Targa Resources Corp. (TRGP) Q3 2013 Earnings Report, Transcript and Summary

Welcome to 13th Investor and Analyst presentation 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 TRP or the partnership have published their joint earnings release which is available on our website at www.targaresources.com. We also posted an updated Investor presentation on our website which we will be using today. So please access the presentation via webcast or through our website, so you can follow along. 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 Q&A. Matt will cover the first part of today’s presentation which includes a review of our third quarter 2013 results, as well our financial and operational guidance for 2014. Following Matt discussion of third quarter 2013 results and 2014 guidance, we will begin our 2013 investor and analyst presentation, which will include an update from Matt and Joe Bob on the partnerships business operations and a Q&A session with the following Targa executives and officers available to participate. We’ve got Mike Heim, our President and COO; Hunter Battle, VP of Logistics and Marketing Assets; Scott Pryor, VP Liquids Marketing and Trade; Vincent DiCosimo, VP Petroleum Logistics; Danny Middlebrooks, VP Gas Supply and Development Badlands and SAOU; Clark White, VP Permian and North Texas, Rene Joyce, Executive Chairman; Jeff McParland, President Finance and Administration; and Jim Whalen. Pursuant to the disclosures on slide two of the posted investor presentation, 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 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 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 Matt Meloy.

Thanks Jen. Welcome and thanks everyone for joining us today including those who are with us in Houston and those participating by via the webcast. As Jen mentioned I will start off with a review of and commentary on the third quarter 2013 and we will than move into financial and operational guidance for 2014. For those of you on the webcast I will be starting with slide five. Starting on slide five, the top graph. This is a record quarter for Targa as our third quarter adjusted EBITDA of a $156 million is the highest reported quarter ever and was 34% higher than the same time period last year. The increase was driven by higher volumes in natural gas and condensate prices and our gathering and processing division and higher fractionation volumes and fees and increased exports in our Logistics and Marketing Division. Our overall results show the benefits of diversity and increasing fee-based margin contributions. Fee-based margins exceeded 50% for the third straight quarter. Moving to the bottom graph, the operating margin was $200 million for the quarter, which is 24% higher than Q3 2012. Logistics and Marketing Division produced quarterly operating margin of $103 million, up 36% compared to the third quarter of last year, primarily driven by higher fractionation volumes, fractionation revenue at CBF along with increased LPG export and storage activity at our integrated Galena Park and Mont Belvieu facilities. We are pleased to announce that the first phase of our LPG export expansion at Galena Park and Mont Belvieu was completed earlier than expected and we began testing and commissioning in September. The expansion increases our export capacity to over 2 million barrels from 1 million to 1.5 million barrels a month to 3.5 million to 4 million barrels a month. In connection with…

Good morning, everyone. Kind of a mic check. We made a last minute audible that neither Matt nor I could get down to this one and sort of working on the lapel mic. Is everything okay? And they tell me that it’s working for the people on the phone as well. But still, so I’m happy to be talking with you today. If you pick the head I’ve got almost as much materials to cover as Mike has already covered, and I’m going to try to stay with the highlights that I could see here on Page 27. That really is the one page story. So if you fall asleep in the middle of my presentation come back to 27 and those are the headlines. I guess I’ll just start with a pretty good slide. Value creation for TRP since the 2007 IPO. We are proud of what we’ve accomplished. If you look at the top left hand chart capital spending from 2007 to today, there is only two eras. First, 2007 through 2010 when we were doing dropdowns and selected investments at the same time on growth capital. Then 2011 through 2014 we shifted, we shifted as the industry shifted to keep up with the demand, but we shifted to a lot of organic investments and selected acquisitions that are driving growth now and in the future. Our strategy from 2007 through 2011 really backed when we founded the company has been the same. The strategy of acquiring selected strategic assets in good locations has the right price. Taking those assets, better utilizing and better commercializing them and then constantly looking for new opportunities that play to our strength that’s the strategy we started with, that’s the strategy we’re doing today and that’s the strategy we’re going to do…

Thank you. (Operator instructions) And our first question comes from James Jampel from HITE. Please go ahead. James Jampel – HITE Hedge Asset Management LLC: Well, thanks for taking the call. If you could just comment on the revised 7% to 9% distribution growth for next year and how that dovetails into the eventual 1.1 coverage target? When should we be expect to see coverage actually moved significantly north of 1 million barrels?

There were two parts for the questions. The first part was how we would comment on the 7% to 9% distribution growth guidance. We believe that that is a reasonable range. Our guidance will usually hit 2% wide I expect to be within the 7% to 9%. How does that dovetails into our coverage, we expected that the improving coverage across 2014 and we’re ultimately headed towards that target about a 1.1 million barrels to 1.6 million. The back end of 2014 for example will have better coverage than the front end. James Jampel – HITE Hedge Asset Management LLC: Would 2015 be run at 1.1 coverage in total in your anticipation?

Well when we look at the coverage, the 1.1 to 1.2 long-term Targa covered does not necessarily any one-year, but if you look at 2014, there is about $900 million worth of projects coming on line in 2014, but we’re spending the capital be up in the door, but we won’t full credit for all the EBITDA. So we’ll still have continued growth and continued CapEx and our planned outlook for years. We don’t have as much visibility and don’t get into 2015, 2016 guidance. But as we look through three years, four years, five years and a forecast we look when the capital has turned out the door when the EBITDA is up and kind of about 1.1 times to 1.2 times out multiple years. James Jampel – HITE Hedge Asset Management LLC: Okay, thank you.

Thank you. And our next question comes from Stephen Maresca from Morgan Stanley. Please go ahead.

Hi Stephen, good morning. I’m on the phone line. You can listen to this. Hello.

Stephen. It looks like he has disconnected. (Operator Instructions) Stephen Maresca – Morgan Stanley: Hello.

Hello, Stephen. Are you there? Stephen Maresca – Morgan Stanley: Can you hear me?

Yeah.

I do not know why the shit I disconnected, sorry about that. Badland, the additional gas processing plan, can you talk a little bit about what the ballpark type of CapEx that could be for 2014, is that what happened? I don’t know if you can mention that.

What I mentioned is we haven’t yet decided the size that is necessary and that will impact the call Stephen Maresca – Morgan Stanley: Okay. Just on the M&A front, you haven’t done anything major since badlands in 2012, is that just a sign of where we are in the M&A cycle in terms of the expensiveness of the assets, do you see that dynamic changing or you just feel that organically you’ve got enough on your plate right now?

We’re still looking, but we do have a lot on our plate and we don’t need an acquisition today anymore than we did when we did our last acquisition, don’t expect us to be doing a major acquisition in the near future. The market that is always a funny market, sometimes people are paying too much for assets, sometimes people hang around the net and get a better deal. Stephen Maresca – Morgan Stanley: Okay. On the export side, obviously volumes are up a lot and you’re seeing some of the differential between the U.S. and international pricing come down a bit. I mean, how do you think that changes your abilities for another expansion project going forward or the types of returns that you’ve been able to receive there. I mean, how deep is this market for the next couple of years do you believe?

I think, I’ll answer the short one instead of taking the microphone back to the people who have been working on that, but I know from them that interest, negotiations are still very robust across some range of types of players. So, there is a lot of demand being expressed for our export capabilities. We’ve contracted fully for the first phase and we’ve got a nice return second phase already underway and that will be adding to our capability across 2014. Once that’s in place, we do have attractive returns, expansion would be bottlenecking, capacity additions on the market, we’re not announcing any of that. I think the market is deep enough for the best players. Stephen Maresca – Morgan Stanley: Okay. That’s all for me, thanks a lot.

You need to look out and see where Scott is sitting. Did I miss something? He said it was fine, he’ll correct me later. We got one from...

And there…

Go ahead, what you got?

[indiscernible]

Your microphone ball is not that good. I actually would not expect any of, many of those major projects to contribute in EBITDA in 2014 with the exception of the Badlands gas plant which we mentioned, so our projects that we’re spending money on that aren’t on the list of the 590 to 600 that will contribute EBITDA in 2014, I would say that we are at the $590 million of projected approved projects and that will add to that across the year. Is that okay. I didn’t repeat the question I’m so sorry the question was about the backlog and what percentage of the backlog might be spent in 2014 and what percentage of the backlog might be contributing to EBITDA in 2014 and so now you have the context for my answer, I apologize for those on the phone.

And a quick follow up on the backlog, you’ve mentioned that the condensate splitter has the potential add on to your export footprint, now that we’re starting to see some of the crude pricing on the Gulf of Coast back off, global prices maybe signaling that there is a bit of bottleneck around the Gulf Coast. Have that accelerated the amount of demand for that condensate splitting for other project and just a bit of the final one for me would be do you think we’d see ethane export as part of this LPG export boom and if we do just Targa participate in those ethane export projects?

Okay, taking the pieces of that. First there was additional interest or not on the condensate splitter projects that we’re working on and that separate and apart from LPGs. But I’ll look out in the room and I will just ask say Vince Di Cosimo to give me an up, down or even.

You said there’s more interest on condensate splitter that we’re talking about and that’s about as much I would want to say about. And you said ethane exports is going to be up a part of the LPG export boom, I think ethane exports are profitable and there is certainly one already there from the east coast facilities like ours could be a part of that. Those projects will have to have backing and the commitment of whatever counterparties who are that one ethane exports that spent a lot more dollars on the other side of the water that need to be spent on this side of the water, so it’s say its probably good capital. Did I missed anything in the question, okay great.

Could you comment on what type of activity you’re seeing in the Gulf of Mexico? And what that could being for target in future years?

Some of the people in this room know that I really like to talk about the Gulf of Mexico but I didn’t pay him to say that and I am not trying to hide the Gulf of Mexico. We’ve just got such a great set of assets across the Gulf of Mexico, the best characters that I believe for near shore Louisiana and offshore Louisiana. And we keep figuring out how to get more liquids and make more money would vest in with volumes. And I think we benefit from the consolidation that’s going on. I’m hopeful of renewed activity and renewed production particularly oil rich liquids oriented which is whether it will be. But I don’t see that in 2014, the research projects and the E&P work that you can read publicly also and I know from my petroleum engineering friends of my age and class that could lead to some thing. And that would be very attractive for our – for that small portion of our business. To give you an idea, we didn’t bring someone from the coastal segment to answer Q&A, but there is no one in the back of the rook shaking their head, nodding their head at.

I would appreciate.

Well, Mike did. Mike remains me of Mars be which is dedicated to Venice it is coming on and the shale has been committed to it and there hasn’t really been any slip in their schedule. That is certainly meaningful for the coastal segments and we see lots of other projects. We are working with those customers, I’m just not trying to oversell the 14, 15, 16 essential for that. But I think you’ll see it continue to help that segment, which is very good in making money.

Hey, can you talk a little bit just your approach, how you see the long-term demand story playing out, for liquids and you highlighted what’s going on up in the Bakken, and what’s going on in the Permian and now you mentioned the potential longer-term potential growth for the catchers mid in the Gulf region. And all I see is supply, supply, supply, supply. We know there is crackers come on board, but are we getting to the point where we aren’t be in a perpetual over supply situation. How do you see the demand catching up to the supply I know we are going to run out of runway?

That’s a risk question and we’ve probably spend six slides talking about it, but I’ll give you my summery review and then we can talk about it more later. The supply side of equations in this country has driven by the drill build, 80% dominated by drilling on oil right now. And on the global scale, that supply increases in the United States are not changing the macro supply and demand. So we are going to in my opinion exist in the world of pricing, the balance of supply demands for world oil that continues to cause the drill test to be as active in this country as it has been in this country. And just got to take you out to the innovativeness of U.S. E&P to continue to find and improve the productivity of horizontal oil wells. So I believe that continues. On the other side of the equation, the gas well inventories at pretty low prices becomes economic in my interpretation of what we saw in 2013 was even some spike in Haynesville drilling, dry gas drilling occurs when gas prices got a little bit up. So I suspect the natural gas supply demand will stay in balance, I don’t know exactly where and if that balance has been assisted by conversion to gas and then gas exports and price will be the valve that turns on how many dry or gas wells get drilled relative to their economics. Than you got it stuck in between and that comes with and that’s NGL that comes from natural gas wells and that comes from big gas from oil wells, those NGLs come, we could try to show the forecast of what’s happening and in the macrosense exports balance that also on the global scale where we’ve got long life, low cost or relatively low cost NGLs on the world scale. First ethane that becomes ethylene takes a few years to get that build, but it’s globally advances except for a few Middle East countries and if you are building a new pit camp to keep up with global demands, you might rather build this here than in the Middle East. So that’s taking care of exports at ethane and maybe you get the question all the time, maybe you export ethane not as ethylene that could occur. Than all of the other LPGs, so it’s not the content to get export it as well from gasoline to butanes and propane as a price clearing mechanisms. And that’s working and when it doesn’t work, prices will go down and then it’ll adjust. I’m not trying to predict prices I’m just trying to show this as multiple needs. Our company is pretty well positioned to do okay through this – sometimes over supplies, sometimes over supplied, sometimes exported then one catches up, as far as I can say.

So is that a reasonable short answer, I’m happy for any of team to give the better one because I often forget things.

So seems it long-term you see it in balance?

In balance, but always being a little bit long and then a little bit short and then having something compensate, there is only brief moments when it’s in balance. But not exports balance.

But there is no future, you are not afraid of any future tipping points of the permanent in balancing supply demand?

All right, I think there is a tipping point on ethane thing right now. We are tipping up to a lot of rejection which is compensating and handling this until the pet chems get built. And the same sort of things might happen in another LPG in there, just some one was talking about the condensate in oil, those are little tipping point that cause something to happen. But I think it works.

Okay.

And it works because we are low cost relative to most of the rest of the world supply and that’s important.

If I may just turn a little bit somewhere in the same regard, I’d allow the chart that you draw up here with a lot of separate triangles about the active rigs around the different systems. I’m just curious a little bit, how much of those – how is it all play out, I mean are those rigs where they are operating for the operators, have they already dedicated acreage of the volumes that you know, what’s common to you and what’s not common to you. Are those operation still jump walls where you can allow five of those volumes, you’ve shown all those rigs, clearly some are right overlapping the pipes and some are two, three inches away from where the current systems are, but are on the map. So I’m just trying to get it right and how that plays in?

You are right, we sell all of those to give you a macro view of the activity and if we actually went to on the people running into those area not on that scale of markets, circles the ones that are already dedicated and the ones that they competed for and maybe lost or compete for and one. If you trying to draw a circle around our system, the more you are in the centre of our system that more you can be pretty sure of it, that we didn’t even have to compete for. Further out from our system, the more might have been a competitor and might have been in the middle of their joining system and we have some system overlaps. So I’m not trying to say, please no one interrupt that we’re saying we get everyone of those, little triangle. But in our areas we can compete pretty going well, because when we say yes to our customer we take all the gas, we don’t have rolling brownouts and we have a pretty good reputation, if you hear anything about our reputation we maybe a hard negotiators, but we get the job done. Okay, thank you.

[Inaudible Question]

And with that, you are wrong when you talked about that’s going outside. With that we are as the producers come in this entire uses and good example. If you look back four years ago, they were drilling operator well. They were all vertical wells, we were connecting 300 to 350 wells, this is going to be less wells connected, that they are definitely will get a huge step for the number of horizontal rigs that we are seeing. It has higher IPs and I think that those dedication are fairly long-term and they are large areas, that chunk that came in at 10,000 and 20,000 to 30,000 acres.

For the people we didn’t hear when Mike picked up the phone, repeating just a piece of it for the people on the phone across our systems. It should not sound like, we’ve got a lot of jump balls going on within our system sort of system footprint, we’ve got lots and lots of dedication. That’s how we do business. That’s how the business is done and those dedications have been increased over the last several years.

Joe Bob, couple of quick questions as it relates to everything that you just laid out around liquids export, I’m curious over the next 18 months to 24 months. How do you see the development of the Patriot Terminal and Channelview, obviously Channelview more suited to doing if you will find product exports, and obviously there is a big opportunity t there, may be ultimately that’s were the splitter goes and it become so light after gas or oil export facility. Patriot is a little bit different, it can do those capabilities as well as propane, butane. So across the opportunities that if you could just rank it in terms of returns, how do those two terminals look in two years?

You sort of asked the question and then probably he gave a pretty good answer to it. Those are nice add-ons to our petroleum logistics, the Patriot dock has the potential down the road after other expansions of a 50% [Ph] of LPG exports. Our terminally work will be around whatever contract that is the most profitable maybe exports, maybe just been movement. But I really don’t want to say more than that relative to negotiations that are going on for those terminals. When the projects are up in running or do you see increases from talk about it.

Joe, I know the answer is great, but that’s all I want to know.

Let me add one thing about Patriot in particular, if you take a helicopter and you fly out into the Gulf of Mexico and then look at the mouth of Calis Bay and you see all the ships that are queued up there. Oil imports refined products, imports and exports that emerged on those ships are huge, the average weight is similar between 9 and 10 days out there for those ships to get into the port. That creates huge demand for utilization of large ship dock and we’ve got Patriot and we are working in our second Phase of the LPG export. We are building dock 4, it’s under construction and we’ve done engineering to build another dock. So that we can on the other side of our existing larger ship dock. So there is lots of demand out there, we are talking to a large number of companies that see the opportunities with all the pipeline our plump through that area plumbed through that area of Mont Belvieu to do all types of exchanges and exports.

A couple of years ago, I may have time a little bit, but a couple of years ago you guys assembled a team of people that where going to working on tunnel acquisitions doing M&A in terminal space. It was fairly consistent for your activity through 2011, into 2012 in terms of tunnel acquisitions it’s been very quite since. What happened to that team and what’s your strategy in that business?

So there is another project that’s out there, that’s the public because we have permits and options around it and that is stock-based and the team is certainly working on other things that would say and there is another little thumbprint that we’re turning into multi-fingerprint, and we are still interested in doing that. What some people have asked us about always do we look at the great big acquisitions like the health acquisitions. We don’t look at that one very long, but we would have been interested in pieces of parts. Vince, do you have anything you want to add to that? So there is another project that’s out there, that’s the public because we have permits and options around it and that is stock-based and the team is certainly working on other things that would say and there is another little thumbprint that we’re turning into multi-fingerprint, and we are still interested in doing that. What some people have asked us about always do we look at the great big acquisitions like the health acquisitions. We don’t look at that one very long, but we would have been interested in pieces of parts. Vince, do you have anything you want to add to that?

Okay.

Still active and still making those more profitable.

Patriot is part of that group.

Yep. So there was one other little acquisition there and just assets like that.

I have a question on the regions. You’re working on now. You’ve had a pretty toward pace of growth in the gathering side. I’m curious as to, is there a point where you see the demand – the activity having on your fields where you are gathering the gas. I’m just staying, when the build out – is there a point when the build out is close to an end of the beginning?

I need to take that by parts. Certainly, the Permian Basin, as far as, my rate our step goes, I don’t see the activity having there and around our assets being very well positioned across that Permian basin. North Texas, I think, I said in the past, I should have that activity in North Texas has decreased, the growth of it has decreased somewhat. We’re still growing volumes and that’s because resources have shifted to the Permian Basin pure oil versus very wet gas now. As an example, the Marble Falls is an oil play for smaller guy who have a position there and don’t have the position in the Permian Basin that’s very attractive economics. In the Bakken, I don’t want to see need for gathering slowing down there at all, we are slower. And for example, we talked about the later potential of our customer segments, there are just very few wells going on in Southwest Louisiana or on the offshore for immediate connections compared to other periods of time and that could improve versus getting slower. So that’s my kind of broad what does it look like. No more questions here, we don’t have anymore on the phone coming up. I’m actually going to say bye to the operator. Thanks operator. Anybody online who are sort of waiting for a question and didn’t get it in feel free to give us a call Matt, Jennifer or any other rest of the team and we’ll try to help you later. Okay. We’re going to still…

Yes.

Hang on a second are we cut off?

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.