Targa Resources Corp. (TRGP) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Targa Resources Corp. First Quarter 2022 Earnings Webcast and Presentation. [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Sanjay Lad, Vice President of Finance and Investor Relations. Sir, please go ahead.

Thanks, RJ. Good morning, and welcome to the first quarter 2022 earnings call for Targa Resources Corp. The first quarter earnings release, along with the first 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. 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. 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. And with that, I'll now turn the call over to Matt.

Thanks, Sanjay, and good morning. We are continuing to perform well and are off to a good start to the year on a number of fronts. Record high quarterly EBITDA of $626 million, record volumes in the Permian and record NGL transportation and fractionation volumes. We also achieved investment-grade ratings from all 3 agencies during the quarter. We completed our corporate simplification, with the DevCo repurchase in January and with the redemption of our preferred stock earlier this week. We continue to invest across our businesses with ongoing construction of the Legacy I, Legacy II and Midway plants in the Permian, plus the acquisition of bolt-on assets in South Texas. We repurchased additional common shares as part of our increasing return of capital to investors. And our reported leverage ratio at 3.4x is in the bottom half of our long-term target range of 3x to 4x. Pro forma for the repurchase of our DevCo interest, our preferred stock redemption, our South Texas acquisition and our GCX sale, our leverage is 3.3x. While we had a strong first quarter with EBITDA up $55 million versus Q4, commodity prices really began to move higher late in the quarter. So we did not see a lot of first quarter price benefit, as our realized prices were relatively flat compared to the fourth quarter. But since then, prices are providing some nice tailwinds for the balance of the year. Given the strong underlying fundamentals of Targa's businesses, we continue to expect that if prices average around current levels for 2022, we would exceed the top end of our previously disclosed full year financial guidance range. Let's now turn the call -- or let's now discuss operational in more detail. Starting in the Permian, our systems across the Midland and Delaware Basins continued to perform well, averaging over 3 billion cubic feet per day inlet volume during the first quarter. Volumes across our Permian systems increased quarter-over-quarter despite being impacted by winter weather conditions, particularly in January and February. Volumes quickly rebounded, with March and April volumes up nicely over the first quarter average. We continued to see strong activity levels across both our Midland and Delaware footprint, and expect to benefit from this positive momentum as we move through 2022. In Permian Midland, our systems continued to run near full and our engineering and operations teams are working diligently to bring our next 275 million cubic feet per day Legacy plant online safely later this year. Our Legacy II plant, another new 275 million cubic feet per day plant in Permian Midland, is expected to begin operations during the second quarter of 2023. In Permian Delaware, volumes across our system are also continuing to ramp. Our new 275 million cubic feet per day 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 in addition to improving our overall operational performance in the region. For full year 2022, we continue to expect our average Permian inlet volumes to increase by 12% to 15% over 2021 volumes. In our Central and Badlands regions, first quarter volumes were impacted by winter weather conditions, most notably in the Badlands. We are seeing stronger activity levels across several regions given the higher commodity price environment. In April, we completed the acquisition of assets in South Texas and are quickly integrating the assets and related contracts acquired in our South Texas gathering and processing operations and expect the acquisition to be immediately accretive. We would like to thank everyone involved in helping make the integration go smoothly. Shifting to our Logistics and Transportation segment. NGL transportation volumes continued to increase, and we transported a record 460,000 barrels per day to Mont Belvieu during the first quarter. Throughput volumes sequentially increased 6%, driven by increasing NGL production from Targa's Permian plants and third parties. Fractionation volumes at our Mont Belvieu complex during the first quarter rebounded at 703,000 per day following fourth quarter's unplanned outage. Looking ahead, we expect NGL transportation and fractionation volumes to continue to benefit from increasing supply from our growing Permian G&P position. In our LPG export services business at Galena Park, we loaded an average of 10.2 million barrels per month during the first quarter. The outlook for our LPG export business remains strong. We are advancing our previously announced low-cost expansion project to increase our propane loading capabilities, which will add an incremental 1 million barrels per month of capacity by mid-2023. The longer-term outlook for Targa remains strong. Our premier integrated Permian NGL business, complemented by our talented employees and strong balance sheet, position Targa to deliver safe, reliable energy domestically and globally. And before I turn the call over to Jen, I would like to thank our employees for their continued focus on safety, while executing on our strategic priorities and continuing to provide best-in-class services to our customers. With that, I will turn the call over to Jen.

Thanks, Matt. Targa's reported quarterly adjusted EBITDA for the first quarter was $626 million, increasing 10% sequentially as we benefited from the repurchase of our DevCo joint ventures and higher volumes across most of our assets, offset by the sale of our equity interest in Gulf Coast Express pipeline and lower marketing margin. Targa generated adjusted free cash flow of $373 million in the first quarter. 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 above fee floors. Looking ahead, as a reminder, the integration of the recently acquired bolt-on midstream assets and associated contracts to our South Texas G&P operations will be reflected in consolidated G&P segment earnings for the second quarter. Our consolidated leverage ratio was 3.4x at the end of the first quarter, and we had about $2 billion of available liquidity. In April, we successfully completed our inaugural TRGP notes offering in the investment-grade market, issuing $750 million of 4.2% senior notes due 2033 and $750 million of 4.95% senior notes due 2052. We really appreciate the support of our new and existing fixed income investors in our initial IG offering and are pleased to have been able to access the 30-year market for the first time. Earlier this week, we completed the redemption of all of our outstanding Series A preferred stock for approximately $973 million. The redemption of the preferred completes an important strategic goal to simplify our capital structure, and we were able to do so sooner than previous expectations as a result of our strong company performance. With respect to the sale of our interest in GCX, the call right process has concluded, and we expect to receive final payment on or around May 20. As Matt mentioned, our pro forma leverage ratio is 3.3x and trending lower, which puts us in excellent financial position with a lot of flexibility. We continue to expect to spend $700 million to $800 million on attractive organic growth capital opportunities in 2022, with approximately $121 million spent through the first quarter to support continued volume growth across our systems. We are paying an attractive $1.40 annualized dividend per common share for 2022, and have been able to return additional capital to our common shareholders through opportunistic repurchases, with $50 million of shares repurchased in the first quarter. Our continued investment in growing Targa's underlying businesses, supported by an attractive macro backdrop and the strength of our balance sheet means we are in excellent position looking forward to continue to return an increasing amount of capital to our shareholders. Lastly, I'd like to echo Matt and thank our employees for their dedication and for continuing to prioritize safety. And with that, I will turn the call back over to Sanjay.

Thanks, Jen. [Operator Instructions]. RJ, would you please open the line for Q&A?

[Operator Instructions]. Your first question comes from the line of Theresa Chen with Barclays.

First, I would just like to ask about your capital allocation priorities from here, given that you've streamlined your structure and fundamentals seem to be trending well. Can you talk about common share repurchases, increasing the dividend and so on?

Theresa, this is Jen. I think from our perspective, you'll see us kind of execute going forward, sort of as we are today, increase the common share dividend 2022 versus 2021, and that's the dividend that we'll have for this year, and then we'll revisit next February. You're seeing us continue to invest in our business. And also, you're seeing us to execute on opportunistic share repurchases. So I think that's going to be the formula for us going forward. And then, it's just going to be a matter of the opportunities in front of us to figure out where we think our capital is best spent.

Got it. And there's been so much momentum in your story in the macro tailwinds. I think all of that is pretty clear. In your mind, what do you think the key risks are from here?

Theresa, I think we feel really good about our business. We've made a lot of improvements to the balance sheet over the years, we've simplified our structure. So the risks that are out there inherent in our business are commodity prices and volumes. But even from both of those, I feel like we're better insulated and better protected to the downside today than we were a year or 2 ago. So I think it's the same risks that we look at. We've made a lot of progress on recontracting and putting in fee floors in our G&P business. We also have a significant amount of hedges, which reduces our commodity price exposure. And just as we continue to grow across our footprints, we have really strong diverse customers across our G&P in multiple basins and have good diverse customer set out in the Permian. So the risk kind of remain in our business, but I think we've done a good job at trying to protect ourselves from the downside.

I think the starting point, if any risks do present themselves, is just so different for us today than it ever has been before. We've just never been stronger, Theresa. So I think we'll be able to withstand and perform exceptionally well even if those risks do present themselves going forward.

Your next question comes from the line of Jeremy Tonet with JPMorgan.

Just wanted to start off with the guidance here, if I could, the EBITDA guidance, I recognize it's early in the year. But just doing some simple math here. It seems like if you annualize first quarter, you'd be at the top end of the guide. In first quarter, didn't seem to benefit from commodity prices, I think, as you said there. And then also, January had a freeze-off weather impact weighing on the quarter. And it doesn't seem like the guide includes the Southcross benefit. And if I overlay spot commodity prices, it's something like a $250 million add to it. So just reconcile these different things. I know the commodity price isn't baked into the guide where it is right now, but Southcross annualizing first quarter all points to above the high end. Is there any offsets over the balance of the year that we should be thinking about?

The only offset that I'd just start with, and then I'll turn it over to Matt, is just the sale of GCX was not part of our guidance. Oh, it was. I'm sorry, it was contemplated in our guidance. So yes, I think that you've got the pieces directionally correct. Current spot prices, just given the backwardation that still exists as we look out for the balance of 2022 is part of the unknown for us right now, but we are very well hedged and are continuing to add hedges. So I think we are in just an excellent position. Matt, anything else?

Yes. Yes, Jeremy, I think you laid it out pretty well. I feel like Q1 was a really good quarter for us. We had increasing volumes in the Permian. But if you look in the Permian Midland, it was up a little bit, almost flat Q1 to Q4. We had some winter weather and operational issues in January and February, but we've seen volumes rebound nicely in March and April. So it sets us up for good volume growth from now through year-end. And if you look at prices, NGLs were up a little bit, but gas was actually quarter-to-quarter for us, realized, down. And as you know, Waha prices now are much, much higher than our average in Q1. So between gas and NGL, if prices hang around here, we're going to have a lot of uplift as we go throughout the year. We also had lower volumes due to some weather impacts up in the Badlands and across our central regions, too. So with a little bit warmer weather, higher prices, I think it sets up really nicely for the balance of the year.

Got it. So I didn't hear anything to walk me away from kind of $2.7 billion, $2.8 billion or more if commodity prices...

We have not been that specific. We just said, I think we're in good shape as we kind of move throughout the rest of this year if prices hang around here -- even if prices don't hang around here, I think we're in really good shape.

Got it. Yes, it looks like that way to us as well. And maybe just pivoting more towards Permian logistics here. The numbers we run on the basin seems like processing capacity is pretty tight. Egress for natural gas, pretty tight as well. There's a number of solutions, I guess, out there on the egress side. Just wondering, your appetite to participate in nat gas takeaway kind of to match, I guess, yours -- your equity and your customers' nat gas production needs. And then, on the G&P side, you have several plants in the hopper, but just wondering, I guess, overall growth expectations moving forward in the Permian on those 2 fronts?

Sure. We've seen pretty good growth here in the Permian, just in the aggregate and on our system over the last 12 months, and we think there's going to be continued growth as we look forward. I'm going to turn it over to Bobby, who can talk a little bit just about how we're thinking about residue takeaway opportunities.

This is Bobby. So on the residue side, we were excited to see the most recent announcements on the expansions. At the end of the day, we look like a producer relative to our exposure. So what we want to know is that the gas flows and then ultimately, we will obviously want basis as flat possible. So we've known about it for a long time, we've known about the expectations of where our expectations of where supply was going. So we're fully prepped for it on the target side even before any of the new pipes come online. But yes, we expect and hope for more pipes to get announced. And whether we participate in it or not really, you'll see us end them at times when they need us to go. And if they don't need us to go, we won't be in them, right? So I think as we think through those things, we just want to see the pipes get built, and the takeaway, egress get there in time for us to not see big basis blowouts.

Got it. That's very helpful. I'll leave it there.

Your next question comes from the line of Colton Bean with Tudor, Pickering, Holt.

So you all mentioned the weather impacts on the Badlands in Q1. And I think we've seen kind of a continuation of that severe weather here quarter-to-date. So can you just update us what you've seen as we move through April? And then are there any longer-term infrastructure damage and considerations that you have as you think about the balance of the year?

Yes, sure. I'm going to turn it over to Pat to answer that one.

Yes, you're right. I mean, obviously, there's been a couple of pretty significant weather events in April in the Badlands. And about the time you get back up from the first one, you know the second one follows up behind. And they were pretty severe. They took production across the Badlands almost to nothing across everybody's systems. Certainly, we're in the rebound mode, we're coming back up, we are not fully up. So will it impact our second quarter? Sure. April, it was impacted. We're still not fully up in May, but we're getting closer, hopefully, mid, late May, we'll appreciably be fully back up to where we were before the weather impact. But on our side, at least, we do have some things that are positive throughout the remainder of the year that will help offset some of the occurrences relative to the weather here in April.

Got it. And maybe just to clarify that. On the offsets, is that thinking for DMP in aggregate or Badlands specific?

Badlands-specific.

Okay. Great. And then, Jen, last quarter, I think you mentioned that M&A was a consideration for the first time in a while. Can you just update us on what you all are seeing in the market and if that may still be a use of cash going forward?

I think for us, you saw us execute on the Southcross acquisition, a great acquisition for us. We're excited to have those employees join the Targa team. Integration is going well, and that's an example of a transaction where we think we're able to buy at really attractive prices and then benefit from synergies, both near term and over the medium and longer term. There are more assets and companies available in the market today than there certainly have been over the last couple of years, which is understandable given the strength of commodity prices. And so for us, the bar continues to be very, very high. And that means that there are a number of unique characteristics that any transaction would have to meet in order for us to even consider looking at it. So I think you'll see us continue to be very selective about anything that we spend our time on.

Your next question comes from the line of Brian Reynolds with UBS.

Maybe, to start off a little bit on future growth projects. No CapEx change with the earnings release, but kind of looking ahead towards 2023, we started hearing from many of your peers of adding additional frac capacity. I'm just kind of curious around Targa's thought process around pursuing a new build versus securing 100% of the economics versus potentially unidling the JV frac that's in Mont Belvieu currently?

Brian, this is Scott Pryor. Just to touch base, we do feel like the fractionation market is starting to tighten up. The number of inquiries that have come into us, both for short-term as well as long-term frac needs has increased. And some of those are actually folks that I think are trying to get a little bit ahead of the tightening of the market by trying to secure a fractionation that may start more dated into the future. We've got a permit in hand for Train 9. We continuously are evaluating when we need to formally start that -- the construction of that. And we will stay well ahead of that relative to what our needs are. Recognize that we've got good transparency back to our producers behind our gas processing plant. And as a result of that, the timing of that, we will be well ahead of that. So Again, I feel like the market is starting to tighten up, the number of inquiries coming in and the view that we have back to our producers, we feel like it -- there will be a time here in the near future that we'll look at starting Train 9 and the construction of that.

Great. Appreciate that color. And then maybe, just as a quick follow-up on guidance and specifically, the Permian inlet volumes. So far this year, we've seen a major customer in the Delaware increase their production guidance expectations for the year. And the Midland seems to be a little bit flattish for the last 2 quarters. And ultimately, wondering if this is related to, one, is there any change to any change in cadence to that Permian outlook? Or maybe, said differently, does the guidance effectively imply just a really strong back half of the year as it relates to just volumes flowing through your system downstream?

Yes. I think we continue to see really strong activity across our overall Permian footprint. Part of what you've seen in the Permian Midland, as we've seen in previous years, we tend to get more of our growth in that system over the summer when it warms up, spring/summer time frame. So it has some seasonality in it. And again, we had January and February, which was kind of impacted more by cold weather and some operational issues, and we are seeing some of that increase already in March and April. So we continue to expect growth across both Permian Midland and Delaware. But we also have seen some of our larger producers stick with their -- kind of stick with their previous guidance and what they're telling us in terms of volume growth. So just because you're getting higher prices doesn't necessarily mean they're going to ramp up production. But it is a mixed bag there. We have seen some of our larger customers point to increasing the growth rate. So I think that may have some impact on 2022, but perhaps that's more 2023 and as we go forward. We are still seeing good activity across our smaller private E&P customers who are continuing to drill. So no, I think we are pretty optimistic about our Permian growth from here going forward.

Your next question comes from the line of Keith Stanley with Wolfe Research.

First question, just with Gulf Coast Express, the sale proceeds coming in. Should we assume you use that to repay any short-term borrowings you might have done to take out the prefs? Or should we think of GCX cash as available for allocation with free cash flow over the rest of the year?

The expectation would be that when we receive those proceeds, we'll use it to reduce borrowings under our revolver right now, Keith.

Okay. Got it. And second question, can you just give an update on where you're at for 2023 hedging, particularly for Permian gas basis, just percent of equity volumes or however you want to frame it?

Yes, sure. So we're significantly hedged on the gas side. And when we do hedge, most of our volumes are Permian related, so we do hedge Waha basis. So we try and cover as best we can kind of the basis risk associated with our hedges. And where we have gas in Oklahoma, we'll hedge at those physical points as well. We were significantly hedged kind of earlier in the year, and we've added as we've seen strength in gas prices and NGLs. We've continued to layer on additional hedges not only for this year but for the next several years. So I'd say with prices hanging around here, we'll continue with our programmatic approach to continue to add more hedges.

And Keith, our 10-Q will be published later today so you'll be able to see in there the volumes that are now hedged across both gas, NGLs and condensate.

Your next question comes from the line of Spiro Dounis with Credit Suisse.

Just wanted to talk about the quarter-over-quarter variance on Slide 7. Two things that stuck out to me there. Just on OpEx, it looks like -- I guess I was a little surprised to see costs actually come down for G&P, for labor and chemicals, just given the inflationary environment that we're in. So just curious, is that sustainable? Is that part of a broader cost control initiative? And the other item there was just on the G&P margin. Matt, I know you mentioned the commodity really to pick up until the end of the quarter, was just was surprised that, that was a negative contributing factor. So curious if there was a mix shift in the quarter, any hedging impact there to be aware of?

Spiro, this is Jen. I'll take the first part of the question. So some of what we did in our G&P business was in the fourth quarter. We actually went ahead and bought fairly significant amount of chemicals ahead of time. So our chemical costs for the first quarter went down as a result of that. I'd expect our Q2 through, really, Q4 OpEx to step up as we move through time here, as we are seeing higher costs as a result of inflation and just difficulty getting certain things. So Q1, I think a little bit of an anomaly. And then also, on the compensation side, we had a higher bonus that we ended up paying for the fourth quarter. And so that was reflected in the fourth quarter, and then we tend to accrue at a lower number as we begin a new year, and so that's what we're doing in the first quarter. So that's part of what you're seeing as well that I think is, again, creating a little bit of an anomaly in Q1 relative to Q4.

Yes. And then, on the mix shift. When you look at first quarter versus fourth quarter, really, the big increase in commodity price was relative to crude oil prices. We don't have that much exposure directly to crude oil prices. We have some, but not that much. It's really on the gas side and the NGL side and gas was down and NGLs were up almost offsetting. So a lot of the run that we saw was in March, so we had some benefit kind of late in the quarter, but it's really kind of through April and then into kind of where we are now. So not a mix shift. It's just kind of the way all 3 of those different commodity prices move relative to Q4.

Got it. Okay. That's really helpful. Second one, just going back to some comments from last quarter around energy transition. I think you all had mentioned evaluating a few renewable or carbon capture opportunities. Just curious if there's been any update on that front?

I'd say we are continuing to work on a potential carbon capture solution. So I'd say that is ongoing. It's going to take a while for us to develop that. I think we're in a good position to develop that. And so we are working with others trying to put something together there to see if we can capture CO2 out in the Permian and move it down hole, there are discussions at other parts in and around our business as well. I think it's just going to continue to make progress, but I think it's going to be a while before we can move anything over the finish line, too.

Got it. Great. We'll stay tuned.

Your next question comes from the line of Michael Blum with Wells Fargo.

I wanted to ask about LPG export markets. I know you're more heavily weighted to South America, but wondering if you're seeing any drop in demand in China given the COVID-related lockdowns there. And then I guess, just more broadly, any impact to volumes from some of the global supply constraints and some of the shipping bottlenecks we've been reading about?

Michael, this is Scott. First off, I would say that when we initially started our export business, we were -- yes, we were heavily weighted towards South America. Since then, much like the rest of the players in the marketplace, we have diversified more heavily, if you will, to the Far East and that growing demand that is there. Places like China for PDH plants, for chemical plants and even for domestic... I would say, when you look at our performance on a quarter-by-quarter basis, we continue to be very consistent. At times, there are some weather issues that may impact it. There might be some logistical challenges as it relates to the shipping market from time to time. And we have seen some of that and did see some of that in the first quarter of this year. But all in all, the market is still very solid. Over time, it will continue to grow. We feel very good about the expansion that we're doing. It's very -- it's small, but yet very complementary to our business, which will allow us for some incremental capacity, and provides additional reliability to our customers that are historical lifters. So again, we've got a good portfolio of customers. They're strong, they stick with us, they appreciate the reliability that we provide, and I think as we continue to see LPG's production increase here in the U.S., we will look for incremental ways to continue to debottleneck where it makes sense and push those across the water.

Great. I appreciate it. Other question I wanted to ask was just about ethane rejection and what you're seeing across your system right now, and then, how you see that trending for the balance of the year? And is there any upside to volumes related to that?

Yes, Michael, we are in recovery across our systems, and we have been for some time. So I don't really see a big change for us there. Our exposure to ethane is really more on the price side than the volume side. So as ethane moves up, we have some hedge, but we do have some length on that. So we benefit from higher prices on ethane, but I wouldn't expect to see with ethane prices moving up, much of a volume impact, really.

Your next question comes from the line of Sunil Sibal with Seaport Global Securities.

Thanks for all the clarity on the call. I just had one follow-up from previous discussion on OpEx. So it seems like OpEx, over the last couple of quarters, has kind of swung around a bit. I was wondering, is there a good way to think about your OpEx in fixed versus variable buckets, especially when you think about exposure to commodity chemicals and all that?

I don't think that there's an easy framework that I can give you, Sunil, related to that. I think that as we think about OpEx Q2 going forward, it's likely to begin to look more like the fourth quarter than the first quarter. So that's probably the best visibility that I can give you right now. But we're also seeing prices increase real time. So it's a little bit tough to predict as well. I think our operations teams and engineering teams are doing an excellent job of trying to stay in front of inflation and rising costs as much as they possibly can and are doing an excellent job working with our suppliers, but it's just a little bit difficult to predict right now. But I think the best visibility I can give you is that second quarter and go forward will look more like the fourth quarter than the first quarter.

Okay. Got it. And then on the NGL marketing side, I think you mentioned in the press release also that there was less optimization opportunities. Obviously, some of that is seasonal, too. But I was curious, is there a good way to think about that part of your business? And what are the drivers of this optimization revenues for you?

Yes, sure. I'd say it's really probably more in the comparison. If you look at last quarter, we had some contango trades that were still unwinding when we had contango that we put on some dated trade. So there's really just less of that in the first quarter relative to previous periods. So I think that is the primary driver of that.

So then going forward, I guess, Q2, Q3 are normally seasonally weak -- seasonally weaker than you would expect that to kind of pick up, obviously, overlaying some contango opportunities which may show up?

Well, the seasonality part of it, we do have some -- we get some benefit in both Q4 and Q1 from our seasonal wholesale propane business. And so that will come off in Q2 and Q3. Yes, as far as the contango or backwardation or those kind of opportunities that present our marketing team, that really just depends on market conditions. So I'd say, in Q1, there was just relatively less of those compared to prior periods, and it will -- we'll see what Q2 and the go-forward quarters present us.

And Matt, just to add -- this is Scott real quick. On the wholesale side of our business, we did see a strong fourth quarter in certain areas of our business, especially those areas where we have nice pockets of field inventory. So more of those volumes moved out during the fourth quarter than they did in the first quarter. So as a result of that, we had some uplift, probably earlier in the winter season than we did in the latter part of the winter season, just where our position is on inventories.

Your next question comes from the line of Harry Mateer with Barclays.

First question, it seems like you guys made it up to investment grade just some time for the rates market to get turnarounds ahead a bit, but I'm curious whether you see more opportunities to optimize the capital structure and your interest expense in the second half now you've done your inaugural IG deal?

Harry, this is Jen. I think we'll have continued opportunities just moving forward. We do have some higher coupon notes. So depending on the callability and call prices of those notes, we'll be continuing to try to figure out how to best manage our liquidity and our notes positions going forward. I do think there is continued opportunities to benefit from savings, but the cadence of that is largely going to be dependent on the prices that we can call in those notes and then where can we issue notes in the market going forward. So we'll just have to see how that plays out. But I think we're in an excellent position anyway.

Okay. And then, earlier on the call, you answered that the call on the GCX proceeds is going to be towards paying down the revolver. Just would love to get a sense for how you structurally like to plan out liquidity, whether it's a cash balance you'd like to have? Or what are some guardrails we can think about it on a quarter-to-quarter basis that you'd like to keep in terms of available liquidity?

I think a lot of the cash that you see on our balance sheet quarter-to-quarter really has more to do with the JVs and the terms of the JVs and when cash is distributed out of those joint ventures than anything else. So we're generally trying to manage our liquidity position as optimally as we can. And so that means utilizing the available tools that we have, whether that be our revolver or accounts receivable facility or just maintaining cash on the balance sheet. So there isn't a hard and fast rule that we're following that I can give you. It's really just us trying to manage as best as possible to minimize interest expense and maximize the liquidity that we have at all times.

Your next question comes from the line of John Mackay with Goldman Sachs.

I wanted to go back to some of the questions -- some of the comments on capital returns. Have you seen some of your peers that saw distribution or dividend cuts in the past kind of aiming to get back to where they used to be and they've kind of started that process now. Just curious if that's on the table for you guys or maybe just a little more detail on how you're thinking about that and whether or not it could be a payout that's more in line with the S&P 500 type framework?

Yes. Sure, John. Yes, good question. I think as we really review our dividend payout, as Jen mentioned, we'll plan to provide an update for you early part of next year. It's not our goal to get back to where we used to be. I think we're looking at market indicators. We are looking at S&P 400, S&P 500 in terms of -- we'll look at yield. I know that moves around with the share price. So we'll look at percent return based on free cash flow and other cash flow metrics as well. So I think we're going to be in a really good position to continue to move our dividend higher given all the free cash flow that we have. So we'll just evaluate it. I'd say similar to the way we evaluated it last year. We'll look and say where do we want to be? Well, we will look at our peers and see what they are paying out, but we'll also look at, I'd say, a broader peer group of the S&P 400, S&P 500. And I think both of those will inform our decision as we think about what we want to do for '23, but then also, as we think about kind of a multiyear, how do we want to be kind of layering in to increase payout over time.

That's great. Appreciate that, Matt. Definitely in the buyback camp over here, for what it's worth. Maybe just one more from my side. Some of the weather issues kind of masked some of the basin trends. So just wondering if you could give us an update on kind of what you're seeing in terms of green shoots or not in some of your other basins kind of outside of the Permian?

Sure. Pat, do you want to give a bit of an update there?

Sure. We have seen increased activity level across all our basins. We've seen not a huge uptick, but a pretty steady, nice uptick in our Oklahoma regions, more so on the southeast side of the state versus Western Oklahoma. Certainly, we've seen people that haven't drilled in 2, 3 years employing rigs and drilling wells. We've seen a lot of recompletions. So I'd say, we're stemming the tide there relative to past steady declines over the last 3, 4 years. We're seeing enough activity to offset decline and, frankly, in some areas to actually grow. In the Barnett, we're seeing activity that we haven't seen in the past. And frankly, that's a little more lumpy. So you'll see that showing up in our volumes as we go throughout the year, but we have some positive tailwinds there. South Texas is such a competitive environment, it kind of gets lost in the sauce. But certainly, with our new acquisition, there's different opportunities relative to sour gas capture, et cetera. So we see opportunity in our South Texas region. And the Badlands is steady, is the best way to put it. The activity level is steady. Certainly, we've had weather events, but we haven't seen a huge uptick, but we've seen good, steady activity levels.

Your next question comes from the line of Neel Mitra with Bank of America.

I wanted to follow up on the ethane recovery, specifically how it relates to Grand Prix. In 2023, the basin should probably move to full ethane recovery. And I'm wondering how your third-party shippers will fare on this, whether your incentive rates will go up or your volumes, how do you see the outlook for Grand Prix with ethane recovery for the basin just trending up?

Neel, this is Scott. As Matt said earlier, when we look at our pipeline as we're getting into our fractionation facility in Mont Belvieu, both of the plants that are operating on our systems -- we do have a few third-party plants that will evaluate ethane recovery based upon their situation where, they're located and whatever their contracts are around their system. But all in all, for the most part, we don't see a lot of swing on both our pipeline as well as the third-party pipelines that are coming into our system. So I would say that it's not a big needle mover. Matt kind of indicated that earlier. But I think that when you look at where the pricing is today, most plants should be in recovery, and that's what we're seeing on our system. And given the price advantage that we see on the petrochemical side, I think that, that will continue for a while. But there's going to be some noise from time to time that all in all, for the most part in our system, we assume that we're going to have some recovery [indiscernible] fractionation footprint.

Okay. And then second question, I know you market a lot of your producer volumes, residue gas volumes at the tailgate and you've been planning for a while for the gas egress issue. But can you kind of just walk me through how you plan for that when you have such massive growth on your systems, 10-plus percent every year. How far in advance you do that? And whether you see any potential issues running into 2023, even though you've started to plan for it early?

This is Bobby. What I'd tell you is it's important to both have your own transport out of the basin, but then, a vast majority of what we do is we team up with, I'll call it, partners in the basin that have their own transport out of the basin. So as you think about us being Waha-exposed and we look to go sell gas at Waha, we will sell it to people that we know -- for lots of different reasons -- have that physical transport to get it out of the basin. They're very large counterparties that everyone on this call would know. And that's how we focus it. Then when you think about how long to go forward, we obviously we look at when we think pipes will be coming online, when we expect our -- there to be capacity issues out of the basin, and we make sure we're crossing across that. And we don't try to get cute within months. We make sure we're well beyond when those expansions and pipes will come online. So we've been doing that, we're still doing that, we've got everything that we think we need covered. And we even take out some insurance beyond that over time. So yes, so it's one where we're able to plan as far out as we want because people want to buy the gas for as long as we're willing to sell it. And then, we try to do it and match it up with when we think the -- there could be issues.

Your next question comes from the line of Robert Mosca with Mizuho Securities.

Just one question for me. Grand Prix volumes have grown pretty strongly over the last few quarters. Just hoping to get your latest thoughts on how that pipeline could be expanded in the medium term? And how early you think an expansion on the Permian segment would be required, just assuming that the potential residue constraint gets addressed?

Robert, this is Scott. Yes, we have been very pleased with the continuation of increased volumes on our transportation side of our business, quarter in and quarter out. First quarter averaging 460,000 barrels a day into out Mont Belvieu complex. So -- and again, we had good transparency back to our customers and our producers behind our plant and the additive of gas processing plants in the Permian. So we will continue to add pumps along the pipeline sector. We've got good operating leverage today. And remember, when we throw out those stats around 460,000 barrels, again, to the first quarter, that -- part of that contribution is coming from North Texas and into Oklahoma from our applications in that area. So we will evaluate the need for additional pipe and pipe expansions. We will be well ahead of that relative to what our needs are and the producers behind our system. So it's something that we're going to be well ahead of when it's necessary.

And there are no further questions at this time. I would now like to turn the call back to Sanjay.

Thanks to everyone that was on the call this morning, and we appreciate your interest in Targa Resources. The Investor Relations team 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 call. We thank you all for participating. You may now disconnect.