Targa Resources Corp. (TRGP) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Targa Resources First Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Joe Brass, Director of Finance. Please go ahead.

Thank you, operator. I’d like to welcome everyone to our first quarter 2012 investor call for both Targa Resources Corp. and Targa Resources Partners L.P. 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 after the call. Speaking on today’s call would be Joe Bob Perkins, Chief Executive Officer, Matt Meloy, Chief Financial Officer and Treasurer. Joe Bob and Matt are going to compare our first quarter 2012 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 Harbors provision of the Securities Acts of 1933 and 1934. Please note that actual results may 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, 2011 and Quarterly Reports on Form 10-Q. With that, I will turn it over to Joe Bob Perkins.

Thanks, Joe. Welcome and thanks to everyone for participating. Besides Matt and myself, there are several other members of management who will be available to assist with Q&A. For today’s agenda, not unlike previous calls, I’ll start off with a high-level review of performance, key accomplishments and business highlights for the quarter. We’ll then turn it over to Matt to review the Partnership’s consolidated financial results, segment results and other financial matters for the partnership. Matt will also review key financial matters related to Targa Resources Corp. Following Matt’s comments, I’ll provide an additional update on some of our ongoing activities, and we’ll take your questions at the end. We’re off to a great start in 2012 with strong operating and financial results for the first quarter and with solid performance across almost all aspects of both our Gathering & Processing and our Logistics and Marketing divisions. As we execute our growth strategy, the Partnership’s diverse midstream platform continues to benefit from strong industry fundamentals. And that same platform provides an exciting inventory of announced and potential growth projects. We reported first quarter adjusted EBITDA of $145 million, which resulted in distributable cash flow of approximately $106 million. Distribution coverage was 1.5x based on our first quarter declared distribution of $0.6225 per quarter or $2.49 on an annual basis. The Partnership’s first quarter distribution represents a 12% increase compared to the first quarter 2011. Moving to the business highlights for our Gathering & Processing division, first quarter operating margin for the division increased 22% over last year. In almost every case, business unit plant inlet and NGL production were up over this quarter last year only exception was Coastal Straddles were inlet was down, but NGL production was up. The Field G&P segment reported a first quarter 2012 operating margin increase of approximately 20% compared to the first quarter 2011. This increase was the result of increased volumes in all of our Field G&P business units North Texas, SAOU, Sand Hills, and Versado. Volume increases driven by very active drilling and production activity. Inlet and gross NGL production for the segment both increased about 14% over first quarter 2011. These increasing Field G&P volumes are primarily from very active and growing resource plays some with years of remaining locations. For example, the Wolfberry oil wells in the case of SAOU, Wolfberry and Bone Springs oil wells for Sand Hills and high liquid gas wells from the oily part of the Barnett in North Texas. Also, if you recall, last year at this time, we had a normally cold weather. This year the mild weather benefited our field operations. First quarter 2012 Coastal G&P operating margins increased approximately 28% over first quarter 2011. The increase was primarily attributable to increased gas purchase for processing at VESCO, higher system liquid content at LOU due to wellhead volume increases we’ve talked about before, continued optimization of throughput and favorable frac spread. Our coastal assets are well positioned for future growth opportunities as well. Well positioned as we see permitting activity in the Gulf of Mexico return to normal. As we see onshore activity heat up in the Wilcox and Austin Chalk. And as we begin to learn more about early indications for the Tuscaloosa Marine shale, sometimes referred to as a TMS or Louisiana Eagle Ford. The ongoing industry dynamics, which are increasing NGL production from Targa and other companies Gathering & Processing facilities, also increased volumes and activity downstream, an increased demand for incremental NGL infrastructure, which benefits our Logistics & Marketing division. For the first quarter, operating margin from our Logistics & Marketing division increased 26% over the first quarter of 2011. While operating margin in the distribution and marketing segment was down versus 2011, the segment really performed quite well given weaker price environment and the low heating demand caused by a warmer than average winter. The logistics asset segment benefited from increased fractionation volumes primarily due to CBF’s Train 3 Expansion increased treating fees due to our Benzene project coming online in January and to some extent from Petroleum Logistics terminals and increased LPG Export activity versus this quarter last year. That wraps up my initial review 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. Let’s start with the review of the consolidated results. For the first quarter of 2012, the Partnership reported net income of $70.1 million compared to $37.8 million for the first quarter of 2011. The income per diluted limited partner unit was $0.63 and $0.37 respectively. As Joe Bob mentioned, adjusted EBITDA for the quarter was $145.4 million significantly above the $107.4 million for the same period last year. The increase was primarily the result of higher operating margins across the Gathering & Processing division and in the Logistics assets segment, partially offset by lower marketing and distribution operating margin. Overall gross margin increased 22% for the first quarter compared to last year. Again, strong performance across those divisions drove the gross margin improvement. And I will review the drivers of this performance in our segment review. Growth maintenance capital expenditures were $16.5 million in the first quarter of 2012 compared to $12.8 million in 2011. Adjusting for the non-controlling interest portion of maintenance CapEx and certain reimbursements from TRC to the partnership, net maintenance capital expenditures were $14.3 million in the first quarter of 2012 compared to $8.2 million in 2011. Before we move to segment performance, let me touch on one more item, as we explained last year when we rolled out our 2012 guidance, we plan on providing guidance on an annual basis. So we are not modifying our 2012 guidance at this time. However, there are a few items I would like to point out for you to consider for the second quarter. The first quarter benefited from positive items that may not occur every quarter such as system gains and contract settlements. In addition, there are some planned outages that will affect VESCO and GCF in the second quarter. Finally as you’re all well aware, NGL pricing is weaker so far this quarter. Turning to the segment level, I’ll summarize the first quarter’s performance on a year-over-year basis for all segments and then I’ll summarize the performance on a sequential basis. We’ll start in our Gathering & Processing segment. Overall first quarter 2012, plant natural gas inlet for the Field Gathering & Processing segment was 655 million cubic feet per day, a 14% increase compared to the same period in 2011. Field Gathering & Processing operating margin increased by approximately 20% compared to last year driven by increased throughput volumes and higher condensate prices offset by lower natural gas and NGL sales prices. All systems had higher volumes compared to last year, North Texas, SAOU, Sand Hills and Versado natural gas inlet increased by approximately 22%, 8%, 19%, and 7% respectively. Activity continues in the oilier portions of the Barnett Shale and in the multi-zone oil plays now largely resource plays in the Permian Basin. For the Field Gathering & Processing segment natural gas prices decreased by 32%, while NGL prices decreased 5% and condensate prices were 9% higher. Turning now to the Coastal Gathering & Processing segment. Operating margin increased 28% in the first quarter compared to last year. The increase was primarily driven by more gas purchase for processing at VESCO and other Coastal Straddles and increased inlet and higher liquids content at LOU, largely due to increased wellhead volumes. While the overall Coastal G&P segment inlet natural gas volumes decreased 1%, inlet volumes at both VESCO and LOU increased 13% when compared to first quarter 2011. As we have discussed, NGL production is more meaningful than inlet volumes for Coastal G&P and relative to other Coastal G&P volumes, LOU wellhead and certain new VESCO volumes are richer in NGL content. As a result, NGL production for the Coastal segment increased 7% in the first quarter of 2012 as compared to last year. Next I’ll provide an overview of the 2 segments and the downstream business. Starting with the logistics assets segment, first quarter operating margin increased 93% compared to the first quarter 2011. This impressive increase which is predominantly fee-based was driven by increased throughput volumes at CBF due to the Train 3 Expansion, increased treating volumes due to the start-up of the Benzene unit and by the new contributions from the Petroleum Logistics terminals. In the marketing and distribution segment, NGL sales volumes for the quarter stayed relatively flat compared to 2011. And operating margin for the segment decreased 20% over the first quarter 2011 driven by a weaker price environment and less favorable marketing margins as a result of lower heating demand. With that review of Q1 results, now let’s discuss the few key sequential comparisons for the first quarter of 2012. First quarter operating margin for the Field G&P segment decreased 2% compared to the fourth quarter of 2011. The decrease was primarily the result of significantly lower gas and NGL prices offset by a 4% increase in inlet volumes. Moving to the Coastal Gathering & Processing segment, operating margin for the segment decreased 12% compared to the previous quarter. The operating margin decline was driven primarily by lower NGL prices. Turning now to the downstream business. In the logistics assets segment, operating margin increased 15% sequentially, due primarily to system gains and the startup of our Benzene treating facility. Fractionation volumes for the first quarter 2012 were relatively flat compared to the previous quarter. The marketing and distribution segment, operating margin decreased 15% compared to the previous quarter due primarily to a weaker price environment into a warm winter. With that, let’s now move briefly to capital structure and liquidity. On March 31st, we had no outstanding borrowings under the partnership’s senior secured revolving credit facility. With outstanding letters of credit of $77.6 million, revolver availability was over $1 billion at quarter end. Total liquidity including $88 million of cash on hand was approximately $1.1 billion leaving us with ample flexibility to pursue organic growth and acquisition opportunities. Total funded debt on March 31st was approximately $1.4 billion or about 47% of total capitalization and the Partnership’s consolidated leverage ratio at quarter end was approximately 2.6x below our target range of 3x to 4x. We had a busy and productive start to 2012 financing in January with 2 capital markets transactions resulting in $565 million of new capital raised, which essentially financed our announced growth CapEx program for the year. Next I’d like to make a few comments about our hedging and capital spending programs for the year. Our hedge percentages including hedges added in April are similar to how we hedged in years past. Relative to the partnership’s expected equity volumes from our fuel G&P, we estimate that we have hedged approximately 60% of 2012 natural gas and 80% of 2012 combined NGL and condensate. For 2013, we have hedged approximately 45 to 55 of expected 2012 equity volumes for natural gas, NGLs and condensate. Moving on to capital spending, we estimate on a net basis approximately $650 million of capital expenditures in 2012 with approximately 12% of the total comprising maintenance capital spending. The estimate does not include our share of investment related to our minority 38.8% ownership in the expansion of Gulf Coast Fractionators. Before handing the call back to Joe Bob, I would like to make some brief remarks about the results of Targa Resources Corp. On April 11th, TRC declared a first quarter cash dividend of $0.365 per common share or $1.46 per common share on an annualized basis representing an approximately 34% increase over the annualized rate paid with respect to the first quarter of 2011. TRC standalone distributable cash flow for the first quarter came in at $14.4 million which was approximately $1 million lower than total dividends. We expect DCF to fully cover dividends for full year 2012. TRC standalone G&A expenses in the first quarter were $2 million. We expect a similar amount of G&A expense in the second quarter. At March 31st, TRC had a cash balance of approximately $35 million which gives total liquidity of approximately $110 million. At March 31st, the balance of the TRC Holdco loans due 2015 was unchanged at $89.3 million and there were no borrowings under the $75 million senior secured revolving credit facility. That concludes my review. So I’ll turn the call back over to Joe Bob.

Thanks, Matt. To wrap up our prepared remarks, I’m going to provide a few highlights of ongoing projects. In the fourth quarter of 2011, we announced a North Texas Longhorn project in response to increased production, significant producer activity and expected increases in inlet gas and NGL volumes in the liquid rich area of the Barnett Shale that we serve. This 200 million cubic feet a day cryogenic gas processing plant project is estimated to cost approximately $150 million and is backed by significant new acreage dedications. With much of the equipment ordered in offsite work underway, it’s expected to be on line mid 2013 or perhaps later depending on the uncertain timing of the new EPA permit approval process. In addition to the Longhorn Project, other North Texas expansion activity continues. With activity levels and growth capital investment expected to be similar to 2011, as activity continues in the area and Targa attempts to meet the growing needs of our producer customers. In the Permian Basin, we are experiencing continued producer activity, active leasing, active vertical and horizontal drilling and increasing producer knowledge of how to exploit the multiple stacked oil plays of the Basin. The Spraberry/Dean/Wolfcamp/Cline AKA Wolfberry in the Avalon/Bone Springs are impacting our facilities. This activity significant new acreage dedications and increasing volumes at both SAOU and Sand Hills have already resulted in 30 million cubic foot a day plant expansion projects at both locations. Both are approved and underway for a total incremental capacity of 60 million cubic feet a day, new processing capacity that will be in place by the end of this year and we see additional expansion expected in the future. The Benzene Treating project is now online and providing additional fee-based margins with term user pay contract arrangements. Construction continues on our $360 million fee-based 100,000 barrel a day Train 4 Expansion at CBF. And it is scheduled for a second quarter 2013 start up. As we have previously mentioned, this capacity is fully contracted for term with high levels of frac-or-pay commitments. Furthermore, we are seeing a high level of customer interest for additional Targa fractionation capacity, significant demand for a new 100,000 barrel a day Train 5. The engineering fee study will be completed in mid May and permits have been submitted. Our approximately $250 million international grade propane export project where we are adding facilities at both our Galena Park marine export/import terminal in our Mont Belvieu complex to provide for the export of low ethane propane is expected to be operational by the third quarter of 2013. We have had tremendous response from the international market since we announced the project. Even though the facility will not be operational until 2013, we already have multiyear user pay commercial contracts in place for a substantial piece of our new international propane export capability. We’re currently executing growth projects and pursuing additional growth capital investments in each of our 3 Petroleum Logistics terminals. And as we’ve said before, we plan to continue our terminal acquisition and development strategy. In conclusion, we are very pleased to see first quarter results continue the strong 2011 year-end increases for both of our divisions. These results clearly illustrate the success we are seeing across our diverse asset base. We’re confident in the continued underlying industry fundamentals that support growth across our diverse midstream platform. And as mentioned earlier, we have over $1 billion in announced growth projects coming online throughout 2012 and 2013 adding to our scale and diversity. These are attractive projects with attractive returns, attractive multiples to EBITDA and they provide a high degree of visibility on incremental fee-based business and on our future financial performance. And we’re continuing to develop high-quality projects I alluded to some of them a little bit ago that were in response to customer demand for quality well run midstream infrastructure. The partnership has a very good track record of delivering on strong growth. And with our $1 billion of liquidity, 2.6x leverage ratio, strong distribution coverage providing additional growth capital, the Partnership is well positioned for future growth. As we previously pointed out with our January financings completed, we’ve essentially funded all of the announced projects. Again we’re very proud of our 2012 first quarter results and proud of all the Targa employees that made it possible. Operator, now we’re ready to take any follow-up questions.

[Operator Instructions] Our first question comes from Darren Horowitz from Raymond James.

Joe Bob, beyond the 60 million of plant expansions that you mentioned at SAOU and Sand Hills, based on the discussions that guys you are having with producers, can you give us a little bit more color on what you think the future expansions across those systems could look like?

We see scales larger than that readily available 30 million a day at each location. We’re working with producers on that, studying the right size and looking for contractual arrangements.

Okay. Shifting over to the propane export facility, can you just remind us on a barrels per month basis what the capacity that’s going to be and if you could give us a little bit more detail as the amount of that capacity that’s booked on those multiyear contracts you said that would be helpful?

It would be helpful. I don’t attempt to say more about the contractual arrangements than what we said in our prepared remarks. But I will remind you of what we said about the capacity of the facility, it’s up to 4 of the very large ships and you can quantify the ships as averaging about 550,000 barrels -- 540,000 to 550,000 barrels per ship -- per month.

Okay. So loading capacity should be about 5,000 barrels an hour more or less?

The 5,000 barrels an hour is important in that overall capacity situation as is the dock situation in getting ships in and out. It’s for us on our capability being up, up to 4 of those large ships per month.

Last question from me. Can you just share your thoughts as it relates to the propane markets as it sits today? Obviously we’ve got a lot of in inventory. Inventory seasonally built about 1 million barrels a week through October that’s obviously putting a lot pressure on propane and there’s a pretty big arb [ph] going on, certainly it swings seasonally. Do you think that the capacity you’re adding as well as some of your competitors is going to be enough to help balance that supply demand?

I think that export capacity is needed. I think the demand we’re seeing says it will be pretty fully utilized. And I believe that it does help pricing. My pricing crystal ball isn’t any better than anyone else’s out there and I think we will see a lot more about propane pricing come this second half of the year and as we go through next winter.

Our next question comes from Michael Blum from Wells Fargo.

Just a couple of quick questions from me. One, in terms of this fracturing side that you’re talking about, will this also be frac-or-pay contracts and what percent of that capacity do you need to have signed up to move ahead completely?

I would anticipate that the contracts would look very similar to the most recently contracted. I don’t have a measured percentage that I was going to -- would announce on this call on to how much would be full before we announced it. In the past, we’ve announced projects after we had some commitments and then they quickly filled up.

Okay. Let me ask that in a different way. Do you expect this one to also ultimately be a 100% contracted based on the demand?

Well I would expect that ultimately it would be a 100% contracted, yes. The demand is very large.

Okay. And then in terms of your refined product terminal initiatives that you undertook probably under a year ago, where does that stand and any update there?

You’re breaking up just a little bit, Mike, or it’s my hearing and probably a combination of both. Please repeat the question.

Sure, sorry. Refined products -- your refines product storage initially that you undertook.

Yes.

Can you just provide an update of where that business stands, where that initiative stands?

We announced in May 3 acquisitions. We are improving them commercially as well as adding physical capability at all 3. And we’re continuing to pursue additional acquisition or development opportunities.

Our next question comes from James Jampel from HITE.

Just one quick question. How should we think about cash taxes going forward at the C Corp?

Sure. We estimated earlier or actually late last year about a 20% effective tax rate on pre-tax distributable cash flow at TRC and we haven’t updated that range. So 20% of the pre-tax DCF is our estimate for cash tax list for 2012.

Our next question comes from Louis Shamie from Zimmer Lucas.

Just had a little bit of I guess more of a granular question about the Field G&P results this quarter. Looks like the gross margin was pretty comparable to Q4 and your NGL volumes were pretty comparable to Q4, but NGL realized prices were like $1.06 versus $1.27. Just wondering if there’s anything in there that did your contracts change or anything happened to kind of benefit you in that segment this quarter?

No. I don’t think there was anything structurally with our contracts that changed as a weaker NGL price environment but similar average contract terms from Q4 to Q1.

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

I guess just following up on Michael’s last question on the SAOU internal. I guess looking for a little more color on the $60 million and spend you’re having there and kind of what capabilities you’re looking to build out here. As the goal I guess given the high crude activity we’re seeing obviously to increase your crude oil capabilities here and then as we continue to see high demand for these types of services, do you think there is additional investment opportunities around these assets above that $60 million?

This is my time. Basically, we’ve got capital programs going on at all 3 terminals. We, out in Tacoma, we are in the process of building a connection to the Olympic pipeline. We are also working on unit train capability out there. We’ve got ongoing discussions with producers that have bottled up condensate and oil that can be moved by rail to the West Coast. We’re also doing the exact same thing in Baltimore. The primary thing that we’re doing in Channelview is we’re adding new storage tanks, we’ve leased acreage next door to us on a long-term contract. We’re going to add a substantial amount of storage there and we’re working on the connection to the deepwater port so that we can both import and export both crude oil and fuel oil.

And as we said in the past particularly in this area that was capital projects were preceded by commercial agreements.

I guess just moving on kind of bigger picture on Gulf of Mexico activity. I know you’ve mentioned you expect permit activity kind of back to normal by the end of 2012. Just kind of curious how this timing translates to volumes from your perspective I guess asking really. How quickly do you anticipate producers being to get supply to shore to show to more of a noticeable impact for you?

Recent indications are that permitting activity actually made the exceeding what were previous normals or averages, probably a function of bottled up demand for that. So permitting the activity is the leading indicator as above average and technology in the place that they’re working on would say that production time to shore will be shorter than it had been in the past much shorter in some cases and we’ll just have to wait and see.

Okay. Fair enough. I guess just lastly a little bit more granular, in the logistics segment, can you tell me what amount of the sequential uptick in margin there was due to the Benzene Treating?

I don’t have -- I don’t look at the sequential nearly as much as you’ll do. I don’t have that now.

No, we haven’t broken out our projects within our CapEx program on an EBITDA by project basis in the past.

And that was a partial quarter result as it did not come on until January, in January.

Good point.

Our next question comes from Scott Fogleman from Credit Suisse.

I just have a quick question. What sort of opportunity backlog are you seeing with the propane facility and other companies reporting – their phones are ringing off the hook and we’re curious if you’re having the same problem.

Opportunity backlog on the propane facility, we’ve got very high demand for that facility well ahead of it being completed if that’s what you mean to the point that I think the term I used was a substantial portion of its already contracted.

Okay. And by substantial, does that mean greater than 50%?

No I used that word substantial on purpose and I’m not going to take it.

Let me say one thing about that. We -- the way we announced the project, the way we went into construction was to get it going not because it’s going to be our ultimate result and we are looking at expansion of that project right now.

Yes, in other words increasing the capabilities that we previously announced, we are looking at that.

And I think there also will be opportunities for supplying propane for proposed propane dehydrogenation units on the Gulf Coast. So, we I think there is a high probability we’ll be expanding Belvieu and Galena Park facilities for both activities.

Okay. Let me rephrase what I was getting at early as far as opportunities. The unannounced project backlog, I mean, you just mentioned you could very likely expand your propane facility. If you had to could you put a dollar figure on…

No, not prepared to do that.

Not prepared to do that. Fair enough. That’s all I have.

Our next question comes from Walter Kass [ph] from Kingfisher [ph].

Mr. Perkins. I have a top down question and that is let’s say distribution reinvestment, excuse me, dividend reinvestment plan is possible at TRGP. What would be advantages and disadvantages be to both TRGP and shareholders?

We’ve looked at dividend or distribution a bit in the past participation is generally pretty low for those programs, but it’s something we’ll continue to evaluate over time and if we think it make sense we’ll consider it.

[Operator Instructions] Our next question comes from Jeremy Tonet from JPMorgan.

It seems like Targa has quite a robust organic growth program over the next couple of years. I was just wondering if you could comment on the Partnership’s appetite for acquisitions that could potentially create new platforms and set up new opportunities for a longer dated growth.

I almost put in a bullet point, because we always get this question and I guess that I can replay on the same answer. We’re always looking -- we’ve got appetite. We probably participated in as many in the first part of this year as we did the first part of last year and when we have one to announce, we’ll let you know about it, but we so far don’t have any acquisitions to announce.

I’m showing no further questions at this time. I will now turn the call back over to Joe Bob Perkins.

Thanks, operator. If you have any other follow-up questions and feel free to contact Matt or any of us. And we thank you again for your time and interest.

Thank you. Ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.