Targa Resources Corp (NYSE:TRGP)
Barclays CEO Energy-Power Conference (Transcript)
September 11, 2013 03:45 PM ET
Joe Bob Perkins - Chief Executive Officer
Rick Gross - Barclays
Rick Gross - Barclays
We're getting towards the end of the roundup here today and next on the agenda for our group is Targa Resources. You can own it in basically two forms. You can own the C-Corp, levered way to play underlying or you could own the underlying LP. Targa is a company that started with rather small footprint like in many of these MLPs, and through a lot of very, very astute positioning, little bit of being in the right place and the right time I said earlier that when they ask Willie Sutton, why he rob banks, he says that’s where the money is. And when you look at the footprint of these folks, you will see exactly why they’ve done well, why they have a large inventory of things and why they have a growing opportunities set. I am very happy to have Joe Bob Perkins here to talk about the company. He is the CEO of Resources and there is also Jennifer Kneale here from the IR Department to help answer all the questions.
So with further adieu, Joe Bob can give us an update.
Joe Bob Perkins
Thanks, Rick. Pleasure to be here. Just popped in my head as Rick said small footprint, we've got a great one on one room. It's a corner to corner room with windows on both sides and reminds me of the corner office we started the company and where several of my partners and myself had desk against the walls and round table in the center and we turn to the middle to have the meeting.
Our footprint has expanded considerably since then and I am very pleased about that. We are proud of what we’ve done and I am going to try to tell you a little bit about it. We expect the two ways to be an investor and this is investor conference call start with the two ways to be an investor.
Left hand side is the partnership, the MLP, Targa Resources Partners often say NGLS the ticker symbol. It [IPOed] in February of 2007, now is an enterprise value of about $8 billion. If you are an investor there, you’re clipping the yield of about 5.8% right now on $2.86 a year and you get K1, those of you with MLPs know what that’s all about. You look at the performance and here we’ve started since December 10, 2010 when the parent went public.
And that charts it against the (inaudible), some other industries and you are a happy MLP investor if you started then or if you started at the IPO in 2007 and I would like to thank we outperform all along the way.
The other way to own it is down to C-Corp, there you had an opportunity be in since December 2010. We have a enterprise value there of about $3 billion and there you have a yield of about 3% and because it is the [key P] of the MLP, that’s leveraged to grow and it has been even better than the MLP since December of 2010.
And you can see its relative performance there on a total return basis, a very interactive investment. This structure shows a lot of things, but I will just focused on the couple. One why the C-Corp has that benefit, it has 12.3% of LP units, but has all of the IDR ownership of Targa Resources Partners LP. Targa Resources Partners LP has all of the businesses, owns and operates all of the businesses. Here on this chart you can also its four segments as reported publicly. The largest segment is our Field Gathering and Processing segment and we will be talking about all of these more. Coastal segment is our smallest at 12% of operating margin and then on the downstream side of the business Logistics segment at about 31% and the rest is in our Marketing and Distribution segment.
This is a really good idea when we started trying to put the entire story on one page and I could stay on this page and tell you the whole story, but it’s gotten a little crowded. The left hand side is about a very attractive gathering and processing footprint that is driven by shale and resources E&P development, I know there are a lot of companies talking about that today. The middle column says and a lot of those NGLs end up in Mont Belvieu and we got a great footprint there and I will spend more time talking about it. And that drives our long-term growth potential, the third column.
Interestingly enough the right hand column is essentially our guidance and that guidance has been unchanged since before the end of 2012. There have been big changes in liquids prices. Some surprises in our operations. Good things commercially. Different things happening but that guidance has been resilient.
I am going to take that framework and give you gathering and processing picture summary, our logistics asset summary and then talk some more about the growth. Our satellite view of the gathering and processing footprint, I think it’s pretty impressive. We always start with the shale and resource map right. While Targa is not everywhere we don’t aspire to be everywhere but we really like where we are.
And our presence starts with the two largest oil fields in North America, the Bakken, Three Forks and the Permian basin, those are two of the largest in the world, very proud of that position and lots of activity. We also have a footprint in North Texas, the oily part of the Barnett shale and a presence along the Louisiana Gulf Coast onshore and straddle plant accessing offshore Gulf of Mexico gas.
Coastal G&P lot of assets going to utilize right now, but they have potential upside long term, where the resurgent of Gulf of Mexico onshore Louisiana drilling, and that’s about all I am going to say about that right now. We operated very well, keep making about the same amount of money with even less volumes going through the plants.
Now let’s turn to the field gathering and processing. Starting with the Permian basin, as I understand it from a one on one there are lot of people talking about E&P activity in the Permian basin, so I want to be careful about repeating the story, it’s a fabulous story. So I hope you heard some of that directly. It really sort of sums up for me if you look at the bottom right hand chart in 2012 you can see what Permian basin crude oil production was. The next data point is 2013 year-to-date, where we’re at level 98% of 2012 through the first half of 2013, that is staggering growth in oil production. That’s what that activity is about, various players and various parts of the Permian basin, that is the total picture, it’s quite an oil basin with a lot of activity.
This is our presence across the basin, we are not everywhere in the Permian basin but we kind of go from east side to the west side and I really like where we are. Taking it from the right side to the left side, our first acquisition included SAOU, on the east side of basin between San Angelo and Big Springs Texas terrific acquisition. When we first got it in 2004, you could drive a long time before you saw an oil rig. Now activity is really high. And the producers inside that would tell you that they have more than 10 years of drilling locations at the current rate.
Drilling units are no longer a single well, but they are multiple wells and might have been Canyon sands originally, then vertical Wolfberry, they want another vertical Wolfcamp and maybe a horizontal Wolfberry and maybe a horizontal Cline, you see that from public information of the companies that are visiting here and others.
We are just trying to do our part of catch up and hand over gas being produced in that area. It's been setting records, certainly setting records on volume. We are full in our existing plants and are building the new 200 million a day high plant you can see illustrated by the star there.
Cline, Wolfberry moving a little bit West Sand Hill to start in the middle, it's benefiting from the Wolfberry on the east side of the Sand Hill system that conditional blob, it’s Delaware Basin not really shale driven resource technology at all. It's good all Delaware Basin oil batch. And at today’s oil prices people keep drilling there and that's contributing to the growth at Sand Hills.
On the West side of the Sand Hill system, the Avalon/Bone Springs is very active. We added a 30 million a day processing facility here recently, we've already built it up. We're looking at other ways of expanding that footprint, where does the plant go, where does the pipe go, how do we continue to take advantage of EMP driven drug? For those of you who have known us for a while, our Versado system was the one we sort of said, that’s kind of sleepy. Go back three years ago, declining slightly. Next year, holding flat. Probably better than last year and then again a little better than last year because of the operational problems we have.
Versado is increasing, increasing I think pretty nicely over the next few years. We benefit again. The Avalon, Bone Springs development has moved towards Versado and all we have to do is reach out and get some of it. It says here in the fine print, pursuing opportunities to lay pipelines, to capture new Bone Springs, Avalon supply. We just have to go a little bit west. It's been retain with a pipe we had in place, I approved a 12 mile high pressure line that's reaching out it's and there is the potential for further reaches and more gas.
There is less competition to the west of Versado and Sand Hills. To some extent, I think we shared this presentation or two ago. It's a little bit like the surface of the moon out there. There is no infrastructure. There are no communities to live in. The equation will be, are we bringing wet gas back to facilities like Versado and Sand Hills, while we're building plants and man camps. And those of you who know the Permian Basin from a few decades ago, that’s how these develop. There were man camps before they were communities to support the infrastructure.
Lot of exciting things going on in the Permian Basin. We're enjoying our little part of it, getting a little bit of our market share and doing what we can to help the producers. North Texas. Look at broad Barnett statistics, you say, the Barnett is declining. The northern part of the Barnett shale is not declining. We are full, we are going to be going filling up our expansion. Activity is very high in Montague and Wise County, not the only thing that’s causing it to be a little low or some people have to be making capital decision between their position in the Permian Basin in North Texas and we understand when dollars went in the Permian Basin, we benefit there.
But there are number of players where this is one of their strong positions and they remain very active, and that Marble Falls play is interesting because it sort of the preview of smaller independence, this is held by production and now a new play that is helping contribute to the growth in north Texas. Sightings still happening here too.
Our third area of terrific activity and growth is our North Dakota Bakken, Three Forks, Badlands acquisition. Targa Badlands is also a growth project. We haven’t owned it but since the first of the year, this is a map you can see our presence in Mckinsey, Dunn and Montreal counties. We are doubling the pipe that we acquired since the first of the year in 2013 and 2014. A lot of work to do its cold winter and the messy spring.
Some of my 2013 construction is going to slip into 2014 that disappoints me. But what doesn’t disappoint me is how we would change the assumptions of our original acquisition model today versus when we were preparing it last year. On a drilling unit basis you can go look at public data anyone in those counties. They are going to be drilling more wells per drilling unit than we assumed and they thought at this time last year. And each well has higher performance than we would assume.
We were looking back over shorter a bit, looking at tight curve, based on previous completions, but that new data the new completions, the learning curve that has occurred so the tight curves are better by every sub region around our system and the initial production is better in every sub region around. So I feel much better about the long-term. We said that it would be accretive during 2014 that’s still the case and beyond that it’s even better than we thought.
That’s our gathering and processing part of the story, what we do in West Texas and North Texas and what others are doing in the Eagle Ford, the Granite Wash and even the Marcellus and Utica by the way that area has been there a long time and now there are projects finally being talked. A lot of those NGLs have to come to Mont Belvieu and again we’re well positioned at Mont Belvieu and are just going to get some of our share of that activity and growth. It has driven a lot of investment for us over the last few years. As we try to help the NGL supply that showing up across the nation and in Mont Belvieu.
These are the logistics assets that we do that with. First starting in the right hand corner of that map, you can see our Mont Belvieu storage terminally liquids handling facility, our CBF fractionator, and ownership in the GCF fractionator. All of that is on top of the limited Mont Belvieu underground salt storage [cabins] well positioned there, just a few of us positioned there and they are not going to create any more salt there.
That’s salt developed by (inaudible) petroleum many years ago is why petchems are located around it, why refineries are located around it, why we already have the interconnection second to none equal to enterprise and above others in terms of connecting to the petchems the little red dots are illustrative of that around the system, it’s hard to duplicate this infrastructure and we are connected back to Galena Park as you can tell by the map which is one of two operating LPG export facilities along the gulf coast, pretty interesting stuff going on. You’ve seen our growth projects CBF Train 3, the GCF expansion, CBF Train 4 which is up and running now and where long term contracts are kicking in beginning in October 1.
CBF Train 5 which we have permitted that’s public where we are told it should pop out before the first of the year. I hate to say that I still can’t count on my federal government but I am increasingly sure that it won’t take any longer than that. In addition to our fractionation growth projects, our international export project is also been driven by those broad economics we just talk about, we are adding capability there to add low ethane propane and you can see it says commissioning.
I think last conference we told you that we would be through ahead of our October 1 long term contract dates across last weekend a test mid-sized vehicle was loaded with low ethane propane and has already left the dock so it must have worked. Last night the first VLGC arrived at our dock and its currently loading low ethane propane. I got pictures sent to me early this morning, those are lot better than the photo shop at VLGC that I will show you in the picture in a second, it’s a real VLGC and its currently loading.
We probably load one more VLGC before the end of the month, which makes everybody feel terrific about the October 1 term contracts. At that point we have contracted four VLGCs a month, those are roughly five to 550,000 barrels of propane or butanes to be exported in addition to the million plus barrels that we've been doing on a regular basis of HD-5 or butane in small and medium size ships. But we've really increased our capability and I'm happy to report we are doing what we said we would do.
I love this picture, I wish we had the real shop, maybe by the next conference we'll have the real ship in this picture. But this reflects the activity, so you can understand the moving parts. First of all, it's very important to recognize that this export facility is directly linked to Mont Belvieu storage, fractionators, the deethanizer over there to the right. You can see a 20 inch and an 8 inch pipeline that's what exist today. We're already working on putting the 12 inch pipeline as part of our LEP project Phase 2.
One of these four refrigerators is now fully up, we're working on the barge to VLGC dock. This one’s already in place, won’t be long by the end of the year will be, from now on we're covering the end pieces of this and by the end of third quarter of 2014, it all be completed and at that point an additional 4 VLGCs per month will be able to leaving this facility, we're already contracting those and I expect high utilization of that total facility. And those exact numbers appear on another page.
Why do we do that? It’s because propane and butane are advantaged on the global price curve for waterborne LPGs. Propane is one of the lowest cost waterborne, U.S. propane from the Gulf Coast is one of the lowest cost propanes in the world. Just a little bit behind the Middle East, a little bit more reliable and with growing supply issues.
If you're in this business you want that to be a part of your portfolio. You can see the rapidly increasing exports. The little red line reflects one relevant and easy to get differential. It's the difference between the [SAOU] crack price and the Mont Belvieu spot price, but this isn’t about what's happening in any one month, or any one year. And even when those have been small, exports have continued through the docks.
Globally what's happening, if you add [IRRs] and loan stars and enterprises capacity to the waterborne market along with the likely increase of waterborne exports, U.S. Gulf Coast would only be about 17% of the market. What happens? Something gets pushed up the cost curve even with growing demand, but it's the guys at the high end of the cost curve, not the guys at the low end of the cost curve. So I feel really good about the U.S. position and our export facilities position for propane exports over the medium term as far as I can see at least. Same position exists for butane just to a lesser extent.
That takes us to our growth projects. I had actually talked about many of them here. This is a summary and we’d happy to answer questions about any line item later, but if you look at that summary, we got about $1 billion of CapEx being spent in 2013. In total, $1.7 billion of projects being completed in ‘13 and ‘14, and if you look at it, about $1.2 billion of that $1.7 billion is fee basde projects. That’s terrific for our mix. It's a result not necessarily an objective, but all along the way taking advantage of opportunities in front of us. We've been trying to make sure we achieve all of the fee based operating margin in front of us.
If you look at that total projects, it’s also interesting that we are able to fund that it looks like there are regular debt issuances in our ATM programs. Now with 1.2 of the 1.7 just now being fee-based and looking back over our shoulder having a similar mix of opportunities, gather and processing versus fee-based, remember our new Bakken acquisition is fee-based.
We can see very quickly this growing to 55% to 65% of total operating margin. I had a little bit of a goal to get it over 50%, that was driven by the rating agencies, so I thought that was a magic number. But I am going to be okay if it’s at the bottom end of the 55% to 65% range because that won't mean a single less dollar on the fee side, it will mean that on the commodity based side I had more operating margin. That’s not a bad answer.
And we’ve got terrific visibility on that fee-based side and may be less visibility on the commodity based side. We still had the portion of our field G&P, don’t really hedge the ethane or propane as much, it’s deal with management and the deal of our hedge committee but there is no sense locking in propane and ethane prices where they have been. Of course propane prices are higher now but not in the forward market. This is terrific example of how all of those things I’ve talked about result in commodity price exposure being mitigated.
Our scale, our diversity, our fee-based that I just talked about, what if you look at EBITDA from left to right 2007 to 2013 estimate, those are bars. And we repeat the bars in each case. The red pricing band is first crude oil pricing kind of moving all over the place since 2007, one of the biggest rises and drops in my career 2008 and 2009, likewise for natural gas and liquids. Another rise and fall in natural gas liquids in ‘11 and ’12, but our EBITDA flat and growing during those fairly volatile pricing periods. We’re just not that sensitive to pricing. We’ve got diversity and scale, a little bit of hedging and a lot of fee that mitigate all of that.
And therefore we’ve been able to grow our dividends and our distributions. This is pretty impressive track record. Go back to that first chart I showed which said performance at the MLP and performance at TRGP, this is just a distribution and dividend piece of that total return, that’s why the price goes up, but 11% CAGR by the way right in line with our 2013 guidance, 34% CAGR for TRGP, our guidance for TRGP for 2013 was in excess of 30%, pretty smooth, pretty agreeable track record, we’re proud of it. We manage the balance sheet conservatively as well.
Our balance sheet approach is if we need more capital and we often do, 50% debt, 50% equity, we’re really, really close to that when we show up every year or more frequently with the rating agencies. You look at Targa leverage ratio, three to four times, that’s always been our target telling all, telling rating agencies well exist at the bottom band of that. We may exceed the top of it for special occurrences. $1.7 billion worth of capital investment was a special occurrence generating now EBITDA for a while, but quickly generating EBITDA beginning in the third and fourth quarter of this year, and that excursion above the band at 4.1 will be quickly back in line where we like it.
With that, I think I have wrapped it up, these are investment highlights and one more satellite heard about the operations.
Any question while we are still in here. So I talked to all in one on ones already.
Rick Gross - Barclays
In the context of you got a number of things that you may, it will pursue in the future beyond into the 2013 and ‘14 guidance. In the context of where you are seeing pinch points where customers are coming to you and indicating that they need more capacity, can you kind of give us little bit a feel for where that might be within the footprint?
Joe Bob Perkins
We will just go left to right, the Badlands acquisition customers are coming to us and sometimes unhappy with us because they need capacity and needed so fast, got a great back bone of an asset and we need to double the pipe in place and hook up wells. So lot of flaring going on in north Dakota. I would like to be more help crude and gas lots of opportunities for this.
Time limits, it’s not opportunity limits out there. You move to the field gathering and processing first at large Permian footprint that I talked about. Customers really want the 200 million a day plant to come up, it's going to fill up much faster than when I got it approved, we're looking at other projects try to be helpful with their incredible growth. And we start with strong footprints, not everywhere, but where we can build from that strong footprints, maybe even connecting Sand Hills and SAOU, we're very active working on those projects.
We're doing that with pipe kind of beneath you radar scope like the example of the 12 mile extension on Versado, extending pipe at Sand Hills, adding compression. We'll probably add a plant here at some point. Would be pretty long pipe but not too longer pipe to connect Sand Hills and SAOU.
I actually didn't finished, apologize, sorry (Inaudible) that was just Permian. I got customers who want the 200 million a day plant completed in North Texas. I am sending gas to other people to be processed right now. You go all the way down to Mont Belvieu and Galena Park incredible demand for the export slots, Train pipes got more than enough customers and would probably will end up doing the Train 6. Rick knows this pretty well did I leave something out. Petroleum logistics business has a lot activity around Galena Park Channelview and thoughts about how to expand the Patriot (inaudible).
Rick Gross - Barclays
Yes. What's the reasonable growth rate and the dividend on the Corp. [movement] over 3 to 5 year time frame.
Joe Bob Perkins
Yep, we haven't provided that guidance. If you look at our historical track record, it's been pretty good. We’ll provide guidance again, first week of November in the investment, when we call Investor Day. That’s Investor Day is likely to provide guidance for the next year and EBITDA guidance for the year after that. With the projects I’ve alluded to, we are continuing to invest capital at attractive returns. I see continued growth and we’ve said that in our earnings call. Continued growth in distribution and in dividends. We just haven’t put a percentage on.
How large can the export capacity become? How much capability is there at that facility in terms of land and siding and everything else that goes along with it?
Joe Bob Perkins
I like the question because it ended within terms of land and siding and everything else that goes with it. An export facility, LPG on the U.S. Gulf Coast is about a whole lot more than land and a dock around the ship channel. It's about that connection I was showing you in the picture. Multiple pipelines, back to fractionation, salt dome storage. terminaling facilities, connections to customers, connection to supplier, critical, then you get it to the dock and you got a refrigerated and dock space. All of that combine for Targa, I've got the 1 million to 1.5 million, a conservative addition of two, a conservative addition of two more, is taking us to the 5 million to 5.5 million.
Those conservative numbers; guess what, when I announce the 1 million, we figured out ways to move more ships through there all the way up to 1.5 million. I think without additional capital investment, figure out ways to move more than two ships, four ships a month and then four more ships a month through that facility or low cost debottlenecking investments or using my Patriot dock to help park and move vessels that’s minus, Phase 1 we are done, almost done. Phase 2 will be done over the next year and we’ll be adding pieces and we are going to be figuring out how to better use it, then we’ll figure out what's after that? Its not land constraint.
On the same subject, apologies if its in the presentation, but the impact of that would have on revenue per share or earnings per share if you;ve reach that 5x expected growth in propane export?
Joe Bob Perkins
I know you would like to number, I haven’t given that publicly, its positive and nicely positive.
Do you see constraints in the channel itself as far as ability to send more tankers and does that mean potential for facility is being build in Corpus Christie or another place along the Gulf Coast?
Joe Bob Perkins
I think the first constraint will be propane. By the time we get fully built out enterprise and some of the loan start, propane supply and low ethane propane probably be a constraint on the margin. Then it’s the interconnectivity in adding it overtime. See a few players continue to add not in the big leagues that we have but on the market in my opinion.
That constraint you just mentioned is that on fractionation capacity or actual supply, as a production I mean?
Joe Bob Perkins
Near term it’s on supply of actual production, the first easing of that the big easing of that constraint was if you turnaround those pipelines coming back from the northeast and then you would have more propane supply and you would need some more dock capacity. Everything gets sequenced in this industry, one bottleneck get solved then the next bottleneck gets pops up.
One last question that sorts out to work in propane prices go. I mean the propane market in United States is about a 1.2 million barrels a day, chemical guys are using 500,000, the seasonal number for and obviously it gets impacted by storage for hitting, crop drying and all of that takes the number up pretty high. If I add up your 5.5, 6 whatever the million barrel a day is Lone Star Enterprise there is tension there between where those barrels go. I get to see Saudi spreads and Europe spreads and Asian spreads and all that, but all the stuff goes to Latin America. How do you read the tea leaves as to how much of a spread unnecessarily you but some of the marketers are making and how big that demand is and how much tension are we really going to get on the propone market here between the two because one of them is going to bid that incremental propane barrel.
Joe Bob Perkins
You actually talk about two kinds tension, what does the tension looks like for the water born propane two particular markets and what does the tension look like in the U.S. for propane supply? I agree with you Latin America’s market looks like its going to be hungry and continue to be hungry for a while. With any grow the Asian market continuous to increase. I am not saying we are immune to global malaise but we are not. We will get to it really as well as anyone, but when growth returns just normal even low economic growth globally, you need more waterborne LPGs, and I don’t see Latin America producing many time in the near futures.
What I was asking is are marketer making better margins than I can see on my Bloomberg screen.
Joe Bob Perkins
I am just trying to make a nice beam; if they are making attractive margins that’s good.
Rick Gross - Barclays
I guess we have done zero, zero. So the breakout room is liberty three for anybody who is got incremental questions, and thank you all for sticking around to the end the round up.
Joe Bob Perkins
Thank you very much.
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