Targa Resources Corp. (TRGP) Q4 2021 Earnings Report, Transcript and Summary

00:04 Good day and thank you for standing by. Welcome to the Targa Resources Corp. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] 00:33 I will now like to hand the conference over to your speaker today, Mr. Sanjay Lad, Vice President of Finance and Investor Relations. Mr. Lad, the floor is yours.

00:44 Thanks, Chris. Good morning, everyone and welcome to the fourth quarter 2021 earnings call for Targa Resources Corp. The fourth quarter earnings release, along with the fourth quarter earnings supplement presentation for Targa Resources that accompany our call are available on our website at targaresources.com in the Investors section. In addition, an updated investor presentation has also been posted to our website. 01:09 Statements made during this call that might include Targa Resources' expectations or predictions should be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our latest SEC filings. 01:34 Our speakers for the call today will be Matt Meloy, Chief Executive Officer; and Jen Kneale, Chief Financial Officer. Additionally, the following senior management team members will be available for Q&A: Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer. 01:57 And with that, I'll now turn the call over to Matt.

02:00 Thanks, Sanjay and good morning. This is an exciting time at Targa, where our operational and financial execution in 2021 provided a lot of momentum for 2022. I would first like to recognize and thank Targa's employees that worked tirelessly across another year of challenges in 2021 to help drive record financial and operational performance. 02:22 Let's quickly mention some of the highlights from 2021: record Gathering and Processing volumes in the Permian, safely bringing the Heim Plant online, on time and under budget, record volumes across our Logistics and Transportation assets, record adjusted EBITDA of $2.05 billion, a 25% increase over 2020, about $1.2 billion of year-over-year debt reduction and a year-end leverage ratio of 3.2 times, and increasing return of capital to our shareholders through a higher fourth quarter dividend and fourth quarter common share repurchases. 03:01 Turning to 2022, we already have a number of highlights to mention, repurchased our DevCo joint venture interest in January, executed agreements to sell our 25% equity interest in Gulf Coast Express Pipeline, or GCX, for approximately 11 times EBITDA, upgraded to investment grade by Fitch and moved to positive Watch by S&P and Moody's, and refinanced our revolving credit facility to a five-year $2.75 billion facility at TRC. We continue to execute on our strategic priorities and have visibility to volume growth across our assets, which is driving increasing EBITDA as we look forward. 03:42 For 2022, we estimate full year adjusted EBITDA to be between $2.3 billion and $2.5 billion, which is a significant increase over 2021. This guidance is based on forward prices where there continues to be backwardation. If prices averaged around today's levels for 2022, we would expect to exceed the top end of our full year financial guidance. With the repurchase of our DevCo interest and our flexibility to accelerate redemption of our preferred stock, given the sale of GCX, we have already simplified and will continue to simplify our capital structure. 04:19 We are also demonstrating our increasing ability to return capital to our shareholders with the execution of common share repurchases in the fourth quarter, in addition to the fourth quarter common share dividend increase. As previously discussed, we expect to pay a common dividend of $0.35 per quarter, $1.40 annualized to our shareholders for 2022. The strength of our balance sheet provides significant flexibility to redeem our preferred shares faster than we previously anticipated and to continue to assess opportunistic repurchases of common shares. 04:53 Let's now turn to our operations. Starting in the Permian, our systems across the Midland and Delaware Basins continue to perform well, averaging a record 3 billion cubic feet per day reported inlet during the fourth quarter. Our average 2021 Permian inlet volumes increased 12% over 2020, exceeding the top end of our 2021 growth range. We continue to see strong activity levels across both our Midland and Delaware footprints and expect to benefit from this positive momentum as we move through 2022. 05:27 For full year 2022, we expect our average Permian inlet to increase between 12% to 15% over average 2021. In Permian Midland, our system continues to run near full with our next 275 million cubic feet per day Legacy Plant on track to begin operations during the fourth quarter of this year. With robust activity levels expected to continue into next year and beyond, we are moving forward with the construction of our Legacy II plant, another new 275 million cubic feet per day plant in the Permian Midland. Legacy II is expected to begin operations during the second quarter of 2023. 06:07 In Permian Delaware, volumes across our system also continue to ramp. Today, we announced the construction of a new 275 million cubic feet per day plant -- the Midway plant. The new Midway plant is expected to begin operations during the third quarter of 2023. Midway will provide us with additional flexibility to flow volumes between our Midland and Delaware systems. We are idling an older plant, which is more prone to operational upsets, has higher operating costs, higher maintenance costs, lower recoveries and is limited in capacity. 06:40 The Midway plant improves performance on all of those items and will give us the ability to flow current volumes being processed at Sand Hills and an additional 110 million cubic feet per day of capacity that can be filled from the Delaware, Central or Midland Basins. This project is a good example of how to improve our overall environmental performance while also providing attractive returns. 07:07 The strong outlook across our Permian Basin footprint will continue to drive incremental volumes through our NGL downstream businesses and our recently announced expansions in both the Midland and Delaware, position Targa to realize very attractive integrated returns and continue to benefit from our embedded operating leverage with modest capital spending. 07:27 In our Central and Badlands regions, we are seeing stronger activity levels given the higher commodity price environment and expect 2022 average Central and Badlands volumes in aggregate to be flat relative to 2021 as higher production is expected to largely offset legacy decline in our systems. 07:46 Shifting to our Logistics and Transportation segment. NGL transportation volumes continue to increase and we transported a record 433,000 barrels per day to Mont Belvieu during the fourth quarter. Throughput volumes sequentially increased 4%, driven by increasing NGL production from Targa's Permian plants, including our new Heim Plant and third-parties. 08:10 Fourth quarter fractionation volumes at our Mont Belvieu complex averaged 612,000 barrels per day and were lower sequentially due to an unplanned outage in associated repairs and maintenance, which impacted volumes by about 50,000 barrels per day. The unplanned outage was associated with cooling water exchangers that support a portion of our CBF fracs, which resulted in reduced operating rates for the quarter. 08:35 We have excess fractionation capacity, so we are handling all incoming NGL volumes as well as some volumes that normally would have been fractionated in Q4, so our Q1 average volumes are expected to be higher. We expect to be operating back to normal by the end of the quarter. This outage resulted in higher CapEx -- sorry, in higher OpEx in Q4 and is also expected to impact OpEx in Q1 of this year. 09:01 Looking ahead to 2022, we expect higher year-over-year Grand Prix and fractionation volumes as our downstream systems continue to benefit from increasing supply from our growing Permian G&P position. In our LPG export services business at Galena Park, fourth quarter volumes rebounded following maintenance completed during the third quarter and increased 19% sequentially as we loaded an average 10.7 million barrels per month during the fourth quarter. 09:31 The outlook for our LPG export business in 2022 remains robust, complemented by our contracted portfolio and supply position in Mont Belvieu. In response to growing international demand for cleaner feedstocks and U.S. LPGs, we are undertaking an additional low cost expansion project to increase our loading rates at our Galena Park facilities. This refrigeration expansion will increase our propane loading capabilities more than an incremental 1 million barrels per month by mid-2023. 10:05 The longer-term outlook for Targa is strong. Our premier integrated Permian NGL business, our talented employees, complemented by our strong balance sheet and financial flexibility, we remain in position to grow our footprint and return increasing capital to our shareholders over time. 10:24 With that, I will now turn the call over to Jen.

10:27 Thanks, Matt. Targa's reported quarterly adjusted EBITDA for the fourth quarter was $571 million, increasing 13% sequentially as we benefited from higher volumes across most of our assets and higher commodity prices. Our full year 2021 adjusted EBITDA was $2.05 billion and exceeded the high end of our full year financial guidance range. 10:51 Targa generated adjusted free cash flow of approximately $1.13 billion, which allowed us to reduce our leverage significantly across the year. At year end, our consolidated leverage ratio was 3.2 times. We spent $408 million in net growth capital during 2021 with spending largely focused on our Gathering and Processing business as we continue to benefit from operating leverage downstream. 11:17 We also had some spending shift from the fourth quarter to 2022, which is included in our 2022 growth capital estimate. Our net maintenance CapEx was about $130 million in 2021. During the fourth quarter, we recognized an approximate $452 million non-cash pretax impairment charge of our South Texas assets attributable to a lower outlook on future volumes. We are significantly hedged for 2022 and continue to add hedges for 2023 and beyond, while still benefiting from higher prices across our unhedged equity volume exposure and prices now well above fee floors. 11:53 We repurchased approximately $40 million of common shares in the fourth quarter and as of December 31, had approximately $369 million remaining under our $500 million share repurchase program. At year end, we had over $3.2 billion of available liquidity, which put us in excellent position to close on the repurchase of our DevCo joint venture interest for $925 million in January. 12:20 As Matt mentioned, we executed agreements to sell our 25% equity interest in GCX for $857 million. We expect to receive the full proceeds from the sale of GCX in the second quarter of 2022, and our current expectation is that we will utilize the GCX proceeds to redeem our outstanding TRC preferred shares. Last week, we closed on a $2.75 billion credit facility at Targa Resources Corp., eliminating the dual credit facilities at TRC and TRP as we continue to simplify our corporate structure. 12:54 Turning to our 2022 financial expectations. We estimate that pro forma for the sale of GCX full year 2022 adjusted EBITDA to be between $2.3 billion and $2.5 billion, a 17% increase over 2021 based on the midpoint of our range. Comparing 2022 versus 2021, key drivers for EBITDA growth year-over-year include: a full year benefit from the repurchase of our DevCo interest; higher commodity prices and continued volume growth across our operations led by higher G&P volumes, primarily from our Permian assets; driving higher volumes across our transport, frac and export assets; and also higher fees across our contracts from inflation. 13:43 Offsets include the sale of GCX and higher estimated operating and G&A expenses from inflation and increasing volumes. As Matt described earlier, we are continuing to invest in attractive organic growth opportunities, including spending related to additional Permian plants, well connect and compression capital on the G&P side, additional pump station capital for Grand Prix and the expansion of our propane loading capabilities at Galena Park. We estimate 2022 net growth CapEx to be between $700 million and $800 million and net maintenance CapEx for 2022 of approximately $150 million. We currently expect year end 2022 leverage to be well within the bottom half of our long-term target range of 3 times to 4 times, providing us with significant flexibility. 14:32 For additional details related to our estimated 2022 outlook, please review our earnings supplement slides accompanying our webcast this morning, which are also posted to the Investors page of our website. Supported by our excellent operational and commercial performance through some very difficult environments over the last couple of years, we have been able to execute on our key strategies. And as Matt described, that means we are in an excellent position going forward. 14:57 Lastly, I would like to echo Matt's thank you to our employees that have continued to perform exceptionally well for our customers and have done so with a continued focus on safety. 15:08 And with that, I will turn the call back over to Sanjay.

15:11 Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow up and re-enter the Q&A line-up, if you have additional questions. Chris, would you please open the line for Q&A?

15:24 Yes, sir. [Operator Instructions] Our first question comes from John Mackay of Goldman Sachs. Your line is open.

15:47 Hey, everyone. Thanks for the time. I wanted to start on capital allocation. I think you mentioned the GCX proceeds would kind of go first towards the prefs. You talked about kind of buying those back over kind of slightly longer period of time before. Should we think about that as you guys are trying to get them done kind of sooner now? And then maybe the second half of the year, the common buyback can pick up. Just how do you think about the balance of those two?

16:16 I think our current assumption right now, John, is that with the proceeds received from GCX, we will be able to accelerate and potentially repurchase all of the preferred interest in the second quarter, that's the base case assumption that we're currently running. Of course, we'll maintain the flexibility to change course if we want, but that's the current assumption. And then related to common share repurchases, you saw us active in the fourth quarter based on our outperformance for 2021. And certainly, our expectation is that we'll be able to return an increasing amount of capital to our shareholders as we move through 2022 and beyond. We've got the common dividend set for this year. And so that means that our assumption is we'll continue to be opportunistic around common share repurchases. So it isn't necessarily that because we're accelerating the TRC prep takeout to the second quarter that changes our assumptions around common share repurchases, we think we've got a lot of flexibility to execute across all parameters.

17:14 All right. Thanks for that. My follow-up is kind of on the CapEx side that fits in there. Can you just kind of frame up how much of the growth CapEx guide is going to the two new processing plants and also to the new export expansion? Just trying to think of those contributions above maybe a run rate level.

17:33 Yeah. Sure. Yeah. We announced the Legacy II plant and the Midway plant this morning. We had highlight we were already ordering long lead time for Legacy II on our prior call. For this year, the Midway plant really was kind of an incremental from maybe what we had signaled previously. There was about $150 million of capital for that Midway plant almost all of that spending is in year, and then there's a little bit of capital, which would move into 2023. We'll still have significant spending on Legacy and Legacy II this year. And then we'll also have pump capital for Grand Prix, the export project. That export project is really more kind of a debottlenecking or a bolt-on. It's relatively small CapEx, which is why we really like that project. It gives us an incremental 1 million barrels a month of ability to load -- increase our capacity on the propane loading side for relatively modest capital. But the large movers are midway and then the spending on Legacy I and II.

18:37 That’s great. Appreciate to them. Thank you.

18:39 Okay. Thanks.

18:41 Thank you. Our next question comes from the line of Michael Blum of Wells Fargo. Your line is open.

18:49 Thanks. Good morning, everyone. Just wanted to stay on Grand Prix. Can you just give us a sense of where utilization sits on the kind of the Mid-Con and the Permian pieces of that type? And then how much are you planning to expand it and what's the timing?

19:05 Hey, Mike. This is Scott Pryor. I'll first just state that we've got tremendous operating leverage when it comes to our downstream assets, and that's inclusive of our pipeline capacity relating to Grand Prix. When you look at the 433,000 barrels a day that we did in the fourth quarter, which was a record for us, we do have contributions that are coming from the North. We don't describe what those volumes are. But I would say that we still have a lot of leverage on our West leg and our South leg as well. We'll add pumps to West leg in the South leg dependent upon the production growth that we see in the Permian and from the North. We're going to stay well ahead of that to make sure that we can move all the volumes that are necessary. We can look at possibilities of loops in the future based upon the cadence as we hedge gas processing plants on our upstream side, again, with a lot of focus on the Permian Basin, but we'll also look for commercial opportunities that may present themselves with other existing pipes that might be in the Basin. So adding pumps, looking at opportunities, future puts us in a great position to leverage into what we have today and future growth.

20:21 Okay. Great. I appreciate that. And then maybe a question on the LPG export expansion you're announcing. Can you just remind us roughly kind of where you are on a contracted basis? And kind of what's leading your decision to expand here? And do you have -- will you continue to add contracts? In other words, will the contracted level as a percentage kind of stay the same as you increase the total capacity?

20:49 Again, Michael, this is Scott. I'll restate kind of what Matt said. When you look at this project, it is a low capital type project. I would describe it less than $50 million. Barrel-per-barrel basis, it's our cheapest expansion that we can put in our system to debottleneck around Galena Park. When we look at the facilities that we're adding, we've got a tremendous contract structure today. We continue to have success with renewing contracts and adding contracts where necessary. The market growth potential continues to be strong. When you look at domestic use of LPG products where people -- developing countries are looking for clean burning fuels, this certainly supports that opportunity. And then obviously, you're going to see continued growth on the PDH side in the East with more focus on China. When I -- when you think about that and the continued success that we've had, really, this is a complementary type addition for us. 21:50 It puts us in a position to be more flexible, more reliable for our customers and our lifters that we have out of our facility. It gives us the ability to rebound from times of weather delays or fog delays or shipping delays that may happen, but it also provides us early, prior to increased production that we would see coming from the Permian into our assets, it provides us the ability to participate more heavily in the spot market when the market dictates and presents itself. So again, a nice bolt-on project, barrel for barrel with the cheapest add that we can do at this time, and we like how it complements, provides reliability to us and our customers that lift from us.

22:31 Thank you very much.

22:33 Okay. Thanks, Michael.

22:35 Thank you. Our next question comes from the line of Spiro Dounis of Credit Suisse. Your line is open

22:46 Thanks, operator. Good morning, guys. First question, maybe just sticking with downstream CapEx, focusing a little bit more on fractionation. I believe you all have Frac nine as permitted. And so I'm just curious, given the rate of growth we're seeing here, is that something that's become a little bit more front of mind right now? And maybe just general thoughts on how you're thinking about the lead times for when that could come online and when you need to start acting on it?

23:12 Again, this is Scott. I'll just start with it, again, the fact that we've got leverage on the downstream side as it relates to fractionation as well. So we've got current capacity today. We do have a permit in hand for Frac Train nine. So we will pay particularly close attention to the cadence of the processing plants that we add in the Permian Basin as well as third-party production that will be steered toward our downstream assets. So with that permit in hand, we can trigger a start up on that frac when necessary. We also have the ability to look at the restart of our Gulf Coast -- or excuse me, our Gulf Coast fractionator as it relates to our needs or the demand that we have with our partners at that facility. So again, we'll stay well ahead of the need. Having a permanent hand for Train nine certainly helps us and the ability to restart the idle frac with our partners is also a possibility.

24:09 Yeah. And just to add to that too, Scott, I'd say we would also continue to look across Belvieu. So if there's some excess capacity from some of our competitors that could give us some more time to evaluate when we need to do Train nine, we can look at those solutions as well. So we're kind of looking at the volume growth and really have all options on the table for us.

24:31 Great. That's helpful. Switching gears a bit. I can't let you all go without asking you about natural gas, egress out of the Permian going forward. I think there's obviously a lot of projects potentially contending to be the next natural gas pipeline, whether it be expansion, a greenfield. Just curious, is it a concern of yours that somehow some of that growth gets stunted in any way. Do you think the industry will resolve the issue and how? And then you've obviously participated in some of these projects in the past, recognizing you just sold GCX, but is Targa interested maybe in participating in the future as well?

25:05 Yeah. Sure. To start, I would say, yeah, we do see one certainly being needed, and it looks like it's coming sooner than maybe previous expectations. So we are looking to be part of the solution. We have a lot of gas. We want additional infrastructure to get built. So we're talking to a number of the pipes that are trying to basically get geared up to get to FID. We want to get something done. So we want to be supportive to be able to get something done. So I guess just stay tuned on that. We think the industry will solve it. It's added pipes before. And just stay tuned on how and when Targa is going to participate in that.

25:47 Got it. Helpful as always. Thanks, guys.

25:49 Okay. Thanks.

25:51 Thank you. Next, we have the line of Jeremy Tonet of JPMorgan. Your line is open.

26:08 Sorry, this is Steve (ph) jumping in for Jeremy. Sorry about that. Really just kind of one question for us. Most of them have kind of already been hit. So just looking at the 2022 EBITDA guide, commodity prices bring your guide to above the high end. And we just kind of want to know what other main moving pieces of the high end versus the low end of the guide are there?

26:32 Yeah. I'd say as we gave a range, commodity prices, as I'd say, the largest variable. And then we also had a range in our Permian volumes, 12% to 15%. So depending on where volumes from the Permian shake out. We are seeing some drilling across the Central and in Badlands. So if prices stay here, we could see some additional upside to our Central as well. I'd say those are the main drivers on the G&P side. I'd say on the downstream side, the export, we see a continued strong export market. But I think there's still some upside to our assumption in our guidance number to exports. And if there's a real weak market, there's some potential. It's not all contracted. So there's some variability in exports as well.

27:19 And we're doing a really good job of managing costs. So hopefully, there's upside to some of the conservative assumptions that we've made around cost. We'll have to see how those play out through the year.

27:31 All right, really appreciate you guys. Thank you.

27:33Okay. Thank you.

27:35 Thank you.

27:36 Thank you. And next, we have a question from the line of Tristan Richardson of Truist Securities. Your line is open.

27:44 Hi. Good morning, guys. Just curious on the contracting environment, just in -- what we're seeing in the strong commodity today, and as you bring on additional plants. Are you seeing from producers a desire to retain more of the economics pushing more towards the -- obviously, you guys have done a lot over the past couple of years, incorporating some changes in the contracting styles? But maybe just the landscape today in this current environment, what types of structures are your customers looking for?

28:17 Yeah. I'd say we're -- most of our growth is happening out in the Permian. Yes, there are some differences between the Delaware and the Midland. On the Midland side, that has been traditionally more POP, although we've done a good job at putting more fee-based components and fee floors on those POP. We have a lot of acreage dedicated to us under long-term contracts. And so a lot of the growth that we're seeing is under already existing longer-term contracts in and around that area. On the Delaware side, we do have more fee-based components on the Delaware side, but I'd say a lot of the volumes there for the growth is under long-term contracts. So it's really keeping the mix kind of similar to what we've had there. Pat, I don't know if there's anything you'd want to add to that.

29:05 I think the only thing I would add, Matt, is that there's so many variables that affect how you contract, right? Is it sour gases? Is it sweet gas? Is it high pressure? Is it low pressure? And certainly, the Midland and Delaware Basin have some nuances related to some of those variables. But generally, the contracting hasn't materially changed. And as Matt described it, it was kind of spot on relative to the basins and how they break down. And we haven't seen a material change in and the way we're contracting.

29:39 Yes. Thanks, Pat.

29:40 That's helpful. And then just a follow-up. Jen, I may have missed this, but -- and appreciating you guys offered the sensitivities for the '22 budget, but can you talk maybe about the hedge position where you sit today and for '22? And then maybe also just what 2023 looks like just from a -- where you stand today?

29:58 Sure, Tristan. We changed our disclosures around hedging just because we found that we are creating potentially more confusion than we were helping folks work through our numbers. So really, from our perspective, the sensitivity is what's most meaningful to you. And that's our result. We do have our equity volumes from our percent of proceeds contracts, but then we also have our fee floor contracts, and fee floors are set at different levels. So there's just a lot that goes into now, I think, figuring out what our position is. But I think we have excellent cash flow stability because we are very well hedged. The last disclosures that we gave showed that we were north of 75% hedged across all commodities for 2022 and then had already put significant hedges on in 2023. So I think importantly, we aren't changing our hedge program at all. So the expectation is we will continue to look to hedge our equity volume exposure 75% next 12 months out, 50% 12 months out after that, and then 25% the 12 months out after that. So none of that has changed. But we really thought that just providing a simple sensitivity provided you with the most clarity relative to all the moving pieces around our Gathering and Processing contracts and positions.

31:18 Appreciate it. Thank you, guys, very much.

31:22 Okay. Thanks, Tristan.

31:23 Thank you.

31:23 Thank you. Next, we have questions from the line of Colton Bean from Tudor Pickering. Your line is open.

31:39 Hey, Colton. Good morning.

31:38 Sorry about that. Good morning. So just on the balance sheet, would love to understand any shift in how you're thinking about optimal leverage. I think you've said previously you wouldn't want to drop below 3 times debt to EBITDA, but it looks like you closed out 2021 at 3.2. And then just the year-on-year EBITDA increase alone, looks like it will drive leverage below that threshold before considering retained free cash flow. So are you thinking about a lower target at this point or considering an alternative cash outlay that might offset that?

32:09 I think we're really comfortable within the target range of 3 times to 4 times. And I've said that our strong preference is to exist towards the bottom end of that range. That doesn't mean that we have to stop at an exact number, but our goal is to really operate within the lower end of that range. So are we comfortable going sub 3 times for a quarter or a couple of quarters potentially, but I think we'll also be able to identify some attractive uses of that leverage capacity to be able to return incremental capital to shareholders, to be able to continue to invest in the business? It's been a while since we looked at M&A opportunities. But certainly, I think with our balance sheet, where we are, are continuing to look at attractive bolt-on opportunities, too. So there isn't a change to how we're thinking about capital allocation. I think just the outperformance that we had in 2021 and now the expected performance in 2022 just provides us with even more flexibility than we thought we would have even a quarter or a couple of quarters ago. So the outperformance in 2021, that's part of what drove us repurchasing $40 million worth of shares in the fourth quarter, maybe a little bit earlier than estimates. But we felt like we had the capacity to do so and opportunistically executed on that. So I think, again, flexibility just means that we've got more places that we can identify the best use of that available cash flow or leverage capacity and then go execute on that strategy.

33:38 Got it. So looking out over the next couple of years, is it reasonable to assume that the incremental leverage capacity from that organic growth and then the amount of free cash that the business is throwing off, first call might be capital returns and the second, opportunistic M&A?

33:53 I don't think that we exist with if you do A, then you can do B. If you do B, then you can go to C, right? I think you've seen us over the last couple of years really just execute across opportunities. And so that's going to be the strategy going forward, Colton. So to the extent that we've got more organic growth or M&A opportunities that are attractive, we're definitely planning on continuing to invest in this business. We think that's what sets Targa up best for the short, medium and long term for our investors. And then we also believe that we'll be able to return increasing capital to our shareholders. Year-over-year, 2022 common dividend versus '21 dividend, we're doing that. We've talked about the fact that we expect that we'll be able to increase the dividend going forward as well in 2023. So that's definitely part of how we'll return incremental capital to our investors. And then also we'll continue to be opportunistic around our common share repurchase program, but it's going to be a combination of everything that's available to us.

34:51 Got it. Appreciate the time.

34:54 Thank you.

34:55 Okay. Thank you.

34:56 Thank you. Next, we have the line of Keith Stanley of Wolfe Research. Your line is open.

35:06 Hi. Good morning. Two follow-up questions. The first one, just to clarify on hedging, and appreciate the policy as the same and the percentage targets for each year. Can you just remind us how you typically hedge gas basis? Is it at the same time, you're hedging your broader gas price exposure or are you more opened on gas basis?

35:30 Yeah. Sure. When we hedge our equity volumes, we hedge really as close to where we sell the physical as we can. So for example, we'll sell Waha and other indices out in the Permian, and we'll sell other Mid-Con indices where we have length on gas. So we cover off the basis as best we can for the volumes that we are trying to hedge.

35:55 Great. And second follow-up was on the commentary about not really being in the market for acquisitions as much in the past few years and maybe being more open to that. Can you give a little more color on things you would look at? I assume tuck-in type Permian G&P opportunities, would you look at anything outside the Permian? And I guess one thought I had too is, is there any potential with the DevCo now done to buy in the rest of the Grand Prix stake or is that unlikely?

36:25 Sure. I'll give you some color there. We've, I'd say, kind of been actively looking at bolt-on, tuck-in acquisitions across our footprint. I'd say we just continue to have a high hurdle. It's not that nothing can cross over that hurdle. But as we look at acquisitions, we want to make sure we're staying within our leverage range. We want to make sure that we have good synergies on the G&P side and on the NGL side. We're in a good position where we don't need to acquire anything. So it's really got to be additive. It's got to be at a good value for us with synergies that drive that value down even more. So I'd say there are opportunities and things we're looking at, but we've -- that really hasn't changed. We've been looking at things for the last several years. There's opportunities in the Permian. There's also opportunities in other basins as well. And if it checks all those boxes of keeping our leverage where we need to be, good upfront value with G&P synergies and downstream synergies, a lot of those bolt-on or tuck-ins could look a lot like organic growth projects by the time you're done with them. So those are -- that's kind of how we're thinking about it, how we're looking at it. So I think, stay tuned, we'll see if anything meets all those -- it's a pretty high bar. We'll see if anything meets that. But if it does, there could be something there.

37:52 Thank you.

37:53 Okay. Thank you.

37:56 Thank you. Next on the line, we have Theresa Chen of Barclays. Your line is open.

38:02 Hi. I just wanted to follow up on the M&A line of commentary, if you don't mind. In terms of valuation of the things that you have been looking at for years, Matt, how has that trended recently given the commodity price outlook? And just more specifically, are there areas of the value chain or region-specific aspects that you're considering that would be most complementary to your existing footprint?

38:30 Yeah. I'd say on the valuation trends, it really depends on what you're looking at. So I consider us to be opportunistic on the buy side, but we're also opportunistic on the sell side, right? So we sold GCX at 11 times multiple. We thought that was a strong market there for that. But I would say for other assets that don't have that cash flow, kind of take-or-pay cash flow feature, it's -- over time, I think those multiples have trended down, but we haven't transacted on anything. So I can't really say how they've moved over the years. But for non-highly contracted assets where it makes sense for a financial buyer, I would expect the multiple to be significantly less than where we transacted GCX.

39:19 And just to repeat, there really isn't a difference in the strategy here, as Matt, I think importantly articulated, we've been looking at M&A opportunities all along, and the hurdle has continued to be very, very high, and that hasn't really changed. All that's changed is our balance sheet is a whole lot stronger now than it was a year ago or two years ago. And that just provides us with more flexibility as we consider opportunities. But the strategy really hasn't changed.

39:45 Thank you.

39:46 Okay. Thank you.

39:49 Thank you. Next, we have the line of Chase Mulvehill of Bank of America. Your line is open.

39:58 Yeah. Hey. Thanks for squeezing me in here. A few questions. I guess the first one is really just a follow-up to Keith's questions about -- the question around Waha basis spread. How much do you actually have hedged in 2023 for basis risk?

40:21 So when we have our equity hedges, we're, call it, 75% and then 50% hedged for our position on our equity position. We have some transport that also provides us ability to move our gas out in various directions. We have a gas marketing team that manages that portfolio very actively to make sure we have contracted takeaway.

40:46 Okay. All right. So it sounds like you got some FT (ph) on some pipes and maybe you could actually benefit from that. So would you say that there is -- the benefit is greater than the risk when you think about Waha basis for you?

41:02 Chase, our primary focus for our gas is to make sure volumes are moving out of the basin. For us and for our producers, that is our focus to make sure we have a market that we can get to, that is our focus, and that is kind of how we manage that overall gas position. We want gas to move and we try and do it as best we can for us and for our producers.

41:25 Okay. All right. A follow-up question, and I apologize if this was asked, but I don't think it was. But 4Q Midland volumes were down a smidge in the fourth quarter, and Delaware volumes were actually up pretty strongly, up 12% quarter-over-quarter. I guess two questions. Number one, you dropped below nameplate capacity. So should we think about -- in the Midland. Should we think that kind of running above nameplate capacity is tough to do consecutive quarters? And then number two is, were you able to move some Midland volumes over to Delaware, and that's why Delaware really saw a nice uptick in the fourth quarter?

42:10 Yeah. Sure. So I'll start on that, and then -- for Q4, so if you're comparing to our reported in Q3, it would look like it's down. If you look at what we reported, it's in the supplement. It's actually we see an increase of about 2% on our Midland volumes. There was a kind of production month accounting change from some volumes that were in October into -- and from September into October, which changed it. So we actually saw when it was corrected volume growth in Q4 on the Midland side. As far as nameplate, we have the ability to run over nameplate. You've seen us do that. It can provide us good flexibility. We actually updated what we estimate our nameplate really to be for our plants. We used to call these 250s. We've been running them for over that and haven't seen a degradation in NGL recoveries or operational performance. So we're calling them 275s now. So we still have good flexibility across our system to continue to operate. So we -- so to be clear, we saw growth in the Midland in Q4, and we expect to see growth in Midland kind of throughout the balance of the year.

43:19 Okay. Perfect. Thanks, Matt.

43:21 Okay. Thanks, Chase

43:24 Thank you. And next, we have the line of Sunil Sibal of Seaport Securities. Your line is open.

43:33 Yeah. Hi. Good morning. So my first question was a little bit of a follow-up on Permian. So when we think about the 12% to 15% volume growth in 2022, could you give us a sense where that is kind of skewed more towards Delaware versus Midland, especially in light of some of the commentary we are hearing from some of your producers in the Midland?

43:59 Sure. We did not provide a detailed breakout of that. I'd say we see growth on both Delaware and the Midland. So we see pretty strong activity across both areas of our system. And so yeah, we see growth in both areas.

44:20 So you wouldn't handicap that 12% to 15% to be weighted towards any specific part of Permian?

44:26 We haven't given that color. I think you'll see it as we report going forward. But no, we haven't provided a kind of basin level detailed breakout. But we do see meaningful growth in both, and we see strong growth continuing in the Midland, which is why we're adding those plants, but we also see growth in the Delaware.

44:44 Got it. And then one bit of a broader question. I think in the past, you have talked about some of energy transition investment opportunities. Obviously, I think the solar generation that you're looking at, you're doing at -- to provide a balance sheet. I was just curious, has that kind of opportunity set expanded for you guys or what is on radar screen currently?

45:12 Yeah. I'd say we are continuing to look at opportunities in and around energy transition. We're continuing to look at renewable deals, whether it's additional solar or additional wind deals. We're continuing to be active to see if we can be part of the solution that way. Like, I said before, I think for those projects, it's unlikely we put our capital on those projects, but we could provide some offtake to help get those underwritten. So we're currently evaluating additional renewable projects on that front. We're also continuing to develop our carbon capture out in and around our assets. So we're continuing to make progress on that. That is going to take a while. So we are making progress. There are some hurdles. There's some -- there's permitting, there's just things that need to get done, but we are working through those. And I think we still are optimistic that we can get something done there in carbon capture. Part of it does depend on where is the 45Q going to settle out, and there was talk for a while of it going up 80. So is it going to be 80 or is it going to be 50? Those kind of things matter as well. So we're going to continue to work to try and develop the operational hurdles and get through that, and then we'll have to make the call on whether it makes financial sense for us or we need to source third-party capital.

46:31 Got it. Thanks for that.

46:33 Okay. Thank you.

46:36 Thank you. And I see no further questions in the queue. I will turn it back over to Mr. Sanjay Lad for closing remarks.

46:45 Thanks to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. The IR team will be available for any follow-up questions you may have. Thanks, and have a great day.

46:57 This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.