in terms of to-the-penny pricing in any way, shape or form, just in terms of trends from the first quarter, to the second quarter, to the third quarter. Do you see sequential LP export unit pricing still weakening, or starting to find specific floors?

First off, when you talked about bottoming out, what I referred to was the shipping market. We're seeing shipping rates today at some of the lowest levels I have ever seen.

Okay.

Again, when you look at the Baltic rates, which sets a benchmark for global shipping prices, hovering around $24 per metric ton price for Baltic rates. Those are very low in comparison to what we saw mid last summer, where we are clearly above $100 per metric ton. Shipping is going in a favorable direction for all those who wish to place barrels on the water and reach a variety of destinations. I forgot the second part of your question. Was it in reference to where we think bottoming out would be on pricing?

What are you seeing, and if there's not a lot of -- if you're seeing some contracting, are you continuing to see weakness versus last quarter or a couple quarters ago, in terms of that pricing? Is there continuing pressure? Any comment about the spot market. In terms of recent trends, nothing specific in terms of dollars.

Yes, we are continuing to add some contracts. We are -- I would say the spot market price that you hear anecdotally in the marketplace seems -- is obviously down. That's what I would refer to as the resell market, where folks are taking their stems and they are evaluating what their lifting price would be versus a cancellation price, versus what they might be able to get on an open spot market. Albeit a very thinly traded market.

Again, I think it's important to note that most customers -- the large vast majority of our customers are lifting. They are not having issues in the marketplace. But there are a number of folks -- there are some that are spot selling if you will, they are lifting, at numbers to try to manage their economic impact relative to the cancellation fee that they would have to pay to us or others.

Okay.

I also think that in your question, you correctly reflected, that it is a very short term focus. That is the short-term balancing mechanism, as Scott described on the margin. Longer term, I know it's very difficult to talk beyond the next quarter, or the next portion of the quarter. But longer term, the dynamics are positive for Targa, and for our continued export business, that is necessary to balance supply and demand.

Understood. I appreciate that, Joe Bob. And any updates around longer term opportunities with LPG? With the ethylene and/or ethane export prospects?

In terms of ethylene or ethane, I think we've described in the past that we have a project that is engineered and designed for ethane exports. In today's current environment, I think it would be very difficult to get long-term contracts to support ethane exports with the current projects that are coming online today. With that said, if the market does materialize over a long-term, pricing is supportive, both US prices for ethane to be exported. We can certainly look at that.

In terms of ethylene, as you know, currently today in North America, we have the one facility that can export ethylene from our dock. It is supported by a long-term relationship we have with a petrochemical customer of ours. That is long-standing and continuing. They are exporting today, ethylene as you are aware of.

Abilities to enhance that, with that relationship, those are constant and ongoing discussions, because if the market over time is going to develop, and ethylene is going to be exported, you have to evaluate that versus the derivatives market that can be exported. When you look at those in combination, we'll be in that discussion, and we'll be in the possibilities of looking at things that can enhance our facilities to accommodate any potential growing demand.

And on the ethylene front, in order to expand that opportunity, that's a dramatically lower CapEx position than what you had laid out originally with ethane, is that correct?

It depends upon the size. It's all relevant to what sort of volumes you're going to be looking at. So we wouldn't be in a position to describe those today, but just know that we will be looking at opportunities like that.

But you're right. It is a capital intensive project, when you look at a sizable ethane export facility versus an already established facility today that can export ethylene, and how you can increase the capacity of that and enhance that, is likely a much, much smaller capital investment.

Great. And on the projects that aren't broken out, that are smaller projects that were referred to in the prepared remarks, the CapEx to EBITDA on that is really exceptional, isn't it? Is there some kind of average range that you could give on the smaller projects?

I think he characterized it.

As pretty good. We said for our projects, 5 to 7 times EBITDA is a reasonable multiple to assume. Usually for the items not listed on that page in our presentation, the smaller projects, is usually at the low end if not better than the 5 times.

Okay. And last question on the maintenance CapEx --

As an example, we talked about the pipeline to get 13,000 barrels instantaneously, and for a long time. You all could run the economics on that one pretty good.

Understood. And the last question on maintenance CapEx, what were the drivers for coming lower for the year, and is that sustainable into 2017?

Our guys, our teams, our people have been working on cost reduction for multiple years now, okay? And are figuring out ways to do things smarter and cheaper without ever -- without ever compromising preventative maintenance or safety. They continue to make progress on those things, and I'm very proud of that.

At the same time, people have followed us for a long time would say that we usually put in preventative maintenance with a -- we usually put in maintenance CapEx with a bit of conservatism. And it's a pretty good bet to say that you would take the under on the maintenance CapEx numbers we put out there. We do spend more in the fourth quarter than we do the rest of the year. But you heard Matt's soft comment, $90 million or perhaps less. I would take the under on $90 million. Our history would say to take the under on $90 million.

How do we keep taking care of cost reductions like that? In the maintenance capital category, I'm giving you one example. Throughout Targa's history, we have expanded our ability to do our own compressor reworks. In our own shops, instead of with third parties. It improves quality dramatically, and it reduces cost.

We recently purchased another facility, okay? With the same supervision that has been leading this effort over the long-term, but in Midland, where we can attract the people we need easier than where they were having to drive before. That reduces cost, they drive it into their plans and forecasts, they drive it into the systems that take care of it, and that is just one of the ways. Lower cost, higher quality, better service, greater timeliness, a really good thing. I'm just happy I got to talk about that. Sorry.

That sounds pretty sustainable. Is that a fair summary of what you just said?

Yes, the cost savings programs that these guys are doing are going down to root cause analysis. The maintenance facility, sustainability, and bravo for those teams.

Great. Thank you.

Jeremy Tonet, JPMorgan.

Thanks for all the color today. Just wanted to ask a high-level strategic question. It seems like there's been a good amount of asset rationalization in the midstream space, and there's been some consolidation. I'm just wondering, is there a bigger role for Targa to play in that? Is the focus really that internal opportunity set and just the singles and doubles as you outlined there, and repairing the balance sheet?

Yes, right now we see a lot of opportunity in and around our assets, where maybe some of the other, whether it's the E&P companies or other midstream companies aren't spending the capital that we're spending to serve our producers and customer's needs. I think we see a lot of good investment opportunities in and around our assets, so that's really where we're going to be focusing on acquisitions. I think if you see acquisitions from us, it's likely going to be smaller bolt-on in and around areas where we are. We're not necessarily looking to get into new geographic areas and expand our footprint. We are in a lot of the attractive basins, and we like the basins we are in.

Great, thanks for that. That's it for me.

That does conclude our Q&A session for today. I would now like to turn the call back over to CEO, Joe Bob Perkins, for any further remarks.

Thank you, operator. Thanks to everyone for patience on the call. I look at the time, and I'm kind of surprised. I guess we were at least having a good conversation. If you have any further conversation, any further questions, if you start thinking about the conversation we just had, and you want to clarify anything, Jen, Matt, myself, any of us are available if you'd like to give us a call. Thanks a lot, and have a good day.

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