Targa Resources Corp. (TRGP) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Targa Resources First 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 follow at that time. (Operator instructions) As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference call, Mr. Chris McEwan. You may begin, sir.

Thank you, Operator. I’d like to welcome everyone to our first 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.taragaresources.com. We will also be posting an updated investor presentation to the website after the call. 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 first 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 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 provisions 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 and 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’ll turn it over to Joe Bob.

Thanks, Chris. Good morning and thanks to everyone for participating. For today's call I’ll start off with high level review performance highlights. We’ll then turn it over to Matt to review the Partnerships consolidated financial results, its segment results and other financial matters for the Partnership. Matt will also review key financial matters related Targa Resources Corp. Following Matt’s comments, I'll provide some concluding remarks and then we'll get to questions-and-answers. Our reported first quarter adjusted EBITDA was $132 million, as compared to $145 million first quarter of last year, this was a 9% decrease in EBITDA compared to the first quarter last year. However, given the backdrop of approximately 30% lower NGL prices compared to the first quarter of 2013 versus 2012, the results show the long-term benefits of increasing fee-based margin contribution to our mix, the benefits of growth in our Field G&P and the growth in the export volume. I should also point out that the first quarter NGL prices were just slightly lower than those assumed in our 2013 guidance. So the first quarter results are tracking our full year outlook just slight. The fee-based Logistics Assets segment produced record quarterly operating margin of $56 million, up 31% compared to last year, primarily driven by higher fees for services across the segment, higher LSNG and benzene treating volume and increased LPG export activity which benefits both the Logistics Assets and Marketing and Distribution segments. The strong results for Logistics Assets segment were achieved despite somewhat lower fractionation volumes caused by third-party ethane rejection and third-party pipeline curtailments. Those somewhat lower volumes were partially mitigated by fracker pay minimum volume commitments. Marketing and Distribution increased compared to the first quarter of 2012, driven by the higher LPG export activity that I just mentioned, and by higher wholesale…

Thanks, Joe Bob. I’d like to add my welcome and thank you for joining our call today. Adjusted EBITDA for the quarter $132 million, compared to $145 million for the same period last year. The decrease was primarily the result of lower operating margin at our Gathering and Processing division, driven primarily by lower NGL and condensate prices, partially offset by 31% increase in our Logistics and Marketing division due primarily to higher LPG export activity. Higher fractionation fee and increased wholesale propane margins. Overall operating margin decreased 8% for the first quarter compared to last year. I will review the drivers of this performance in our segment review. Gross maintenance capital expenditures were $21.7 million in the first quarter of 2013, compared to $16.5 million in 2012, adjusting for the non-controlling interest portion of maintenance capital expenditures and certain reimbursements from TRC to the Partnership, net maintenance capital expenditures were $18.8 million in the first quarter of 2013, compared to $143 million in 2012. Turning to the segment level, I’ll summarize the first quarter performance on a year-over-year basis. We’ll start with our Gathering and Processing segments. Field Gathering and Processing operating margin decreased by 26% compared to last year, driven by lower NGL and condensate prices and higher operating expenses due to additional compression and maintenance cost associated with system expansion and the addition of Badlands. These effects were partially offset by increased natural gas plant inlet volumes, higher natural gas prices and margin contribution from Badlands. Please note that these segment results do not include the mitigating impact of our hedging program even though the hedging program is primarily associated with this segment. First quarter 2013 natural gas plant inlet for the Field Gathering and Processing segments was 729 million cubic feet per day, an 11% increase…

Thanks, Matt. To wrap up our prepared remarks, I’d like to review some highlights of the ongoing business in our growth project activity. As you know, our growth opportunities are being driven by the underlying industry dynamics of shale and resource play development, which are increasing volumes for both our Gathering and Processing and our Logistics and Marketing division. These dynamics have allowed us to execute over $1.7 billion of announced growth investments to be placed in the service in 2013 and 2014. Approximately 75% of that total $1.7 billion will provide primarily fee-based margin. By the way, we are very proud of how our people are executing on these projects an impressive on time and on budget track record. Now I’ll provide a quick status update on some of those growth projects currently underway. Our 100,000-barrel per day CBF Train 4 expansion has been delivered on time and on budget and has currently been commissioned. Capacity of Train 4 will be utilized to process Y-grade and advance of the Base Train 4 contracts which begin in August and also to assist while CBF conducts required safety inspections of certain pressure vessels associated with Train 1, 2 and 3 during May through July. Consistent with an estimated timing included in our 2013 fiscal year guidance, we expect CBF Train 4 to meaningfully contribute to third quarter operating margin and to be fully contributing to operating margin in the fourth quarter of 2013. Our expanded international export project remains on budget and is ahead of schedule, which might allow us to service a few spot cargos before the term contracts we have signed beginning in October. We expect the project which will enable us to load a total export in excess of 3 million barrels per month to be in service…

(Operator Instructions) Our first question comes from Bradley Olsen with Tudor, Pickering.

Good morning, guys.

Hey, Brad. Good morning.

So, obviously, you’ve guys have already talked about a dock expansion and have been very active down on the Ship Channel. But in light of two dynamic that have kind of emerge over the last quarter, one of those being a proposal of a pipeline to take Y-grade from the Marcellus down to the Gulf coast, the second of those being a dislocation and U.S. butane prices. Do you see opportunities -- incremental opportunities to expand given that you already have the footprint that I think some folks coming out of the Marcellus are looking for and do you see an opportunity to expand what has been mostly a propane focus export expansion into the butane side of things?

Thanks, Brad. I was actually getting some additional input and I’m glad because I would have forgotten to mention it. But you are right. Those are two very interesting and important dynamics. First, we've been expecting more or Marcellus Y-grade, Marcellus and Utica Year-grade to come to the Gulf Coast, started with enterprise project and the Boardwalk-Williams project is the best of those to turnaround. That brings only opportunities for us in the Gulf coast. And that product showing up comes to Targa assets that are very well-positioned to help. The dynamic Y-grade trying to get to marketing, getting to the Mont Belvieu and Galena Park benefit us and we were expecting it and are working with parties who were also expecting it. The [dislocation] in butanes, yeah, we’ve been seeing that and we are working with other parties. You are aware of our Patriot dock acquisition, which allows us to expand our Galena Park capabilities and removing the bottlenecks that might occur, as we try to handle multiple LPG from Galena Park, and expand our ability to do so. I think I will probably leave it at that. But commercial opportunities continue to increase and those are two dynamics that we think are favorable.

That’s very helpful. On the Bakken or the Babylon side of your business, when you made the acquisition you discussed roughly $250 million of additional capital expenditures that were needed to get the system kind of where you wanted it in light of any dynamics to that that you’ve observed in the last 180 days or so. Do you see incremental opportunities beyond that original $250 million? Have you been -- have there been any developments in the Bakken that have contrasted or compared with your original model case, and whether those be field gathering or an expansion of potential kind of rail loading facilities?

Well, that was a lot of questions, Brad. I will try to hit them all. First of all, the $250 million that we described, when we first made the acquisition was consistent with what was on the drawing board for 2013. It’s not getting the system to where we want to get it. We are going to be doing that in ‘13 and ‘14 and I see more opportunities not less opportunities than when we acquired it. And I’m not trying to be subtle, but we have been saying $250 million or more for 2013 and we haven't yet given guidance for 2014. We will do that in the fall of this year. Has anything changed relative to our model of Bakken and announcements in the Bakken? I do follow -- I try to follow the entire Bakken, but we have continued discussions with contracted producers and perspective producers in and around our system and I’m focused there. I can’t share that. I do view every public announcement from those producers with a highlighted part about what's happening in and around our system and I’m looking at the person who actually helps me do that work. And here's where I come out, is the activity in and around our system is better than we thought it was going to be, number one. Number two, the number of completions per trailing unit in and around our system are better than we thought it was going to be over time. And number three, the productivity of all of the completions that we are seeing are better than we thought it was going to be, when we made the acquisition. So if my enthusiasm is a little too loud, those are the reasons. It’s just the information has gotten better or not for three of those.

Okay. Great. That's helpful. And just one last question. Condensate pricing in our Field Gathering and Processing segment have fallen about 15% year-on-year. Is that, as you think about the build out of your Patriot acquisition? Is condensate exports or condensate handling a potential avenue that you could pursue going forward? That’s it for me. Thanks.

Yeah. When we made the announcement of the possibilities of Patriot, we said refine products as well as NGLs and you are correct. Condensate is one of the things that we are talking about. That’s Patriot. I should also say that Patriot works nicely with the Galena Park, but we also have a Channelview facility on the Ship Channel that has those same opportunities.

Our next question comes from Darren Horowitz with Raymond James.

Joe Bob, I just have one question for you. As it relates to your commentary around what you are seeing in the Permian, whether or not it’s a Wolfberry activity or decline or what’s driving a lot of those inlet volumes through Sand Hills. How much more capacity, as you are talking with producers, do you think it’s going to be necessary in order to keep the market effectively balance without degrading price?

The producer opportunity seem to increase every time I look and the Permian Basin is one of the most economic basins in the country and in the world. But when we say degrading price, we have two, three levels. Increases in U.S. production, really is not degrading global prices because it is cost competitively advantaged. At the same time there could be temporary dislocations in oil prices by markets sub hub. The Permian Basin is pretty well-connected for moving oil out. I think that’s one thing that producers have enjoyed about it. If WTI has varius discounts relative to Brent, that’s against the global. But WTI ability to get out of Permian is being improved as we speak. We are not yet involved in any of those projects, but we feel good about them. Anything else?

That's all I have, Joe Bob. I appreciate it.

Hey, you bet.

Our next question comes from Steven Maresca with Morgan Stanley.

Good morning, everybody.

Hey, how you doing? Good morning.

I’m doing well. Thanks. Question on the -- you mentioned, Joe Bob, 3 million barrels a day a month by third quarter ‘13 export. Is that all propane or is that a mix?

No. In fact, one of my colleagues was saying during the very first question, I should have clarify, that part of that butane question is, we -- typically is probably an okay word, have to 25% to 30% of those total exports being butane, the rest being propane. And as we come on for the VLGCs in the third quarter, most of the offtake agreements provide options for butane to be a part of the cargos and I would expect that they would be.

Okay. And what do you have to do to go from that three to five in terms of infrastructure or CapEx and how likely is that?

To go from 3 to 5…

You mentioned it’s going to 5 million by third quarter.

It’s a 100% likely.

Okay.

First of all. And second of all, those are sort of round numbers and my capability maybe a little larger than that in the third quarter of 2013 and little larger than that in third quarter of 2014. So I don’t want to mislead anyone. The types of project things that we have to do is increase some pipeline capacity and improve our dock space. We had some refrigeration as well. Mike, what did I leave off? That's the high level. And we’re always adding utilities and making sure it all does well.

All of those contracts have been left and all of it is under construction.

Mike, does not let us say, expect on time and on budget unless he is really expecting on time and on budget. And I want to say it again I’m really proud of our execution on all of these projects. We’re establishing a really good track record.

And then you mentioned also you’re still being able to get multiyear take-or-pay contracts. Is the market shifting at all or are you able for all these exports to majority or what would that be, 90% or more, is it under these type of multiyear take-or-pays?

Well, I haven’t announced percentages that are under those take-or-pays.

Okay.

The existing capacity has multiyear contracts but we’ve also been able to handle more than we thought we could. So we have some spot cargos as well. The 2013 third quarter expansion for international grade propane along with butanes is completely contracted but we maybe able to work some spot volumes in above that. And we see very high demand for contracting and have already contracting volumes that will begin in 2014 associated with that additional expansion.

Okay. And then final question, shifting gears to Badlands, appreciating you haven’t had it for a long while yet. What -- can you discuss a little bit of impacts of rail up in that region for this business going forward?

Okay.

Just love to hear some thoughts on that?

I’m borrowing a quote that I liked a lot. Some one else created it. To a great extent, the Badlands system is agnostic to how crude leaves. But been agnostic wasn’t to get producers the way to get out that they want at any particular time, which is to connect them by pipe better than they currently are. They wanted to go by truck. They wanted to go by rail or if they wanted to go from available pipeline capacity out of the area. Our connectivity strategy is all about that. Right now, crude going from our system may leave in a truck, may leave in a pipe. It may ultimately go away on rail. And our anticipation is to sort of agree with the industry view that rail has a long-term future for the Bakken. Leaving the Bakken, we’re preparing for rail. Leaving the Bakken to catch it either on the west coast through the east coast and help people with that as well.

Okay. Thanks very much guys.

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

Sorry, if I missed this. But did you or can you provide the margin impact that Badlands had on field G&P during the first quarter?

No. I didn’t provide that. And I would also say that whatever is in the queue is probably not as helpful as you would like it to be. But what I did say is that when you look going forward for the rest of 2013, the combination of Badlands and other things going on with projects, CBF Train 4, coming on -- the export facilities coming on is perfectly on track with the guidance we provided in our last call.

Okay. Thanks. I guess, just a follow-up on the Patriot Terminal again. Is the current thought there to take more domestic rate propane through Patriot or is there an opportunity for more butanes there? And then I guess as you look at optimizing the opportunities there, the initial investment was relatively modest, can you give us any idea of what type of growth capital would be required to develop some of these capabilities?

First of all, our initial thoughts in January that we shared with you was a strategy of both working refined products and LPGs in conjunction with Galena Park. That’s still our strategy because we are in commercial discussions with potential customers that will back the additional capital investment. I wouldn’t want to go into more details than that but that still is our strategy which is refined products and overtime been able to help Galena Park with additional LPGs. Yeah. That’s all we would want to share but it was -- they are very complementary asset with a lot of commercial interest.

Okay. Thanks. Fair Enough. I guess, just lastly the rail unloading and barge loading project at Tacoma. I think you said you’re back to taking manifest trains. When would you expect to be able to start planning unit train capabilities there?

I haven’t announced when we might start unit train capabilities there but we have said as we’re continuing to work on it.

Fair Enough. Thanks guys.

Thank you.

Our next question comes from Michael Blum with Wells Fargo.

Hey, Michael, good morning.

Good morning. I was curious if you could just expand. You said part of the slight downtick in frac volumes was third-party pipeline curtailment. So are you talking about NGL lines into Belvieu as long as you can just expand upon that to extent you can?

Yeah. NGL pipeline capacity into Belvieu experienced constraints in the first quarter. They were just full. That is -- I'm sorry, what you said. Yeah, there were full and one of them in particular that we saw had to go down for maintenance, also a little longer than they had planned. What was -- that was the second part to your question.

No. That was the first question. The second question is a similar question on constraints but in the Permian, are you seeing any constraints as it relates to natural gas takeaway, associated gas takeaway out of the Permian through your system or just in general?

Broadly, under Permian basin, as volumes have increased, people have been working around natural gas system which was designed for a lot more than it’s currently producing but compressor stations have been taken away and pipes have been derated. So I think you’ll see people working on that overtime. There are some constraints and there is also a nitrogen issue out there that we’re seeing.

Okay. And then last question is really just a point of clarification. When you talk about these acreage dedications around the Badlands system, are you talking about associated gas, oil, both or mix, what exactly?

I won’t give you exactly right now but we have announced an initial acreage dedications of oil, separate from gas, part of the reasons, lot of the gas is already committed. And we have more oil than we have oil and gas and we have a little bit, I think of maybe just gas. Of the acreage dedications, that occurred in the first quarter that I just announced, I didn’t give specificity about oil relative to gas but so far it’s primarily oil.

Right. Thank you very much.

Our next question comes from [Matt Black] with HITE..

I’m sorry didn’t get the name.

This is [Matt Black] with Hype. There are two quick questions is, first one is when you think about your propane and butane exports business, there seems to be market really accelerating. If you think three to five years down the line, what’s your vision for the kind of volume in each one of those products, you could see going through your system?

My vision. A lot -- many of those volumes go through our system whether they get exported or not. We’ve announced capability of providing $5 million barrels a day by the end of 2014. That’s the capacity. My vision is we wouldn’t have built that if we didn’t think we could use a significant portion of that capacity.

And $5 million a month.

Sorry. That’s 5 million barrels per month which is how we tend to think about it. I also think about barrels per ship but that’s a little more complicated to describe.

Given the volume of NGL production ramp in this country and strategic location that you have, is there another leg beyond that -- that you could leverage with your assets?

Potentially.

Okay. And then given the significance of your CapEx program over the course of the coming year and the opportunities that you have, how urgent is your need to come back to equity markets and have you thought about alternatives such as pipes that may reduce the need for the LP to do overnight?

We were always thinking about it. Matt is the person who thinks the most. He gets up in the morning. In Q1, I would say that we were pleased with the amount of equity we raised to $105 million through the ATM program. At that rate, we don't necessarily even see that as ceiling. There was some pretty light activity in March in just trading volume. So raising $100 million or so on a quarterly basis gets us a long way to the equity needs for the CapEx program we have this year.

Okay. That continues to be successful. It's possible you wouldn’t even need to do it overnight

If we’re able to raise the amount we need in the ATM but it’s based on market conditions, so to say during -- if Q1 is a good proxy of if we’re able to raise money, yeah, puts us in good position to use the ATM for the balance of our equity over the year.

Fantastic. Thank you.

Our next question comes from Louis Shamie with Zimmer Partners.

Hi. Good morning everyone.

Good morning.

So, my question is kind of around the Badlands asset. We saw CenterPoint kind of make a step out and announce that they were going to build a crude oil facility up around that same area. Can you talk a little bit about the competitive environment there and kind of the advantages that you might have versus other you may try to get business in that area?

We don’t expect to be participating without competition in a very attractive area. I saw that CenterPoint open season for non-existing asset also. We have other competition there. I want to put us in a position and working very heard to put us in a position of being the midstream provider that is doing the best in the area to meet the producers’ needs. And we have though admittedly very new assets, assets in place, connectivity strategy that gets them very soon to seven different points for delivery that’s -- I hate to ever say competitive advantage but that's at least a pretty good head start. And the producer customers that we already have dedicated to the system and are adding acreage or considering dedicate into the system, I think see that as advantage to their needs.

Yeah. That’s great. And in terms of Train 5 of CBF, what’s the outlook there?

Sometimes our federal government helps us in ways that don’t benefit business or customers. And the outlook for there is for us to go to our Board, get that approved and build it once we have a permit, as Mike announce last fall. I still feel very good about project. I don’t feel very good about process that’s gotten us to getting the permit but our competitors are facing some of the same issues.

Okay. Great. Thank you very much.

Our next question comes from (inaudible) with Millenium.

Good morning. It’s (inaudible) and thank you for taking my question. I just wanted to clarify some of the comments around the LPG export capacity. I know, you’ve gone through this but I was a little bit confused looking at the couple of different numbers and units. Would you mind us reviewing briefly the various increments of capacity that come on line and went over the course of next two years?

Sure. Speaking in barrels per month, we are -- we currently have capability of over a million barrels per month of domestic grade propane or butane exports loading medium size or smaller ships. Beginning in the third quarter of 2013, we will have added a significant chunk of capability which adds an incremental 2 million plus barrels per month of international grade propane or butanes on the VLGCs, very large ships. Similarly in the third quarter of 2014, we will add another 2 million barrels per month plus international grade propane or butanes for servicing export needs.

Okay. Great. And I believe you may reference to the fact that the phase one expansion was proceeding a little bit ahead of schedule and it was possible that it might come on and be able to service some spot barrels before your contracts become effective in third quarter. Is that correct?

That’s pretty well known in the industry, and I just wanted to go ahead and recognize that. We are already having discussions with our current customers and potential other customers. We will probably give it to our current customers for those spot cargos.

Okay. And I guess when, what month do you expect it to come online and when, what month of the contract, do the contracts or the capacity begin?

We did say what month the contracts begin. There is only a little bit of time before that in the quarter.

Which month is that that you said?

We said contract month was October.

Okay. Great. Thank you very much.

Our next question comes from Jeremy Tonet with J.P. Morgan.

Good morning, gentlemen.

Good morning.

I just had a question around ethane rejection and are you seeing that much in your areas of operation on the Gathering and Processing side? And then with the fractionators, the volumes came in lower this morning -- this quarter because of the ethane rejection now, although you are covered by the take or pay commitments there. I was just wondering if that trend has continued into this quarter, and how you think that might trend over the course the year?

Okay. First, let’s start in the Gathering and Processing and you said that we see ethane rejection in our systems. Starting with the Targa systems, we’ve had -- we barely had to regard to constraints but we had to react to pipeline constraints on the margin. We were in super good position because we had foreseen some of this and got an additional pipeline capacity, while waiting for the new pipelines to come out, so almost no rejection from Targa Gathering and Processing systems. We have ways we can work it by getting rid of liquids in local markets and that sort of thing. We did see in other Gathering and Processing systems, because we can see the pipelines coming into our Mount Belvieu facilities that other parties, particularly from the Permian for example. We are having to reject because it impacted, what was the ethane content coming into Mount Belvieu. In the Mid Continent and Rocky Mountains, we saw economic rejections, not a function of pipeline constraints. But probably a function of economic rejections though we weren’t pulling those levers. We were just observing it and I think I agree with industry news that it was occurring Moving to our fractionation volumes that resulted in slightly lower fractionation volumes, but the primary driver for that was the pipeline constraint for maintenance. And they weren’t off very much. And it wasn’t even hardly economically significant, certainly not as economically significant as the rolling up of fractionation rates but you’re also correct. It was partially mitigated by the take or pay contracts in those take or pay we described as typically 90% of volumes. It’s not surprising that some customer might not be ramped up to their total volume commitment level, yet, while expecting to ramp up to that quickly. We are largely covered by the frac or pay is probably better term than take or pay, largely covered by the frac or pay commitments until those volumes pick up to full expectations.

That’s helpful color. Thank you.

I’m not showing any further question at this time. I’d like to turn the conference back over to our host for closing remarks.

Well, we really do appreciate your time, appreciate your questions. If you got any other questions, please feel free to contact Chris, Matt, myself or any of us. Thank you, again for your time and we look forward to speaking with you again soon.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.