Targa Resources Corp (TRGP) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Targa Resources Second Quarter 2013 Earnings Webcast and Presentation.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this call may be recorded.

I'll now introduce your host for today's conference, Jennifer Kneale, director of Finance. You may begin.

Thank you, Operator.

I'd like to welcome everyone to our second quarter 2013 investor call for both Targa Resources Corp. and Targa Resources Partners LP.

Before we get started, I would like to mention that Targa Resources Corp., TRC, or the Company, and Targa Resources Partners LP, Targa Resources Partners, or the Partnership, have published their joint 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.

Speaking on the call today will be Joe Bob Perkins, Chief Executive Officer, and Matt Meloy, Chief Financial Officer. Other management team members are available for the Q&A.

Joe Bob and Matt are going to be comparing the second quarter 2013 results to prior period results, as well as providing additional color on our results, business performance, and other matters of interest.

I would like to remind you that any statements made during this call that might include the Company's or the Partnership'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 statement.

For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the Partnership's annual report on Form 10-K for the year ended December 31, 2012 and quarterly reports on Form 10-Q.

With that, I will turn it over to Joe Bob Perkins.

Thanks, Jen.

Welcome and thanks to everyone for participating.

For today's call, I'll start off with a high-level review of performance highlights. We'll then turn it over to Matt to review the Partnership's consolidated financial results, its segment results, and other financial matters for the Partnership. Matt will also review key financial matters related to Target Resources Corp. Following Matt's comments, I'll provide some concluding remarks, and then we'll take your questions.

Our reported second quarter adjusted EBITDA was $127 million as compared to $123 million last year. This was a 3% increase compared to the second quarter last year, driven by volume increases across all our Field Gathering and Processing systems and by increased margin in our Logistics and Marketing division.

Our overall results show the benefits of diversity and increasing fee-based margin contributions. Fee-based margins were greater than 50% for the second straight quarter.

For the Field Gathering and Processing segment, the combination of volume increases and higher natural gas and condensate prices more than offset the NGL prices that were 20% lower in the second quarter of 2013 versus the second quarter of 2012.

The Logistics Assets segment produced quarterly operating margin of $52 million, up 14% compared to last year, primarily driven by higher fractionation revenue at CBF and increased LPG export and storage activity at our integrated Galena Park and Mont Belvieu facilities.

The strong results for the Logistics Assets segment were just achieved despite a planned partial turnaround at CBF that resulted in lower fractionation throughput.

In addition to the work done during the turnaround to comply with OSHA requirements, we are completing some additional work that will increase operational efficiency at CBF.

We are pleased to announce that CBF Train 4 is now operational.

We are also pleased to announce that we have finally broken ground on our 200 million-a-day Longhorn plant in North Texas.

We received our greenhouse gas permit in mid-June, but it was subject to an additional 30-day public notice period related to some necessary changes to the permit requested by Targa. That period was over in mid-July, and we were able to break ground.

As you may recall, we ordered the plant some time ago, and we have done all that we can to be able to construct as quickly as possible. We now believe that the plant will commence start-up activities just shortly after the first of the year.

In the Permian Basin, our 30 million-a-day expansion at SAOU was completed in the first quarter, and we are already close to full.

The new 200 million-a-day High Plains plant at SAOU, announced in the fourth quarter of 2012, is still on track to be finished in mid-2014. The producers' need for this plant is even greater than when we announced it. The producer activity in this portion of the Permian Basin is very high, and the activity around all our other Permian Basin systems continues to increase.

This is the second quarter that we are including results from Targa Badlands, our Bakken shale crude oil and gas gathering operation. We saw a quarter over first quarter increase in crude gathered and continued to make progress on multiple fronts of this growth project. Similarly, we're making progress on other growth projects across the company.

So back to our overall results and outlook.

Distributable cash flow for the quarter of approximately $79 million resulted in distribution coverage of approximately 0.8 times based on our second quarter declared distribution of $0.715, or $2.86 on an annual basis.

Second quarter distribution coverage is expected to be below point for the year, with third quarter distribution coverage expected to increase and to continue to improve in Q4.

As you probably recall, this coverage profile I just described is consistent with our previous guidance for distribution coverage, which we expressed as about 1.0 for the year but lower in the first half of 2013.

We expect significant coverage improvement over the remainder of this year, driven by highly visible improvements from the following factors -- increasing inlet volumes in our Field Gathering and Processing segment, increasing NGL volumes from our Coastal Gathering and Processing segment, and from the highly visible increasing margin contributions from our capital growth projects that are beginning, CBF Train 4 and the International Export project, which are both on time or early.

Of course, a sustained decrease in the NGL prices below current levels could reduce our coverage below our expectation for 2013 but not materially. Similarly, sustained increases in NGL prices above current levels could improve our coverage but not materially.

The Partnership's second quarter distribution of $0.715, or $2.86 annualized, represents an 11% increase compared to the second quarter of 2012.

At the TRC level, the second quarter dividend of $0.5325, or $2.13 annualized, represents a 35% increase compared to the second quarter of 2012.

Given Q2 performance, we are comfortable with our previous EBITDA guidance and comfortable that we will deliver on our distribution and dividend goals for 2013.

That wraps up my initial comments, and I'll hand it over to Matt.

Thanks, Joe Bob.

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

Adjusted EBITDA for the quarter was $127 million compared to $123 million for the same period last year. The increase was primarily the result of increased volumes in our Field Gathering and Processing segment and higher LPG export activity in our Logistics and Marketing division, partially offset by lower NGL prices.

Overall operating margin increased 2% for the second quarter compared to the second quarter last year. I will review the drivers of this performance in our segment review.

Gross maintenance capital expenditures were $21.8 million in the second quarter of 2013 compared to $15.5 million for the same period last year.

Net maintenance capital expenditures were $19.4 million in the second quarter of 2013 compared to $13 million in the second quarter of '12. The increase in maintenance CapEx is consistent with increased activity, higher volumes, and higher capacity utilizations across our businesses.

As a result, we now expect net maintenance CapEx for 2013 to be $85 million versus previous guidance of $75 million.

Turning to the segment level, I'll summarize the second quarter's performance on a year-over-year basis. We'll start with the Gathering and Processing segments.

Field Gathering and Processing operating margin increased by 25% compared to last year, driven by higher natural gas inlet volumes and NGL production, higher natural gas and condensate prices, and increasing margin contribution from Badlands. These increases were partially offset by lower NGL prices and higher operating expenses due to additional compression and maintenance costs associated with system expansions and the addition of Badlands.

Second quarter 2013 natural gas inlet volumes for the Field Gathering and Processing segment were 793 million cubic feet per day, a 19% increase compared to the same period in 2012. The overall increase of natural gas inlet volumes was due to increases experienced in each business unit -- 27% at SAOU, 24% at Sand Hills, 20% in North Texas, and 1% at Versado, plus the addition of Badlands.

For the segment, NGL prices decreased 20%, while natural gas prices increased by 93% and condensate prices increased by 5% compared to the second quarter of 2012.

Turning now to the Coastal Gathering and Processing segment, operating margin decreased 40% in the second quarter compared to last year. The decrease was primarily driven by lower commodity prices and less favorable frac spreads.

Inlet volumes increased 48% at LOU, driven by the addition of Big Lake plant and 12% at VDSCO but were lower at our Coastal Straddle plant as a result of the impact of the Yscloskey and Calumet plant shutdown and operational issues.

We continued to add to the recapture volumes that previously went to Yscloskey and our more efficient cryogenic VESCO plant. We would have seen a larger overall segment increase in volumes but were impacted by third party producer and pipe operational issues. Since quarter end, those operational issues have been largely resolved and volumes have been increasing.

For the segment, NGL prices decreased 15%, while natural gas prices increased by 80% and condensate prices increased by 12% compared to the second quarter of 2012.

Next, I'll provide an overview in the two downstream segments.

Starting with the Logistics Assets segment, as Joe Bob mentioned in the opening, second quarter operating margin increased 14% compared to the second quarter of 2012, driven by LPG export activity and higher fractionation fees despite fractionation volumes declining as a result of the previously mentioned planned maintenance turnaround at CBF. The effect of lower fractionation volumes will be partially recovered in the third and fourth quarters as inventory is processed.

We continue to see increasing levels of export activity across our Galena Park Marine Terminal on the Houston ship channel. We loaded over 1.2 million barrels per month of LPG for export in the second quarter, a 46% increase over the second quarter of 2012. Export activity continues to exceed our expectation as we improve our ability to load ships even with the ongoing construction at Galena Park that resulted in a slight reduction in sequential quarter-over-quarter volumes.

In the Marketing and Distribution segment, operating margin for the segment increased 5% over the second quarter of 2012, due primarily to higher LPG export activity and increased truck and large transportation opportunities. These positives were partially offset by decreased NGL prices.

With that, let's now move briefly to capital structure and liquidity.

As of June 30, we had $225 million of outstanding borrowings under the Partnership's $1.2 billion senior secured revolving credit facility due 2017. With outstanding letters of credit of $48 million, revolver availability was about $927 million at quarter end.

Total liquidity, including approximately $73 million of cash on hand, was about $1 billion.

At quarter end, we had borrowings of $125 million under our accounts receivable securitization facility. As of the end of July, we had $114 million borrowed under this facility.

On May 9, we announced that we priced a successful 625 million offering of 4-1/4 senior unsecured notes due November 2023. A portion of the proceeds were used to pay down our revolving credit facility, to redeem our 11-1/4 notes, and for other general and partnership purposes.

In the second quarter, we received gross proceeds of approximately $157 million from equity issuances under our at-the-market equity program, which allows us to periodically sell equity at prevailing market prices.

Year to date, we have now raised approximately $265 million of gross proceeds under this program. Given the success of this program so far this year, we believe that it could be possible to use the ATM to meet our equity needs over the remainder of the year. While the other options are available to access additional liquidity, one of the benefits of the ATM program is that allows us to match the timing of our equity issuances more closely to our capital spending profile.

To accommodate additional units that can be offered through our ATM program, on July 29, we filed an amended Universal Shelf Registration Statement that allows us to issue an additional $800 million of debt or equity securities.

Total funded debt on June 30 was approximately $2.65 billion, or about 57% of total capitalization, and our second quarter compliance debt to EBITDA ratio, which provides adjusted EBITDA credit for material growth projects that are in process but not yet complete and which includes other adjustments, was 4.1 times.

Next, I'd like to make a few comments about our fee-based margin, hedging, and capital spending programs for the year.

Prior to the start of the year, we provided guidance that we expected over 50% of our operating margin to be fee based by the end of '13. In both Q1 and Q2, operating margin was over 50% fee based, and we expect this to increase in Q3 and Q4. We continue to expect operating margin to reach 55% to 65% during 2014, driven by our fee-based expansions, including fractionation, LPG exports, and crude gathering.

During the second quarter, we added some additional hedges for natural gas. For the non-fee-based operating margin relative to the Partnership's current equity volumes from Field Gathering and Processing, we estimate we have currently hedged approximately 69% of remaining 2013 natural gas and 50% of remaining 2013 combined NGL and condensate.

We continue to be less hedged than in previous years primarily on ethane and propane, but our diversity and increasing fee-based improvements reduced the need to hedge commodity prices to previous percentages across all commodities.

Moving on to capital spending, we estimate approximately $1 billion of growth capital expenditures in 2013 and expect maintenance CapEx net to our interest to be approximately $85 million.

Next, I'll make a few brief remarks about the result of Targa Resources Corp.

Targa Resources Corp standalone distributable cash flow for the second quarter 2013 was approximately $30 million, and TRC declared $22 million in dividends for the quarter.

On July 16, TRC declared a second quarter cash dividend of $0.5325 per common share, or $2.13 per common share on an annualized basis, representing an approximately 35% increase over the annualized rate paid with respect to the second quarter of 2012.

As of June 30, TRC had $78 million in borrowings outstanding under its $150 million senior secured credit facility and $10 million in cash, resulting in total liquidity of approximately $82 million.

That concludes my review, so now I'll turn the call back over to Joe Bob.

Thank you, Matt.

To wrap up the final portion of our prepared remarks, let's start with a brief update on the status of some of the $1.7 billion of major growth projects coming online in the second half of 2013 and in 2014.

As mentioned earlier in the call, our 100,000-barrel-per-day CBF Train 4 expansion is operational. Consistent with the estimated timing included in our 2013 fiscal year guidance given last year, we expect CBF Train 4 to contribute to third quarter operating margin and to be fully contributing to operating margin sometime during the fourth quarter of 2013.

As briefly discussed in our last earnings call and as now reported in the industry, our expanded international export project will likely be completed prior to our term contracts beginning in October, which may allow us to service additional cargos in September.

We have firm take-or-pay contracts to load four BLGCs per month beginning in October, when the expansion will allow us to load total propane and/or butane in excess of three million barrels per month. We expect to bring the facility up in September, ramping up during September to that October rate.

We also expect to continue to increase our export loading capability so that we can load in excess of five million total barrels per month sometime during the third quarter of 2014 when the second phase of our export project comes online.

We continue to see strong demand for capacity reservations under multi-year take-or-pay contracts.

In North Dakota, there's a lot of hard work going on as we integrate and grow the footprint of the Badlands asset. Quarter over first quarter, our average daily crude throughput increased by 21%. Driven by producer activity, volumes are now beginning to ramp. And through the rest of 2013, we expect to at least continue with this rate of sequential quarter-over-quarter volume growth.

We are adding growth-related infrastructure projects that will capture existing producer volumes in the Badlands that are currently being trucked out. That work will capture new near-term dedicated volumes, and that work will position the system to access dedicated volumes related to future producer drilling plants.

Through the rest of 2013 and 2014, we expect to almost double the miles of pipeline on our system, doubling just to serve expected drilling on our existent dedicated acreage.

We expect that the combination of volume growth from producer activity and the ongoing construction in our areas of dedication will result in significant increase in both crude and natural gas volumes by year-end 2013. We continue to expect the Badlands acquisition to be accretive during 2014.

So, in conclusion, as you can tell from our overall comments today, Q2 was an important quarter for Targa. We continued to execute according to plan on our major growth projects coming online and on our ongoing business performing well, even with lower NGL prices.

We have said that 2013 is a transitional year for Targa. With our business performing very well and the timing of some of the projects coming on, we believe that you will look back and see the second quarter as clearly an inflection point or an inflection quarter for our transitional year.

We're looking forward to having some of our highly visible growth projects starting to contribute to margin in the third quarter and believe that the scale and diversity of our business and those growth projects will support continued distribution growth in 2013, 2014, and beyond.

The solid performance in Q2 underpins our comfort with our guidance on volumes, EBITDA, and distribution and dividend growth.

So with that, we'll open it up to questions. I'll turn it back to you, Operator.

Thank you. (Operator Instructions)

Edward Rowe, Raymond James.

With crude spreads tightening in the [backward dated] market, how have you guys -- how has really customer reaction around the Saddle Butte asset base, has that changed or -- compared to what your views were almost six months ago?

The change in spread has not slowed down overall producer activity in our area at all. We have seen some switching month to month of where a producer would prefer for their barrels to be getting off of our system, and we expect that to continue. That's why we're trying to provide them multiple outlets off of the system. That's really the short answer.

Okay, very good. And given that we're seeing approximately 30% to 35% of natural gas being flared in the Bakken, do you guys see some incremental opportunities within the Midstream space to really capture some of these constraints?

Gas gathering and processing is very much a part of our strategy in the Bakken. We've got a lot of work to do. We've been reengineering the existing plant. The third plant's going to be coming on in -- the second train is coming on in the third quarter, not the third train in the second quarter. That's way too much talking. It's coming on now.

We are working with operators, producers to improve how their system is bringing gas to our gathering system. We have reengineered the plant to better handle too many liquids coming into the gas, and we're going to be improving that over time. We like the up side, and we're trying to help out with the flaring situation.

All right, very good. A couple more questions. Given the expectations that the Gulf Coast could get really saturated with condensate, although we're not really seeing that in prices, could you see -- could this really open a door for maybe refined product exports at your facility and maybe condensate splitting capabilities?

The industry knows that we're looking at condensate splitting projects. And as far as exports, our Galena Park export facility is pretty much committed on what we handle through it right now. We do handle refined products, and we're looking at refined products through the Patriot dock, not necessarily for export.

Okay. And last and final question. There's been some chatter around the TMS in Cotton Valley, and I know the Coastal G&P segment is a little south of that, but are you guys seeing some extensions north with your facilities to capture some of these volumes?

I am bullish, though it's not in our guidance or our forecast, about the positioning of our Coastal Straddle operations. You mentioned the TMS. We've told people we'd been benefiting with the Wilcox. We've had discussions with probably most of the producers working on the TMS. We've got existing facilities that can potentially serve that should they have significant gas processing needs. I'm also -- think that the positioning into Coastal Straddle prospects over the next few years will benefit from increased activity in the Gulf of Mexico.

Thank you. That's all I had.

Thank you. Matthew Phillips, Clarkson.

We've seen a nice little bump here in propane prices the past month or so during July, $0.20 or so, back up into the 90s on a per-gallon basis. If this sustains itself, we could see average NGL barrel maybe back in the 80s. How do you see that impacting your coverage guidance for the remainder of the year?

I was -- we were trying to be clear how we felt about our overall guidance at current price levels. Our current price levels are in the low 80s right now for our barrel, and prices will go up and down and around current prices levels, in our opinion, for the remainder of the year. We feel good about our guidance at current price levels. I think I even said that if prices were to go down and stay down below current price levels, we might be a little bit lower than our expectations for 2013 but not materially. And if prices go up from current levels and stay up from current levels, we might be a little bit above but not materially.

Okay, thanks. That makes sense.

On Galena Park, what's your rough breakdown on propane versus butane exports? And as we -- butane exports are pretty seasonal contra the blending season, and do you expect the expansion will be online to maybe capture some butane spot exports before blending season kicks in?

If you look back historically, our performance on propane versus butane has ranged from 20% to 30% butane. Prospectively, the large VLGC contracts that we have have rights to take percentages of butane that that would be representative of.

In terms of before the blending season, waterborne butane isn't as seasonal as US butane use, and there wasn't a seasonal, a percentage difference over the last year historically.

Okay, great. That makes sense. That's all I have. Thank you.

Thank you. (Operator Instructions)

Okay, not showing any further questions in the queue, I'd like to turn the call back over to management for any further remarks.

Thank you, Operator. To the extent anyone has follow-up questions, please feel free to give us a call. You can call me, Jen, Matt, any of the rest of us. Thank you again for your time today, and we look forward to speaking with you in the future.

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