Targa Resources Corp. (TRGP) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to the Targa Resources Corporation’s Second Quarter 2019 Earnings Webcast and Presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to your host, Sanjay Lad, Director of Investor Relations. Sir, please go ahead.

Thank you, Tom. Good morning and welcome to the second quarter 2019 earnings call for Targa Resources Corp. The second quarter earnings release for Targa Resources Corp., Targa, TRC or the Company, along with the second quarter earnings supplement presentation are available on the Investors section of our website at targaresources.com. In addition, an updated investor presentation has also been posted to our website. Any statements made during this call that might include the Company's expectations or predictions should be considered Forward-Looking Statements and are covered by the Safe Harbor provision of the Securities Act 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 recent SEC filings, including the Company's annual report on Form 10-K for the year ended December 31, 2018 and subsequently filed reports with the SEC. Our speakers for the call today will be Joe Bob Perkins, Chief Executive Officer; Matt Meloy, President; and Jen Kneale, Chief Financial Officer. We will also have the following senior management team members available for Q&A session. Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Marketing and Bobby Muraro, Chief Commercial Officer. Joe Bob will begin today's call with a few strategic highlights, followed by Matt, who will provide an update on business outlook and then Jean will discuss second quarter results before we take your questions. Before I turn the call over to Joe Bob, I would like to bring your attention to update to our Company website. We recently introduced a new page to our Company website presenting our initial sustainabilty disclosures. We highlight our framework of policies, practices and systems in the areas of safety, environmental, social and governance complemented by our focus towards continues improvement in these areas. We plan to continue to progress our disclosures in these areas as we move forward. And with that, I will now turn the call over to Joe Bob.

Thanks Sanjay. Good morning everyone. Before we get into our prepared remarks this morning. I want to take a moment to mention our recently announced planned executive succession and management transition. As described in the press release effective March 1, 2020 Matt will become the Chief Executive Officer and will be elected to the Board of Directors. At the same time, I will become Executive Chairman of the Board and will remain as a member of the management team and Jim Whelan our current Executive Chairman will retire from the management team and will continue to serve on the Board of Directors. These changes early next year will continue the succession and transition in leadership, long contemplated and developed under target ongoing management succession plan. Of course, developed with an approved by Targa's Board of Directors. Matt is ready for and largely already performing his next role. And I look forward to continuing to work with him, the Executive Team and Targa's Board of Directors as Executive Chairman. On behalf with the entire Targa's team, I want to take this opportunity to thank Jim Whelan for his dedicated service and invaluable contributions on the management team and as a member of our Board across Targa's history. It is a privilege to work alongside Jim. Although it is hard for me to imagine Jim not being a part of the management team, we expect to continue to benefit from his wisdom as a readily accessible and highly interested Board member. So, kicking off the prepared remarks. It continues to be a special time at Targa with multiple important growth projects recently online and we look forward to increasing cash flow contributions from these highly strategic assets now online. Especially important our Grand Prix NGL pipeline, which just started flowing NGLs all the way to Mont Belvieu. We announced that we were building Grand Prix more than two years ago and is the largest and clearly most strategic single project in Targa’s history now having the pipeline in service as the realization of our integrated vision and a lot of hard work by many Targa people. Thank you to everyone who has been involved in the key project for Targa, it really underpins our excitement about the near-term and along - for our Company. With our premier assets customer reputation in both our gathering and processing business and our downstream NGL business with the Grand Prix pipeline further integrating those businesses and with talented leadership and employees Targa is exceedingly well positioned for the future. With that, I will now turn it over to Matt.

Thanks Robert and good morning. It is certainly an exciting time at Targa as we begin to benefit from cash flows associated with our significant investment cycle. These projects are coming online at a good time when the outlook for our commercial activity and production in many of our operating regions remained robust. Since the end of the first quarter, we have had the busiest and most productive period in Targa's history in terms of bringing on an aggregate gross value of about three billion of projects online, including Grand Prix pipeline, Fractionion Train 6, Hopson Plant, Little Missouri 4 Plant and the Pembrook Plant. Grand Prix has commenced full operations and have consistently flowed between 150, 000 and 170,000 barrels per day, first filling the pipeline and now flowing into Mont Belvieu. We expect these volumes to increase to approximately 200,000 barrels per day in September then further increase throughout the rest of the year as short-term third party transport arrangements continue to roll-off and as additional GMP facilities come online. Overall, Grand Prix came online, with about two months of delay versus our initial announcement timing provided over two years ago and about 10% over budget. Most of the delay and cost overrun was related to this year's construction of the 30-inch line in East Texas that flows into Mont Belvieu. This delay and related cost overrun was largely caused by longer permitting timing as well as weather related construction delays, primarily for much heavier than normal rainfall at critical times. Even with the increased overall cost for Grand Prix, our estimated returns are significantly higher than when we announced the project. As we have continued to add significant long-term acres contracts and CNF contracts, further strengthening the volume outlook for Grand Prix going forward. Moving to our gathering and processing business and beginning in the Badlands, we recently commenced operations of our new 200 million cubic feet per day Little Missouri 4 plant, providing much needed relief given our system has been operating at capacity. The plant is expected this quickly ramp through the balance of this year has incremental NGL take away capacity when the basin comes online. The final costs associated with LM 4 was roughly 30 million higher than originally estimated as a result of the shift and project timing, but again, given the strong outlook for volumes, we estimate our returns are at least as good as when we announced the project. Moving to the Permian, we are seeing volumes from the Midland Basin, even above our expectations so far this year. We commenced operations of our new 250 million cubic feet per day Hopson Plant in late April, and the facility is already operating at capacity. Our next 250 million cubic feet per day Pembrook Plant is starting up and is expected to be highly utilized. Given the volume growth that we are seeing across the Midland Basin, we are moving forward with our next new 250 million cubic feet per day plant named Gateway and anticipate that we will be online in the fourth quarter of 2020. Capital associated with a Gateway plant was previously included in our initial 2019 net growth CapEx guidance. And as we go forward, we expect our integrated NGL business will generate higher returns than we have experienced in the past as the NGLs from new plants will largely be transported down Grand Prix and to our Mount Bellevue fractionation complex. In the Delaware, we remain on-track to complete our 250 million cubic feet per day Falcon plant in the fourth quarter of 2019 and the 250 million cubic feet per day Paragon plant is expected to be completed in the second quarter of 2020. While our Permian residue gas exposure is substantially hedged in 2019, weak Waha Natural gas pricing during the second quarter weighed on our realized natural gas prices for those volumes un-hedged. Fortunately, we are seeing the residue gas landscape in the Permian Basin improve with the Gulf Coast Express pipeline on-track to begin full operation by the end of the third quarter. Turning to our downstream business, our fractionation facilities in Mount Bellevue continue to remain highly utilized during the second quarter. Our new Train 6 fractionators which commenced operations in May quickly ramps the capacity. Construction continues on Train 7 and Train 8, which are expected to be online late first quarter and late third quarter of 2020 respectively. We expect both frack trains to be highly utilized at startup based on our expectation of rapidly growing NGL volumes from Grand Prix and contracted third-parties. In our LPG export business, we are on-track to complete the rebuild of Dock 2 at the end of the third quarter of this year. Our next phase of export expansion at our Galena Park facility remains on-track as well and will increase our effective capacity to approximately 11 million to 15 million barrels per month in the third quarter of 2020. We remain focused in executing on our strategic priorities to increase longer term shareholder value. I want to recognize our talented and dedicated employees across the Company who continue to safely operate our infrastructure facilities every day. With the completion of Grand Prix combined with the completion of a number of gathering and processing and downstream expansion projects year-to-date, the trajectory of our CapEx spend will substantially moderate and we expect 2020, net growth CapEx to be meaningfully lower in 2019. Additionally, we continue to thoroughly evaluate and highly scrutinize all future new capital project to align capital spend with available cash flow going forward. With that, I will now turn the call over to Jen to discuss Targa's results for the second quarter.

Thanks, Matt good morning everyone. Targa's reported quarterly adjusted EBITDA for the second quarter was $307 million, which was about $7 million lower than the first quarter of 2019 as a result of the sale of the 45% interest in the Badlands which closed in April 3rd. Overall, strong fundamentals for Targa's gathering and processing and downstream business led by higher sequential volumes in the Permian region, higher fractionation volumes and LPG export volumes would have resulted in higher sequential adjusted EBITDA if not for the Badlands sale. In the G&P segment operating margin contribution from higher sequential inlet volumes led by our Permian midland and Permian Delaware region was offset by the impact of lower NGL and natural gas prices. NGL prices trough to historic low during the second quarter, net of realized hedge gains second quarter gross margin was only about $3 million higher than the first quarter as a result of those prices. In our logistics and marketing segment operating margin sequentially increased due to higher volumes from start up of Train 6, higher marketing opportunities which contributed roughly $10 million in the second quarter, and which I would characterize as more one-time in nature and higher LPG export volume. In addition to pipeline transportation margins from the start up portion of Grand Prix. Our G&P and downstream operating expenses increased in the second quarter over the first quarter from additional assets and system expansion primarily in the Permian where labor costs have been increasing and also from a re-class of certain G&A expenses to operating expense. Our G&A decreased in the second quarter versus the first quarter. Looking forward, we are very focused on managing our operating and G&A expenses and expected begin to see our per-unit operating expenses decreased overtime as utilization of recently completed projects increases and we benefit from the new AGI well and our Wildcat facilities in Delver which should reduce chemical cost that have been increasing to treat Targa gas. While there has been obvious plus and minuses year-to-date, our full-year adjusted EBITDA guidance range $1.3 billion to $1.4 billion remains unchanged. Some of the larger headwinds that we have faced so far this year include lower NGL and Waha crisis, the shift in Grand Prix completion to August, the shift the Little Missouri 4 plant completion in the Bakken into August, lower South Texas inlet volumes and higher operating expenses, particularly in G&P. On the positive side, some of the some of the pluses have been higher frack volumes and marketing opportunities, and higher Permian inlet volumes. I would also like to point out that our non-controlling interest cut back is increasing and expected to continue to increase given the ramp up in Train 6 and Grand Prix, which is a deduction for partnership ownership interest to align with Targa's reported adjusted EBITDA. Currently hedging, our percent of proceeds equity commodity positions are well hedged as we continue to execute additional hedges to increase cash flow stability, particularly for the back half of 2019. Our updated hedge disclosures can be found in our investor presentation. On a debt compliance basis, TRPs leverage ratio at the end of the second quarter was approximately 4.4 times versus a compliance covenants of 5.5 times. We continue to expect our compliance leverage to peak in the third quarter and then begin to come down rapidly. In early June, we executed an amendment for TRP credit facilities to utilize greater benefits by EBITDA contribution from our projects in progress, but not yet in service, which successfully increased our flexibility and also resulted in lower compliance leverage, which reduces our borrowing cost as it puts TRP in a lower pricing tier. Our consolidated reported debt-to-EBITDA ratio was approximately 5.3 times. Our 2019, net growth CapEx estimate for announced projects is now expected to be approximately $2.4 billion, which represents a 4% increase compared to our initial estimates. We have spent about $1.4 billion of net growth CapEx through the first half of this year. As Matt described earlier, project costs associated with both Grand Prix and LM 4 were higher than initially estimated. Additionally, over the last 12 months, we have seen labor costs move higher, and now forecast that a new 250 million cubic feet per day Permian plant costs approximately $160 million. We continue to remain highly focused on our capital spend, and are working diligently across the organization to manage CapEx for 2019 and all future new capital projects. Our full-year 2019 maintenance CapEx forecast remains unchanged at approximately $130 million. No common equity has been issued year-to-date and based on current market conditions, our expectation is we may not need to issue any equity into the foreseeable future, as we benefit from increasing cash flow and lower leverage from our projects now in service. Looking prior to the second half of this year, we expect adjusted EBITDA and dividend coverage to be highest during the fourth quarter, as we benefit from full quarter contribution from a number of recently completed growth projects, providing - with significant momentum towards improving metrics as we exit 2019. The trajectory of our capital spending relative to our cash flow is improving and we are spending a lot of time in pulling an enhanced top down focused approach to control feature CapEx, prioritize future investments around our core strategy, which is to maximize participation across Targa’s integrated value-chain. We are at a key inflection point within past second quarter where our spending peaked as a result of our strategic growth CapEx program and the final Permian earn out payment and with our EBITDA at lowest point of the year as a result of the Badlands partial interest sale. Now moving through the third quarter, where we benefit from some partial quarter contributions from key assets, lower growth capital spending and then moving into fourth quarter when we will demonstrate rapidly increasing EBITDA and dividend coverage with lower growth capital spending and improving leverage metrics. With that, I would like to turn it back to Matt, for a few closing comments.

Thanks Jen. We have accomplished a lot and we still have a lot of work ahead of us. So I want to thank all the Targa employees who have been working very hard to complete the important strategic project that have recently come online. And thank you to all of the operations and support organization employees that have prepared for and are now handling the new facility’s expanded volumes. This is an exciting time at Targa, great project coming online and strong outlook ahead. So with that operator please open the line for questions.

Sure. Thank you. [Operator instructions] Our first question comes from the line of Spiro Dounis from Crédit Suisse. Your line is now open.

Hey good morning everyone. Maybe just starting with CapEx, hey Matt. Starting with CapEx very encouraging comments around and it sounds like we have essentially hit the peak here. I know sometimes some of your peers maybe talk to shadow backlogs and you guys have held pretty firm to that 1.8 billion of CapEx across 2020, 2021, which does assume things get down from here. Just anything sizable in the backlog that you are working on now that could increase that spend in 2020 and as we are close to 2020 any sense you can give us in terms of what percentage that 1.8 billion could hit?

Sure. Yes we are obviously working very hard to keep 2019 CapEx, we actually worked very hard to keep it at the 2.3, but with the cost over around it, it moved to 2.4. As we look out the kind of capital that we have been describing as adding additional fractionation train, which now in Train 7 and Train 8 that is obviously going to be capital that is spent next year, adding additional processing plants, adding the Gateway plant. We got the Falcon plant out in the Delaware, the Peregrine plant. I would say as we look out kind of over the near-term what we see in terms of capital spending is more normal. Capital spending associated with our core integrated strategy which is gathering and processing, largely going to be in the Permian basin and then additional fractionation and export those projects are for the most part already announced and included in what we are planning for 2020.

Great. That is helpful and then just a follow-up on Grand Prix and thinking about the ramp up there. How should we think filling that pipeline up from here, I guess more specifically what processing plants are going to be connected into that and do you benefit from NGL coming off in some of the third-party pipeline on to Grand Prix.

Yes, exactly. We are going to benefit from really both of those items going forward. One we will have shorter-term transportation agreement that we had entered into to move NGLs while Grand Prix was being built. So those are going to continue to roll off. So we will be able to continue to just move volumes off other pipes onto Grand Prix, but we are also going to benefit from our new gathering and processing plant being put in place as most of those NGL are going to be pointed towards Grand Prix and then into our fractionation and export. So we will be benefiting on it really from the full value chain as new processing plants gets put online.

Great. I appreciate all that color. Thanks everyone.

Alright. Thank you.

Our next question comes from the line of Shneur Gershuni from UBS. Your line is open.

Hi, good morning everyone. Maybe to start off, first of all I just wanted to offer my congratulations to both Joe Bob and Matt on your new roles.

Thank you. I appreciate it.

Thank you.

Just in terms of - a couple quick questions, maybe to follow-up on Spiro's question here, just when in starting with CapEx, when you talk about a meaningful reduction in CapEx for 2020. Are we talking in the neighborhood of greater than 50%, because the numbers are kind of split over two years, is it more 2020 versus 2019. And then you also talked about some cost over runs, but also last call you talked about moving some of the in-service paid for some of your facilities to capture some labor costs benefits. Is it too early to see some of those benefits, just wondering if you can talk about those trends?

Sure. It is Jen. I think that from our perspective, it's premature to roll out 2020 direct sort of CapEx guidance as we did in February for 2019. What we provided last November was meant to be really instructive. It was a point in time forecast that really I think directionally demonstrates that at that point in time, what we felt like our CapEx budget would be reduced to over 2020 and 2021. We are very much focused on reducing CapEx on a go forward basis, certainly expect 2020 to be absolutely substantially lower than 2019. But we do think just that there is a lot changing, think about everything that has changed as we move through this year, that it is a little premature for us to come out with a direct sort of hard and fast number that we will certainly be holding ourselves to in 2020.

In the cost spends, in terms of starting projects later, talk about [CapEx] (Ph) benefits on that?

I think you have seen that we shifted some frack timing. So the timing of Train 8, which we shifted on our last earnings call. You see with the announcement of the Gateway plant that really on the Midland basin side volumes have exceeded our expectations. And so while we expected that we will be moving forward with that plant this year, maybe a little bit sooner than expected with the announcement today. And, so I think that when we look out across our portfolio of future sort of capital projects, to Matt's point, it feels like it is going to be very much across the core value chain. I think it will be totally easy for you to forecast when we will be adding plants and fracks just as a result of the volume growth that you are seeing across Targa, because of the integrated value chain that means as we bring on new plants, those volumes will have to go to new fracks, and so I think it would be easy for you to forecast the associated spending and timing of when we will need new facilities.

I think Shneur you have also described the ongoing discipline that the team is using. Yes, pushing the frack trains out a little bit for it saves some labor costs. And yes, we announced the Gateway that is right about on time, not pushing it out, because the volumes are causing that. That is the disciplined framework that the management team is using.

That makes sense and I appreciate that follow-up Joe Bob. And just with the new assets coming online a lot of them are fee based in nature. Can you give us a sense of where your commodity exposures sort of ends up as a result like, from the to and from type of scenario. And there any opportunities to further reduce exposure either by selling assets or restructuring the contract?

I think this year we forecast about 75% of our operating margin to be fee based churn and when we think about assets that has been placed in service such as Grand Prix additional frack trains, the plants out in the Delaware, certainly we are moving to a more fee-based model and that I think will become very obvious in our results really beginning in the fourth quarter and then going forward. I think that we are continuing to look across our portfolio of assets to figure out where there are opportunities to move less away from commodity price exposed contracts and more to fee based contracts and we will be continuing to do that. But that is really a practice that we have had within Targa going on for years now. And so that will continue. I think when you think the complexion of our assets in contrast, in the Midland basin where we have got largely a lot of our POP exposure, we are trying to make those contracts more fee-based or at least have more fee-based elements there and expect that would continue, but that is a slow process. So I would expect that our fee based margin will increase going forward 2020 over 2019, 2021 over 2020, et cetera, but it won’t be a sort of a monumental one-time shift that gets us to largely entirely fee-based.

That make sense. Final question, at the export our LPG has been extremely wide, obviously of the new facility coming online. Have you been able to use the wide nature of the spread right now to like login system more longer term contracts to more capture some of that spread.

Yes. I will turn it over to Scott to handle that one.

Yes, basically we have seen through the first quarter and second quarter, there were some tightness in the export markets, some of that was related to some challenges that the Houston ship channel was facing due to some fires and some issues that they had. So we were playing a little bit of catch up during the second quarter, but now that we had kind of cleared that opportunity, we are excited to see the revamping of our Dock 2 which will come online during the third quarter of this year and the of course our refrigeration unit that come online in the third quarter of next year. So though we have had limited opportunities to match up the larger art that was present at times. We do think that, given the opportunities with the expansion projects that we have got underway the bottleneck projects that we gone under over the last several quarters to include assets added to our building facility to debottleneck butane as well as our pipeline down Galena Park. These will provide further opportunities for us to participate when those ARB opportunities are present. We are very comfortable where we are on our term contract basis and look forward to when that present itself in the future.

Perfect. Thank you very much guys. I really appreciate the color today.

Okay. Thank you.

Our next question comes from the line of Colton Bean from Tudor, Pickering, Holt. Your line is now open.

Good morning. The labor discussion on the capital program, but I think in that 2020 and 2021 forecast there is an assumption around three potential Permian plants, so we have Gateway being slated for Q4 2020, does that imply that there would be two plants in 2021 or should we think that maybe there is one of those things can move into 2022?

Yes. So we are still working through timing, on both the Midland basin and on the Permian side. You know we have already got two announced sort of yet to come on the Delaware side of things. So there is potentially another point in that timeframe out in Delaware potentially and so there could be potentially another plant point on the Midland side. So I think that is still a reasonable estimate, having three plants come online in that timeframe, but again talk about - we are still really working through going over producer volumes forecast, moving that into our forecasts and trying to stage so the plants at that is a correct time.

Got it. That is helpful. And then just we focus express starting-up in about a month and a half. Can you clarify for us what sort of uplift that has on your commodity margin. So understanding that you have the equity interest, but when you look at your POP natural gas exposure, what does that do for you in our Q4?

Yes, I mean, really, for us having GCX online, we are going to benefit much like the producers are going to benefit which is higher Waha prices out in the Permian. So you saw our realizations, relatively low producers have the same effect here, recently, prices are still low. So we are greatly looking forward to GCX coming online, and we will see higher Waha prices, which will benefit us on the equity side of our volumes.

And would - effectively 100% of your equity volumes be covered by GCX or should we still assume that there is a little bit of end dates on there?

Yes, so it will be a mix. It's not necessarily going to be all transported down GCX. But our equity volumes will benefit, even if they are not moving down GCX just from the uplift in Waha prices from GCX.

Got it. I appreciate the time.

Thanks Colt.

Okay. Thank you.

Our next question comes from the line of Keith Stanley from Wolfe Research. Your line is open.

Hi good morning.

Hey, good morning.

I wanted to clarify first just with the good second quarter here, that you feel good on the EBITDA guidance for the year even using current commodity assumptions over the balance of the year?

We reaffirmed our guidance for the year and we have gout - the first half of the year is completed. And now as we move through the third quarter with Grand Prix coming online. We didn't think that it made sense for us to change our guidance. We are not expecting to change our annual guidance on a quarterly basis anyway. So, I think we detailed some of the headwinds that we have faced as we move through the year and we have got, some of the tailwinds as well. And now with Grand Prix online, feel very, very good about our fourth quarter contribution of Grand Prix to our EBITDA, increasing cash flow from other assets as utilization increases. So, really just reaffirming what is out there.

Okay, and one follow-up on LPG exports. So, will you have 10 million barrels per month of capacity in the fourth quarter? And are there any bottlenecks to sort of filling that and ramping that higher pretty quickly in the fourth quarter on exports. And, I just want to clarify, it sounds like you have a little bit more exposure to the ARBs, once these expansions come online, just in the earlier question wanted to make sure I heard that right. Thank you.

Well, what I would say is, again, we were highly utilized during the second quarter, we moved about seven million barrels per month during the second quarter, somewhere around 231,000 barrels a day. Our focus continues to be to complement our export business as it relates to our overall platform our G&P business that feeds into Grand Prix that feeds in - and through our storage, through our fractionation business. And then all the way down to our dock for Galena Park for exports. As I said earlier, the projects that we took and underway to the bottlenecks the facility, a lot of those projects were geared more towards butane, our ability to export butane at higher volumes. So depending upon what the mixture is of propane's and butanes we will kind of dictate whether or not we are hitting the nine million or 10 million barrels of export volumes during the fourth quarter. Once we enhance that even more with refrigeration unit in the third quarter of next year. That provides us even further opportunities. So we were highly utilized, most of that was related to term business. So I would not say that were exposed what the ARB is because we have got fee base related contracts that are going to flow in though our business and so the volumes have to move offshore when you think about incremental volumes of production of propane and butane.

Thank you.

Our next question comes from the line of Tristan Richardson from SunTrust. Your line is now open.

Hey good morning guys. Now that you have got substantially more visibility on Grand Prix and Train 6 and GCX tracking the schedule, can you talk about just sort of the plans to update the multi-year outlook with that enhanced visibility now.

I think that from our perspective we have left the long-term outlook slide in our materials, largely because we find it instructive. Particularly with those that are less familiar with Targa when we have an opportunity to talk about our growth capital program that has been underway that now many of those assets are online around, it’s an easy slide to point to. I don't think that we see it as necessary for us to continue to update a multiyear outlook. I mean if you think about all the plus and minus that I have even gone through today around what has happened in 2019, that is just a difficult endeavors to undertaken and putting out a multi-term outlook every quarter. And so I think Tristan, right now we are thinking that we will put our typical 2020 guidance around our normal timeframe, which would be in February which is when we have the optimal amount of information from producers to really I think effectively predict not only EBITDA, but capital for 2020 and that is really I think the tactic that will most likely take.

Very helpful, thank you and then just on the capital deployment you guys have been very local, very clear with us that your assumption for substantially lower CapEx next year and when we think about governors of that, I mean is Dallas stronger governor than sort of your return hurdle metrics and criteria in other words, if something came along that was very strategic and very compelling is it that substantially lower sort of comments that drives your decision-making or is it more sort of how complementary your project might be?

Yes, so good question and it is difficult as we are going through and allocating capital and trying to allocate the capital to the highest return projects. I think as Jen said, we are looking it at a top-down thing we are trying to move towards that free cash flow so we don't need to issue anymore equity and go towards free cash flow. So that is our starting point and then we look at what is the best use and how do we balance the capital between investing and gathering and processing projects and another projects in downstream. Our focus has been and really will continue to be what is along the core value chain, where we can earn margin on a gathering and processing side on transportation, fractionation and export. So those are the lenses that we are using as we think about growth capital into 2020 but we are starting with what financial metrics are we are going to try and hit in 2020 were reasonable targets that we can have to move towards that free cash flow as soon as possible.

And I think the Williams project that we announced earlier this year really highlights how we are thinking about the world of capital so that is a project that is incredibly strategic for us in terms of additional volumes on Grand Prix to our fractionation, but we approached it as it Williams, and what we both viewed as the most capital efficient way possible to get a very attractive deal done for both sides. But again, in a capital efficient manner.

It makes sense. Thank you guys very much.

Okay. Thank you.

Our next question comes from the line of Jeremy Tonet from J.P. Morgan. Your line is now open.

Good morning guys. Thanks for taking my question. This is [Rahul] (Ph) on for Jeremy. With 119 in the book, so could you update us on your second half outlook what those initial expectations and provide us your latest thoughts on what you are seeing in terms of producer equity and what it could mean for the exit rate?

Yes, sure. I think, as we have said in the prepared comments, and I will just kind of reiterate maybe expand a little bit on those, we saw really good volumes on the G&P side across our Permian business. So we saw a good growth in the Midland side, really good growth sequentially on the on the Delaware side. I think as we look into the back half of the year, we would expect that strength to continue, as we are bringing on - Pembroke will be bringing on additional facilities here, and we are going to start-up on that plant, we have Falcon coming on. So, I think our outlook for the back half of the year, on the Permian side is continued strong growth, even exceeding our previous guidance, potentially there. So, I think we see really good growth on that side. And that is going to bode well for us on the Grand Prix volume as most of those volumes are headed towards Grand Prix into our fractionation and export.

Got you. That is a helpful color. On just going back to Grand Prix for a second, considering all the gives and takes on the pipe as it ramps and as the short-term contract so last, like are you guys are in a position to hit that to $250,000 barrels per day by mid-2020 targets, you guys stated before?

Yes, so our previous guidance, there was 250 to 1,000 barrels at some point in 2020. We are not officially changing that, although sitting here, giving you guidance that we are going to be at 200,000 or so in September, I would say we feel really good about hitting that. And I feel good about hitting that kind of earlier in the year versus maybe the previous guidance we gave was later in the year, right, so as we are moving forward in time and feeling better about those volumes, our volume expectations kind of continue to increase on Grand Prix volumes.

Sounds good, that helps. And then like just a housekeeping question on the MTI, I think which kicked up notably you guys did talked about in the prepared remarks Grand Prix ramps, it could step-up, like is there any good indication of how we should look at it in the back half of the year?

I would suggest that you follow-up with Sanjay, obviously, the other ownership are disclosed related to Blackstone owning as 25% in Grand Prix, as well as the - that are in place. But we can walk you through all the steps associated with where that ought to increase just in terms of making sure that you are modeling our partnerships accurately and how that impacts the MCI cut back.

Sounds good. Thanks for taking my questions guys.

Okay. thank you.

Thank you very much.

Our next question comes from the line of Danilo Juvane from BMO Capital Markets. Your line is opened.

Good morning and thank you. Some producers in the Permian are talking about capital discipline so forth as it pertains to lower volume outlook going forward. But that is of course the crude. Is it fair to say that because of the highest GORs, you still see pretty solid growth even into 2020 and understanding that you don't give any guidance for 2020. But do you still see a sort of solid volumetric outlook out of the Permian?

Yes, I'm going to turn it over to Pat to add, but I would say we expect continued growth in the Permian in 2020, the outlook there is still very good. Pat anything you want to -...

Yes. I would echo the - I mean when we look at our core customers their balance sheet, their available capital to put to the drill bit. We feel really, really good about their continued activity level. As matter of fact we have line-of-sight on what they are doing the next six, 12-months and 18-months. So this has been huge surprised commodity price drop to alter that drilling schedule. We feel really, really good about our core producers and what volume going to look like.

Thanks for that. And I guess as a follow-up. Do you see GCX immediately help to mitigate any flattering issues that you have seen out of Permian.

Well there is flaring issues for a number of reasons. While the flaring issues tend to be even more local and could be related to the quality of gas whether it is H2S and others. So GCX may provide some relief to that, I would expect it alleviate all of it, because things are flared for different reasons. I think with us - everyone is producing gas out there, it’s going to be a welcome addition to capacity because we know Waha prices are hovering around zero, so we need that capacity online and we are going to benefit.

Thank you and last question for me and - the update in the press release on the out rigor earn out. Obviously there is debt co payments to be 2023 and beyond and so forth, but with respect to the Bakken sales are there any payment that you guys would have to make as well. At the end of that deal or is that simply go find something higher cadence of distribution in early years that ultimately converse down to that 45% as the discussed previously.

It will be a latter, so there are no obligation for us to make any payments at any point in time beyond the minimum quarterly distribution and then what Blackstone will be entitled to as a result of the 45% interest.

Oka. Thanks for that update Jen.

Thank you.

And our next question comes from the line of [indiscernible] from Barclays. Your line is now open.

Hi guys, good morning. I guess just first for me. I appreciate all the color so far on Grand Prix, it looks like based on what you are expecting today, maybe the volume that of your own processing plants that will we seeding into the pipe are on-track for maybe even better than what we expected, when you first announced the project, but you also have a number of third-parties on that pipe as well. Can you maybe just give us an update on how those volumes are trending relative to maybe original expectations and whether or not there any [MVC] (Ph) behind those.

Sure. So it is a mix, so we have a multiple third-party I would say third-party dedications, multiple third-party MVCs on that. Depending on the producer, we have seen, I would say volume coming on not as fast as early indications when we were contracting that pipe, which is not unusual when you are getting forecasts from customers. But overall, the outlook in some of the cases catches up or even exceed as you move forward in time. But again it’s a diverse customer base. We have many customers and it’s a mix. So our volumes are going I would say even above expectations and in aggregate we have added more contracts than we estimate so even if those contracts are slightly under the volume forecast they gave us, they are still more third-party than we originally anticipated when we announced Grand Prix.

Okay. I appreciate that thank you. And the next for me I guess, now that you have the full NGL pipeline, you have more of an integrated value chain than you did even just a year or two ago, I guess we kind of thought of it as the lack of the pipeline was, you know, the hole in the value chain in that part of your business. So should we think about the way that you operate commercially going forward without being different? I guess maybe what I mean by that is, should we look for you guys to take more advantage of some marketing opportunities, Contango and NGL, price, anything like that?

I would say, we think it makes us more competitive. So when we are talking to the larger producers, we are able to offer the integrated suite of not only gathering and processing, but be able to handle the liquids all the way to the dock, and even through export. So, I think it makes us more competitive having the pipeline there. Anything Pat you want to add to that?

Yes, I think once we announced Grand Prix, and we were sitting down with some of the larger production, opportunity capture opportunities in Delaware Basin. The fact that we were going to have Grand Prix going forward, that we would have a fully integrated platform, significantly added to our success. And planning some of those big dedications in those, capturing some of those larger opportunities. And quite frankly, that continues to be that way going forward. We are known as a very reliable G&P unit, we keep people's oil coming out of the ground and now the NGL interruptions et cetera, that we were afforded via having to rely on third-parties, we now have the ability to get around that. So, it's just another kind of added piece that our reliability and how we perform and provide service for our customers is enhanced that much further. So we feel really good about that and we are using it, and we will continue to use it.

Okay. Thank you, that is all for me.

Okay. Thank you.

And that concludes our question-and-answer session. I would like to turn it back to Sanjay Lad for any further comments.

Thank you to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. As a reminder, I will be available for any follow-up questions you may have. Thanks and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.