Targa Resources Partners' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Targa Resources (TRGP)

Targa Resources Partners LP (NYSE:TRGP)

Q3 2013 Earnings Conference Call

November 5, 2013 10:00 AM ET


Jennifer Kneale – Director - Finance

Matthew J. Meloy – Senior Vice President, Chief Financial Officer and Treasurer

Joe Bob Perkins – Chief Executive Officer

Vincent Di Cosimo – Vice President, Products & Crude, Storage & Terminaling


James Jampel – HITE Hedge Asset Management LLC

Stephen Maresca – Morgan Stanley

Jennifer Kneale

Welcome to 13th Investor and Analyst presentation for both Targa Resources Corp and Targa Resources Partners LP. Before we get started, I would like to mention that Targa Resources Corp TRC or the Company and Targa Resources Partners LP, Targa Resources Partners or TRP or the partnership have published their joint earnings release which is available on our website at www.targaresources.com. We also posted an updated Investor presentation on our website which we will be using today. So please access the presentation via webcast or through our website, so you can follow along.

Speaking on the call today will be Joe Bob Perkins, Chief Executive Officer; and Matt Meloy, Chief Financial Officer, other management team members are available for Q&A. Matt will cover the first part of today’s presentation which includes a review of our third quarter 2013 results, as well our financial and operational guidance for 2014.

Following Matt discussion of third quarter 2013 results and 2014 guidance, we will begin our 2013 investor and analyst presentation, which will include an update from Matt and Joe Bob on the partnerships business operations and a Q&A session with the following Targa executives and officers available to participate. We’ve got Mike Heim, our President and COO; Hunter Battle, VP of Logistics and Marketing Assets; Scott Pryor, VP Liquids Marketing and Trade; Vincent DiCosimo, VP Petroleum Logistics; Danny Middlebrooks, VP Gas Supply and Development Badlands and SAOU; Clark White, VP Permian and North Texas, Rene Joyce, Executive Chairman; Jeff McParland, President Finance and Administration; and Jim Whalen.

Pursuant to the disclosures on slide two of the posted investor presentation, I would like to remind you that any statements made during this call that might include the company’s or the partnership’s expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the partnership’s Annual Report on Form 10-K for the year ended December 31, 2012 and quarterly reports on Form 10-Q.

With that, I will turn it over to Matt Meloy.

Matthew J. Meloy

Thanks Jen. Welcome and thanks everyone for joining us today including those who are with us in Houston and those participating by via the webcast. As Jen mentioned I will start off with a review of and commentary on the third quarter 2013 and we will than move into financial and operational guidance for 2014. For those of you on the webcast I will be starting with slide five.

Starting on slide five, the top graph. This is a record quarter for Targa as our third quarter adjusted EBITDA of a $156 million is the highest reported quarter ever and was 34% higher than the same time period last year. The increase was driven by higher volumes in natural gas and condensate prices and our gathering and processing division and higher fractionation volumes and fees and increased exports in our Logistics and Marketing Division. Our overall results show the benefits of diversity and increasing fee-based margin contributions. Fee-based margins exceeded 50% for the third straight quarter.

Moving to the bottom graph, the operating margin was $200 million for the quarter, which is 24% higher than Q3 2012. Logistics and Marketing Division produced quarterly operating margin of $103 million, up 36% compared to the third quarter of last year, primarily driven by higher fractionation volumes, fractionation revenue at CBF along with increased LPG export and storage activity at our integrated Galena Park and Mont Belvieu facilities. We are pleased to announce that the first phase of our LPG export expansion at Galena Park and Mont Belvieu was completed earlier than expected and we began testing and commissioning in September. The expansion increases our export capacity to over 2 million barrels from 1 million to 1.5 million barrels a month to 3.5 million to 4 million barrels a month.

In connection with start-up and commissioning of the export expansion, we loaded low ethane propane on one mid-sized vessel and two VLGCs in September. The Gathering and Processing division produced quarterly operating margin of $92 million, up 28% compared to the third quarter of 2012. As the combination of volume increases and higher natural gas and condensate prices more than offset the impact of a fire at the Saunders gas processing plant in the Versado system and a slight decline in NGL prices in the third quarter of 2013 versus the third quarter of 2012.

Moving to page six, starting with the top graph, we saw increased activity across our Field Gathering and Processing divisions in third quarter over third quarter of 2012 had volume increases in both our field and coastal segments. Plant natural gas inlet volumes in our Field Gathering and Processing segment increased by 17% in the third quarter of 2013 versus same period last year led by a 30% increase at SAOU, a 26% increase in North Texas and the addition of the volumes from Badlands which was acquired at year-end 2012. This is the third quarter that we are reporting volumes from our Badlands systems. And Crude oil gathered increased by 37% to 52,400 barrels a day in the third quarter versus 38,300 barrels a day in the second quarter.

You will note on this chart that NGL production shown by the triangle symbols also increased for both segments. And the graph also makes a point that not all inlet volumes are created equal but our Field segment having much more NGL production than our Coastal segment even with significantly less inlet volumes. On the bottom graph, same page, the increase in volumes coupled with higher natural gas and condensate prices resulted in a 28% increase in gathering and processing operating margins. These increases were partially offset by slightly lower NGL prices, higher operating expenses due to additional compression and maintenance costs associated with system expansion and the addition of Badlands as well as the fire at the Saunders plant.

On September 5, we experienced a fire at our Saunders gas processing facility in Lea, New Mexico. Saunders is the smallest gas processing plant in the Versado system. Repairs have been underway since the fire and the plant is expected to be operational by year-end. The net impact of the fire for Q3 was approximately $3 million net reduction in margin for the Field Gathering and Processing segment, approximately 50% in loss processing margin and about 50% in cost of our insurance deductible.

Moving now to page seven, starting with the top graph. The fractionation volumes increased by 8% in the third quarter of 2013 versus the same time period last year, CBF Train 4 was operational during the quarter and we were able to work through some of the inventory build-up that occurred during the second quarter as a result of maintenance and inspection turnaround at CBF Trains 1, 2, and 3. As previously mentioned, in September we began testing and commissioning our LPG export expansion at Galena Park. The increased capacity of the facility contributed export volumes averaging 1.7 million barrels a month in the third quarter, a 77% increase versus second quarter 2012 average volumes of about 1 million barrels a month. Treating volumes were substantially lower in the third quarter 2013 due to facility impact associated with the start-up of our LPG export expansion.

Now on the bottom graph of Page 7, the increased activity across the Logistics and Marketing division resulted in a 36% increase in operating margin in the third quarter 2013 versus Q3 2012 with Logistics up 40% and Marketing and Distribution up 30%. The increase in margin was largely driven by factors already discussed including higher fractionation revenue and increased export activity. The increased margin from fractionation activity was partially offset by factors associated with the startup and commissioning of Train 4 at CBF.

Moving to Page 8. The top graph, you’ll see distributable cash flow for the quarter was approximately $111 million, 44% increase over the third quarter 2012 and resulted in distribution coverage of over one-time based on our third quarter declared distribution of $0.7325 or $2.93 on an annual basis. In the bottom graph, as you can see in the chart, distribution coverage for both Q3 2013 and Q3 2012 was approximately one-time. As you will recall, this coverage profile is consistent with our 2013 guidance for distribution coverage being lower in the first half of the year in about one-times for the full year. Even with Q3 declared distribution, a 11% higher than Q3 2012, we expect continued coverage improvements in Q4, driven by the ramp up of contributions from the first phase of the LPG expansion and continued contributions from projects such as CBF Train 4.

Moving to Page 9, the top graph, you’ll see capital expenditures were about $267 million in the third quarter of 2013 compared to a $145 million for the same period last year. The 84% increase was driven by all of our high quality growth projects including the commissioning of CBF Train 4, the initial phase of our LPG export expansions and ongoing construction of the High Plains and Longhorn processing plants in the second phase of our export expansions. From the bottom graph, you’ll see net maintenance capital expenditures were $16 million in the third quarter of 2013 compared to $14 million in the third quarter of 2012. The increase in maintenance CapEx is consistent with increased activity, higher volumes and higher capacity utilizations across our businesses. For the full year 2013 net maintenance capital expenditures is expected to be approximately $80 million.

Moving to Page 10, the top graph, shifting to a few brief remarks about TRC’s third quarter. At TRC third quarter 2013 distributable cash flow of $36 million was 62% higher than the same time period last year and resulted in dividend coverage of 1.5 times. The higher than expected coverage is a result of an overpayment of taxes in 2012 that is being applied to 2013 cash taxes. On the bottom graph, you’ll note that TRC third quarter dividend of $0.57 or $2.28 annualized represents a 35% increase compared to the third quarter 2012.

That concludes our review of the third quarter 2013 reported results. We will now give an update on our 2013 financial and operational guidance and review our guidance for 2014. 2013 has been an exciting time to target as we have seen some of our high growth projects come on line, on budget and on or ahead of schedule and we have been working hard on a number of other projects that will contribute in 2014 and beyond.

So moving now to Page 12, starting with the top graph, you’ll see adjusted EBITDA for the last 12 months through the third quarter was a record $545 million. In the fourth quarter 2012, we provided a 2013 adjusted EBITDA guidance range of $595 million to $655 million. At this point in the year, we believe the adjusted EBITDA will likely be in a lower end of that range even with the number of factors that have impacted performance this year including slower than originally estimated ramp of Badland volumes, lower volumes of Y-Grade to fractionate due to ethane rejections at some of our customers processing plants, third-party incidence impacting volumes at Besco, supplier at the Saunders processing facility in the Versado systems, permitting delays which move the expected completions of a Longhorn plant to 2014. Despite these impactful factors, we still anticipate meeting the EBITDA guidance provided a year ago, which underscores the strong performance across all our businesses.

Now in the bottom graph. Thus far in 2013, we have spent $667 million on growth capital expenditures. For 2013, we anticipate spending a total of approximately $900 million. Our previous guidance for 2013 was total growth CapEx of $990 million, but we expect actual spending will be slightly lower. We are pleased to confirm that both CBF Train 4 and Phase I of the LPG exports came in on or under budget in early, our overall CapEx was also impacted by the permitting delays around the Longhorn plant, which moves some expected 2013 spending into 2014. Similarly, some of the expected Badlands CapEx for 2013 shifted to 2014. For 2014, we have currently announced plans with $590 million of growth capital spending, which maybe conservative if we are successful at some of the projects we currently have under development that are not included in our guidance. As previously mentioned, we now expect to spend approximately $80 million in maintenance capital expenditures net Targa interest in 2013 and approximately $90 million in 2014.

Moving to Page 13, we are maintaining 2013 guidance on distribution growth at 10% to 12% at TRP and then expect to continue our track record of top tier growth into 2014. We’re announcing distribution growth guidance of 7% to 9% at TRP for 2014. As mentioned earlier, TRP distribution coverage for the third quarter was one-time. For full-year 2013 and 2014, we expect coverage to be approximately one-times as well. As our scale and diversity and fee based business continue to increase, we believe that our long-term coverage target of 1.1 times to 1.2 times is appropriate. Now on the bottom graph same page, we are maintaining 2013 guidance on dividend growth in excess of 30% at TRP and expect to continue to grow our track record of top tier growth into 2014. Our dividend growth guidance for 2014 at TRP is in excess of 25% over 2013.

Moving now to Page 14, top graph. The graph on this page effectively illustrates how Targa has had stable to increasing EBITDA through periods of high volatility in crude, natural gas and NGL pricing. As I mentioned on the prior page, the prices we used for the 2014 guidance are $95 of barrel crude oil, $3.75 in MMBtu of Henry Hub Natural Gas and $0.90 of gallon weighted average NGL price and we also included overall NGL price sensitivity for 2014. Every $0.05 a gallon increase or decrease in weighted average NGL prices equals about a 2% change in 2014 estimated adjusted EBITDA.

On Page 15 now, our fee-based margin contributions were record $113 million in Q3 2013 and fees have provided greater than 50% of our operating margin in every quarter in 2013. We expect our fee-based margin to continue to increase and estimate that 60% to 65% of operating margin will be fee-based during 2014. Joe Bob is going to discuss our major capital project later in the presentation, but I did want to emphasize the point that 72% of our announced project that will be completed in 2013 and 2014 are predominantly fee-based.

Moving to Page 16, top graph, as of September 30th you see we had total liquidity of $824 million. In the third quarter, we’ve received gross proceeds of approximately $118 million from common equity issuances under our aftermarket equity programs, which allow us to periodically sell equity at prevailing market prices. Year-to-date we have now raised approximately $383 million of gross proceeds under this program. We are very pleased with a success of the program through three quarters of this year and believe that subject to market conditions we could potentially use the ATM program to meet our equity needs for the remainder of this year and for 2014.

Total funded debt on September 30 was approximately $2.8 billion and our third quarter compliance debt-to-EBITDA ratio was approximately 4 times. We expect this ratio to continue to improve through 2014 and expect to be comfortably within the three to four times range by the end of 2014 while continuing our 50% debt, 50% equity target funding on growth capital expenditures.

On to Page 17, the table on 17 provides the summary of our guidance for 2010. We have already covered a number of these items this morning and we will discuss the other such as CapEx and operating steps later in the presentation. That concludes my review of the third quarter 2013 and overview of 2014 guidance. We will now move in to our 2013 investor and analyst presentation and I’ll begin by giving an overview of Targa and we’ll then discuss some of the current industry trends and impact on TRP before turning it over to Joe Bob, who will provide additional highlights related to the partnerships footprint, operation and opportunities.

Okay, on to Page 19. I want to give a brief overview of the Targa Corporate structure. As you can see there are two publicly traded companies under the Targa umbrella: Targa Resources Corp which has a NYSE ticker TRGP also referred to as TRC and Targa Resources Partners LP, NYSE ticker NGLS or referred to as TRP. TRC does not own any operating assets and its only source of revenue is from its general limited partner interest including incentive distribution rights in TRP. TRC owns 11.9% limited partner interest at 2% general partner interest in TRP and the IDRs. As illustrated all of Targa’s operating assets are owned by TRP shown in the grey box segments and bullet point business units and are split into two divisions: Gathering and Processing and Logistics and Marketing. Currently TRPs operating margin split equally between the two divisions.

All of Targa’s publicly traded debt is issued by TRP and TRPs senior notes are currently rated Ba3 by Moody’s and BB by S&P. For our public debt ratings, we continue to deliver on all fronts relative to expectation that we’d laid out for the rating agencies, completion and commercialization of CBF Train 4 in the first phase of our export expansion project are important for the agencies and we look forward to giving them an update when we visit with them prior to the end of the year.

Moving to Page 20. There are two ways to invest in Targa. TRP is a master limited partnership that completed its initial public offering in February 2007. TRP pays quarterly tax distributions and issues K-1 to investors. TRP is the owner and operator of all the operating assets is currently trading at about a 6% yield and has a current enterprise value of approximately 8.4 billion. TRC went public in December 2010 and is a C-Corp. TRC pays quarterly tax dividends and issues 10.99 to investors. TRC is currently trading at a 3% yield and has an enterprise value of approximately 3.4 billion. As you can see from the graph at the bottom of the page, TRP and TRC have both generated very attractive returns for investors, which we’ll discuss in more detail on the next page.

So moving to page 21, you can see that steady sequential quarter-over-quarter growth in TRP’s annualized distributions for LP units on the graph at the top right of the page. Given TRP’s position as an MLP with top tier growth, it’s not surprising that TRP has outperformed the Alerian Index by more than 50% since the beginning of 2010. The graph at the bottom left demonstrates TRC’s strong performance since the IPO. And TRC has outperformed the AMZ, S&P 500 and Utilities Index year-after-year. We’re proud of the strong returns that TRP and TRC have generated for investors and believe that there is ample opportunity for continued distribution and dividend growth going forward.

Let’s now turn to discuss some current industry dynamics and the impact on Targa. Page 23, if we start and take a brief look at rig count, there are some key shifts that have taken place reflecting significant changes in the broader energy industry. In the mid-2000s producers begin to have some success using techniques such as horizontal drilling and multi-stage fracking to unlock some of the tight shale rock that have never been successfully produced before. One indicator of the shifting focus is the increase in horizontal drilling versus vertical drilling. Horizontal drilling now accounts for over 60% of U.S. rig activity.

Natural gas producing regions or initially the focus for producers using horizontal drilling techniques, producers then started to apply similar techniques in oil and liquids rich shale plays with continued success. Producers have continued to shift more and more resources to oil and liquids rich basins and currently about 80% of drilling activity is focused on oil production. This is the trend that we expect continue going forward.

Moving to Page 24, the potential result of continued producer activity in oil and liquids rich basin is illustrated on Page 24, as crude production in the U.S. is expected to increase over the foreseeable future. The EIA’s base case projection estimates crude production of 7.5 million barrels by the end of 2020 with a high case projection of 10 million barrels. Current domestic production has already exceeded the EIA’s base case expectations. The majority of increase over the next decade is expected from tight oil resource plays like those in the Permian and Wilson basin where TRP has well positioned expanding footprints. One impact of increased crude and liquids focused activity in domestic shale plays drives more NGL supply from field production.

Using forecast from a variety of sources, we estimate that between 2012 and 2017 there could be about a 50% increase in U.S. NGL supply. Increasing up steam crude NGL and associated natural gas will drive demand for additional mid-stream and downstream infrastructure. Targa has benefited and we believe we’ll continue to benefit as more highly efficient processing plants, fractionation services and increased export activities are needed across the country.

Now on Page 25, you can see TRPs geographic diversity, and our Gathering and Processing division is intentional. Our Permian and Bakken systems are located in two of the lowest cost producing crude basins, which as a result are two of the basins with the most active rigs running. The Permian has more than 460 rigs currently running, and is the most active basin in the U.S. The Williston Basin is the third most active basin in the U.S. with 183 rigs currently running.

Our North Texas system is located in the liquids rich window, the Barnett Shale and our Coastal Gathering and Processing assets are well situated for the longer term potential ramp up in Gulf of Mexico activities. We have intentionally targeted oil and liquids rich basins for our Gathering and Processing activity, producer activity around our Field G&P systems have driven expansions that will increase our growth processing capacity by approximately 50% from the year-end 2012 to year-end 2014.

On Page 26, TRP has the second largest fractionation position in the hub of the NGL market activity Mont Belvieu, Texas. NGLs from around the country flow to Mont Belvieu in various pipeline conversions and expansions are trying to get additional volumes connected to the country’s NGL hub. In addition to our fractionation footprint, TRP has one of only two operating commercial LPG export facilities connected to Mont Belvieu. TRP’s overall footprint in and around Mont Belvieu includes fractionation, storage, connectivity to supply pipeline and the petrochemical complex in an export terminal. We expect to have continued opportunities for growth in this part of the downstream business as additional volumes flow to the Gulf Coast and drive demand for downstream services.

Page 27, the slide on 27 reads well positioned for 2014 and beyond and we firmly believe that TRP is well situated to take advantage of the Renaissance of the U.S. energy industry in the U.S. We have assets across Active Basins coupled with the leading downstream position at and around Mont Belvieu that cannot be easily replicated which means continued opportunities for growth and value creation.

2013 has been a big year for TRP and we’ve already seen the initial benefits for some of our organic CapEx projects going into service, and we are announcing guidance with continued strong distribution growth as more projects go into service in 2014 and beyond. TRC, our general partner continues to benefit from TRP’s rapid growth and we expect dividend growth in excess of 25% for 2014. We are excited about what’s going on in our industry and what that means for Targa.

I will now turn it over to Joe Bob.

Joe Bob Perkins

Good morning, everyone. Kind of a mic check. We made a last minute audible that neither Matt nor I could get down to this one and sort of working on the lapel mic. Is everything okay? And they tell me that it’s working for the people on the phone as well. But still, so I’m happy to be talking with you today. If you pick the head I’ve got almost as much materials to cover as Mike has already covered, and I’m going to try to stay with the highlights that I could see here on Page 27. That really is the one page story. So if you fall asleep in the middle of my presentation come back to 27 and those are the headlines.

I guess I’ll just start with a pretty good slide. Value creation for TRP since the 2007 IPO. We are proud of what we’ve accomplished.

If you look at the top left hand chart capital spending from 2007 to today, there is only two eras. First, 2007 through 2010 when we were doing dropdowns and selected investments at the same time on growth capital. Then 2011 through 2014 we shifted, we shifted as the industry shifted to keep up with the demand, but we shifted to a lot of organic investments and selected acquisitions that are driving growth now and in the future. Our strategy from 2007 through 2011 really backed when we founded the company has been the same. The strategy of acquiring selected strategic assets in good locations has the right price. Taking those assets, better utilizing and better commercializing them and then constantly looking for new opportunities that play to our strength that’s the strategy we started with, that’s the strategy we’re doing today and that’s the strategy we’re going to do tomorrow. It worked pretty well.

Chart on the top right shows the value creations since IPO. IPO there is about $1 valuation and has grown to as Matt said $8.4 billion towards an enterprise value. That’s a significant increase and value above the capital that we put in it. The chart shares that there is $2.2 billion worth of value creation above that IPO value above the capital that was invested in the business, but that doesn’t include $1.1 billion worth of cash distributed to TRP investors along the way. So the total value creation the $3.3 billion since the IPO of TRP and we’re proud of that track record.

Page 30 has a lot of words on it. 2013 as we said this time last year was going to be a transformative year and it really has been. As I said our business strategy has been consistent. We’re investing in gathering and processing. We’re investing in the downstream. We’re effectively executing across a very diverse business mix and we’re identifying and developing new opportunities all the time. I’m proud of execution in 2013 where we put $900 million of growth CapEx to work this year, we make plant additions, CBF Train 4 has been brought on, the LPG export facility has been expanded successfully and the Badlands acquisition has been integrated in growing, so great execution for 2013.

Looking forward by the end of this year, right now frankly, we are very well positioned. Fee-based margin as Matt said is 50 some thing percent and going up to 60 something percent. Those next few dot points talk about execution across the diverse business. And then we look at a strong financial position and strong guidance for 2014, where 2014s EBITDA will be 25% plus our 2013 EBITDA. It’s a transformative year, but there’s a lot in front of us. Now, if we look back to the IPO in 2007, I see many people in the room remember that 2007 looked a lot different. I mean the pie chart illustrates, we were a gathering and processing company only with one asset in North Texas and essentially no non fee-based, essentially all non fee-based revenue. North Texas was our MLP.

Fast forward to that today looking sort of three quarters through 2013 and that business mix with half gathering and processing half down strength. Gathering and processing have caused multiple basins, frankly some of the best places. Our downstream business across fractionation and exports and projects that are driving fee-based revenues much different look 60% fee-based pretty soon. It says 54% looking back of our shoulder. That’s a diverse robust business, a whole lot better than just the North Texas assets will be up when public.

Next page, page 32 shows ours major announced capital projects, we’ve been using a chart like this for several years and what we do after things become announced, improved and put them on this chart, we rack them up and we show people what we are doing with it.

We’ve got approximately $1.9 billion worth of projects coming on in 2013 and 2014. If you sort of look at the columns you can see that in 2013 we spent about $900 million by the end of the year and give new guidance for 2014 based only on these approved projects were about $600 million. If you look across the entire page line items and columns you can see diverse spending across all of these projects creating and adding to our diverse business mix. About $0.5 are being spent on the Gathering and Processing side, about $0.5 in total are being spent on the downstream side and as Matt said over 70% of those dollars on this page are being spent for projects that contributes a fee-based revenue. Now every time we cover this chart, people sort of know these projects well and the first question is what next.

On page 33 is the simplified version of what’s next. Some of this is public, because you can see that in permit, so you can see it in projects or our customers and are taking about it. That short project list, I just kind of what to talk to, so you get a feel for it. In the Badlands and I’ll talk about the Badlands in a minute. We’ve got additional gas processing opportunities in front of us. We’ve got one plant working, we just commissioned another plant. That’s had a little bit of start-up issues, but we are looking at the third plant and will probably happen in 2014. The Badlands expansion programs, we talk about how many dollars on the first page we’ll be spending next year on identifying projects, but we’ll be spending dollars beyond those identified projects in the Badlands, Permian expansion program and likewise. We’ll be putting in place a pipe that my Board hasn’t approved yet, maybe plants that my Board hasn’t improved yet because there is so much going on there and we’ll talk about that in a little bit.

CBF Train 5 expansion, I don’t’ know how many earnings call that’s been asked. When is that the permit is going to pop out. And I’m going to say again recognizing that our Federal Government has disappointed me in the past that I expect that permit to be out by the end of the year. Winning conversations and that’s our expectation. CBF Train 6 is on the drawing board here too. We’ve got room for it. Mike’s acquired property quietly for years to make sure that we have, I’ll show you how proud that there stage for five and six. And there is underground storage space sufficient for five and six. Another projects are always on the drawing board and we don’t talk about them until we approve them. And sometimes they are smaller message you don’t even hear about them, that drives our EBITDA on the future.

This looks the projects will move from this chart to the chart previous as they get approved that’s what we always do, and the list of projects is not on this chart, looks a whole lot like this list of projects. We expect there to be additional investment opportunities as we go forward. I thought I was through with projects, but I had instructions in pictures right.

The top picture is our Mont Belvieu CBF fractionation facility. Looks pretty crowded, if you look real close on the chart you can see activity in cranes. We’ve been busy out there for quite some time and believe it or not there is some green space and there is sufficient planning for CBF Train 5after we get a permit, after we come up with a commercial deals that we want to drive that and even room for CBF Train 6 if there is demand for, it is crowded. I’d like to picture on the bottom first. This is the picture of first phase of the LPG export facility actually in action that is not a photoshop shoot through putting a photoshop shoot in there before, that’s a real VLGC in the front ground.

Our business before was medium size and small ships, I remember I was talking about that, 1 million to 1.5 million barrels of exports with the medium size of small ships they are in the background there. Through the medium size of small ships, the next two ships above that VLGC that gives you a little bit of scale on what the difference is on our new projects versus our old projects. All are important, we’ll continue to do the other business just as we do a lot business with VLGC. There was a conference just recently where I guess to show the first ship that was coming in with high in the water and one of the analysts looking at that ship says that ship is hungry for LPG because it was rising high in the water and I said that was a pretty good comment. I need to pause for a minute.

Our environmental safety and help is a lot more important to us than our employees probably than it is he is an investor, but for he is an investor it’s important. They don’t want a company that’s doing the wrong thing, we do the right thing. We spend a lot more time talking with our employees about the stuff than we do with our investors, but our performance is pretty going strong. For example, if we compare with our GPI peers and that’s a good group, I guess our GPI peers were far better than average.

We get awards and honors all the time and we are always looking for ways to be more better on the environmental front than we always look. I want to take a deeper dive into a few gathering and processing highlights. Starting with the Permian Basin, if we could only choose one basin to be in which is the Permian Basin. Permian Basin is the second largest oil fields in the world according to the footnote that we referenced there. Truly it’s an amazing place to be doing business. Targa’s assets across that basin are part of the active production, taking advantage of active drilling in the Spraberry, Wolfcamp, Wolfberry, Cline, Canyon, Sands, Bone Spring and Avalon shale, very, very active. If you look at the bottom left hand corner, Permian Basin permitting activity shown since 2006, which you could go further back it’s up into the right and I expect it continue to be up into the right.

Permian Basin drilling activity in the chart on the top right shows very high activity 400 to 500 rigs over time, it’s not flattening now. Look at the blue lines, the blue line has horizontal rigs increasing steadily over that period of time, which is a multiplier effect, because horizontal rigs have a higher rig effectiveness than those rigs we were looking at on the left hand side of the chart. So permitting activity and drilling activity and advances and technology are driving the bottom right hand chart, production going up into the right, crude oil, NGL, natural gas from this oil driven basin.

Page 38, is forecast, there is a lot of details in these forecast. I don’t want to take you through you can look at it latter by producer or by hydrocarbons, all of the forecast for the Permian Basin show continued activity in growing production. Many of them, I’m not even saying most of them are showing the Permian Basin growing to 5 million barrels of oil equivalent by the mid-20s. In the chart at the bottom of this for example, shows decades of growth.

Let’s talk about Targa’s presence in the Permian Basin on Page 39. You can see three major systems across the Permian Basin. They extend from the east side of the Permian basin to the west side of the Permian basin and down into the Southwest of the basin. We’re active across all of those active plays shown in different colors. We’re not dependent on the single producer, not dependent on a single play, not dependent on the single area and in all three of those areas SAOU, Sand Hills and Versado are expecting to have endless volumes meaningfully higher in 2014 than 2013. Life is good for us in the Permian Basin.

The recent expansions that you all are well aware of 60 million cubic feet a day in total, they’re essentially full. We’re building the 200 million cubic feet a day plant, the High Plains plant sort of shown in the center of the chart. And we expect more investment opportunities over time. Broadening our footprint, extending pipe to where the drilling has been done from our system, better utilizing the capacity that we have or the capacity we’re having and then perhaps expanding or adding plants over time. Really just giving our share of that activity in the Permian Basin those of you who follow EMP companies know about.

I want to talk about each of those three areas quickly, so you got a better feel for what’s going on there. Page 40 starts with SAOU, so called San Angelo Operating Unit, we never say that full term, SAOU is located on the east side of the Permian Basin. The activity around SAOU is robust. These little red triangles represent a snapshot in the middle of October of how many rigs we’re running, drilling rigs not work over rigs. SAOU is an extensive system, multiple plants and we’re adding a big one around the western side now and like I said 2014 volumes will be meaningfully higher than 2013.

Switching to Sand Hills on the next page, Sand Hills is located sort of the Southwestern part of the Permian Basin. It covers the large area of extent as you can see. The same red triangles represent producer drilling rig activity and its all across the system. My guess would be those over on the east side, not guess I know, those on the east side our drilling for Wolfberry. Those in the west side are drilling for Bone Spring. There are some conventional drilling in the center. And the volumes year-to-date for Sand Hills are up from last year and the volumes from 2014 will be meaningfully better than 2013.

The third area is Versado. Last but not least I’ll get to that in a minute. For contacts by the way Matt mentioned the fire that’s the Saunders facility at the top of the page, it’s the smallest of the three plants not a meaningful impact and it will be back up in December if you don’t believe me you [indiscernible]. Really an extraordinary job putting it back together and I am very proud of the employee effort on that. Back to the activity levels. This is recent activity.

Those of you who follow this for a while I remember three to five years ago we’ve talked about Versado not very, very much about it and when asked about the volume say wells will be a little less than last year. I said that for several years. Two years ago, we were able to stay flat, the volumes that we’re started, we’re hanging in there. They were flat. Last year, we said flat to increasing with that. I am really proud to say meaningfully higher for Versado for 2014. And we’ve got available capacity and it’s probably our fee based expansion in the Company, it does not cost much. Clark White feels good about this too as all the employees hope we call Versado.

North Texas growth overview, shifting to North Texas, North Texas located around Dallas, Fort Worth. Someone said the view out of the hotel here looked better than Dallas when I first walked up. Active area indications of that activity are showing in the top left chart.

So, let did North Texas well. Here, I can get the close to proxy of our combo Barnett area by looking at Montague, Cook, Clay and Wise Counties. So that’s part of the Barnett is not accurate. But Montague, Cook, Clay and Wise Counties, as proxy for that wet part, so permitting activity that’s 2005 drilling and that’s high.

Now we know that activity has less than it would be, so many opportunities on the Permian Basin. The people have sort of diverting their resources. But the good news is there are still producers very focused on this and we’re benefiting from that.

This shows that snapshot of that activity, where we are in the middle of October again, most of the activity in the top right hand corner that is the wet part of the Barnett Shale. Volume increases here are being driven by the wet part of the Barnett Shale and by the Marble Falls. Marble Falls is the same source of the rock is the Barnett Shale, but is actually a dewatering oil play and been contributing to our growth. As other ship resources, there is still some companies focused here.

Shifting from North Texas to North Dakota, where our Badlands system is located; our system is located in McKenzie, Dunn and Mountrail counties. Assuming then on the McKenzie, Dunn and Mountrail counties, we can look at selective permits on the bottom left hand corner on Page 45, that permitting activity is up into the right, since over the last three years. There is no slacking off in those three counties in terms of the activity as indicated by the leading indicator of Permian activity.

It’s a little harder to see rig activity in North Dakota by counties, but if you look across the basin, rig activity hanging in there in the sort of 150 to 200 rigs. But that’s not the whole story. As producers largely are moving to manufacturing mode and pad drilling and pad completion, a flat number of rigs is actually an increasing number of effective rigs, if I can use that term.

The result of the permitting and the drilling, and advances and completion techniques and more formations becoming productive is Bakken Three Forks oil production going strongly up and into the right in the bottom left hand corner of the graph.

And there are lots of forecast out there, I wouldn’t go into the details of this forecast either not know I can read the type in those boxes. But if you look at forecasts, most forecasts show oil production doubling in this area over the next 10 years.

2013 has really been a game changer I think and inflection point, if I we’re drilling the box with little arrows and we sort of still this one, when I would say is 2013 is manufactures shifting from delineation and research projects to manufacturing lists and that shift is now occurring. It’s about still increasing technology, improving the IPs and the type curves by sub regions refracting the curve. It’s about improved expectations you can see that from the producers in the area. There is going to be more completions for drilling unit, the IP is a high operating completion than they expected and the reserves are higher than were expected a couple of years ago. So that’s the game changer we’re talking about in summary.

So now zeroing a bit on our Badlands facilities. Our first one is the deal with something that’s in the disclosure of [indiscernible] contingent. The so called contingent consideration associated with Badlands. In quarter three, we estimated this liability that we had to put on our books to zero. That’s completely consistent with what we thought it was going to be when we acquired the property part of the deal was if you got to a certain level, we would have to pay an additional amount to the seller. That was a very low probability. Now with a passage of a little time and satisfying accounting rule, we can put that to where it was and by the way that does impact the adjusted EBITDA that we’ve been talking about.

So much for that. I mean to go over pages 47 and 48 together talking primarily off the math. So a lot of words on those two pages what I’ll say is consistent with that text and you can read that later I guess. We acquired Targa Badlands nine months ago, spent the last three quarters – 10 months ago, spent the last three quarters working hard to execute our strategy, working hard to execute that strategy with some difficulty and this is a brand new acquisition.

We’ve experienced the challenges that we frame new acquisitions, operating them and based on the features we did have difficult winter and spring weather and we told you all about that. There are issues with the quality of producer operations up there too as they’re struggling to work with their own new infrastructure. Producers have difficulties splitting oil and gas lines, but doesn’t do a lot of processing plants. The problems with their quality of gas setting their gas lines. But we’re working through it, working through with them and improving those operations.

We’ve experienced some slow and difficult lot of ways there are too as well. And if you talk to other and mid-stream companies you’ll know that most difficult one is reservation. We are dealing with our boom town up there. Boom town levels of activity and the difficulties getting people and working with regulators and governments and the tribe these also dealing with that same rapid growth.

Probably it’s almost down a whole lot below beyond their expectations but it has been a lot of hard work. However, we feel that is good or better or about this properties and when we acquired it.

So the reason I sort of alluded to. The math shows the general footprint. I’m going to take you through it, and we start with a Little Missouri processing plant. Located in the middle of McKenzie, Dunn and Mountrail County the very good place for being that plant location had a 20 million cubic feet a day operating and actually we operating it when we visited it plant when we acquired it.

That plant had some design defects that we had scrapped and make it work better. That plant that was in progress with some constructions less. We have got one finished.

And after considerable effort we got both plants running much closer to way we would run a plant somewhere else. From left to right, so I’d also should mention the Little Missouri processing plant required 40 acres right across the road premise for the third plant an indication our potential to help on the gas side as well. We’re still evaluating that plan as I mentioned earlier, what’s the right size, what’s the right time and probably happens in 2014.

From the left side of the map, our Alexander Terminal is a crude terminal with 30,000 barrels of tank capacity and improving into our connection capability to enrich North Dakota pipeline an important spot for many of our customers. Further east the Johnsons Corner terminal now has 40,000 barrels of tank capacity is interconnecting to three pipelines Tesoro, Four Bears and BakkenLink and providing truck and other rail capability. We’ve now got three lines going to five lines – truck lines for trucks to rail for our customers.

At and around the Johnsons Corner terminals and Alexander Terminal, we’ve been adding flexibility and interconnections for our customers to get those places even as their desire of what place they want to get to changes on a monthly basis. And that’s just what it looks like in North Dakoda right now was somewhat indifferent to where they move it and our movement by pipe is a whole lot better than movement across the base that portion of the basin by truck.

Since closing, the acquisition about 10 months ago, we’ve also been expanding the pipeline footprint. You can see that pipeline footprint it’s on the scale that really isn’t precise to have to be more indicative and that’s good because some of those gas lines are still getting right away from and I want them to know exactly where it is. The solid red lines are completed oil lines. The solid blue lines are completed gas lines and the dash is represents projects and process. Those projects and process maybe adding right away, they maybe under constructions, they may even be done and we haven’t updated the map. But that progress in terms of pipeline miles is important. We acquired this system with 300 miles of pipeline. First of the year that about how much oil and gas pipelines were in place after multiple years by the previous owners.

By the end of 2014, we were more than doubled those miles of pipes. More specifically in 2013, which is almost over we will have had – we’ll have put in place about 200 miles a little bit more of pipe on top of the 306. We estimate that based on our known projects in 2014, we’ll put in place another 130 miles. So by the end of 2014, across dedicated acreage with our first mover advantage we’ll have 640 or some odd miles of price in place, benefiting from producer capital investment.

Our system as the facilitator, the producer spending, the producer drilling or what drives the growth of oil volumes and gas volumes through our system and the drivers of that producer capital investment are pretty obvious. And as I mentioned, they are better than when we acquired. You can look at producer, public information about the number of completions per drilling units, the IT for each completion, the reserve for each completion, all significantly above by micro regions what we were expecting when we first acquired this. So that’s why we feel very good about for this project that we are having to complete.

As an example of increased expectations and I’m not going to get into reserves and I’m not going to get into initial productions. But as an example, several producers are saying publicly and telling us that they may have 16 wells for 1280 acre drilling units. That’s more than double what we were assuming when we acquired the stuff.

This is not the miles of pipe important to you, and I can tell you about miles of pipe, and I can tell you about the progress we are making across there while working very hard on miles of pipe. We’ll be monitoring oil volumes, and our oil volumes have improved. We told you in the second quarter we thought we’d see 20% increase in oil volumes for the third quarter and a 20% increase for the fourth quarter, Matt already told you that we increased oil volumes by 37% for Q3 over Q2. We expect a 20% plus increase for Q4 over Q3 and 2014 volumes well above that, that’s the guidance that what we thought those volumes would increase for 2014, and we usually hit our guidance.

Of course the Badlands EBITDA, the Badlands performance is embedded in our overall TRP EBITDA growth guidance and in our overall distribution growth guidance. And because we get the question so often, we reaffirm – I hate reaffirming, we reaffirm our guidance as this acquisition is accretive during 2014. That completes the gathering and processing highlights, and I’ll switch to our downstream highlights beginning again a little bit with our context.

Page 50 shows NGL supply flows, which certainly continue to increase to the Gulf Coast in Mont Belvieu. The reason why, there is a chart at the bottom left-hand corner, and so the [indiscernible] 80% in North America is down there, that’s where the NGLs need to go. Matt touched briefly on the graph at the top left hand corner, and just touching on a couple of other things about it. We’ve got questions.

What is that green upside bar there? Well, first of all, you see everything going kind of up into the right as still gathering and processing, and NGLs naturally connected to Mont Belvieu in the Gulf Coast, are probably coming in that direction. That green piece up there is 400 barrels a day of NGLs. Coincidently, that’s probably about the – I didn’t do this exactly how they got there, but 400 barrels a day would equal the first phase, the blue graph plus the Kinder Morgan or would equal the potential set by blue graph as NGL is moving somewhere that haven’t been moving very well, maybe its coming to the Gulf Coast.

I should also mention that with respect to y-grade moving around differently than it has, y-grade potentially coming from the Northeast to the Gulf Coast, ethane rejection occurring in at various spots at area around Mont Belvieu need to get more flexible at handling a range of y-grade through its fractionation expansion facilities and you’ll probably be hearing a lot about that. So Mont Belvieu is the demand center. Page 51, says that Targa is very well positioned in and around Mont Belvieu. In and around Mont Belvieu meaning all the way to the ship channel.

Page provides a summary of a lot of assets. Interconnected assets between our Mont Belvieu and Cedar Bayou Fractionator that sits on top of the valuable short-term storage and between Galena Park, which sits on the Houston Ship Channel. It shows details on fractionation and treating assets, underground storage, pipeline connectivity to supply end customers, terminals and docks, and very importantly the interconnected export facility. These all work together and it’s very difficult to replicate anyone of them that alone the combination, the one we say it’s difficult to replicate our assets that’s what we mean.

Page 52, provides a little more context that I wanted to touch on. In 2012, it’s about 40% of fuel production flow to Mont Belvieu. This chart is trying to show industry NGL supply and Y-grade pipeline capacity. A lot going now, let me explain, what’s in there a little bit. First of all the blue shaded area represents pipeline capacity, back in 2012 pipeline capacity fractionation, NGL supply were kind of all in saying after first fixing pipelines and fixing fractionation. Pipeline capacity continues to go on and you can see pipeline capacity exceeding the other two lines. The blue represents a third parties estimates of Y-grade to Mont Belvieu, which we don’t believe includes the announced pipeline projects coming from the Northeast and apparently reflects some significant ethane rejection as we look at the numbers impacting the incoming volumes, we agree there is significant ethane rejection occuring.

The orange line represents a third-party estimate of Mont Belvieu based fractionation capacity, which includes announced projects like Targa’s CBF Train 5, which is still in permitting, but probably very likely. And you see that the yellow line gets a little bit above the blue line in 2014, a little bit more above it in 2015, 2014 looks about like take or pay levels on average to me. 2015 looks like utilization maybe a little bit below those take or pay levels. Beyond 2015, we continue to have supply increases, but starting in 2016 2017, we expect demand increases as well which will bring ethane into that mix, further increasing the supply picture. So some temporary perhaps less than utilization and my longer-term forecast would be need for additional fractionation over time.

Let’s turn to Page 53, also for context shifting to world’s LPG export supply and demand, get this sort of question often, so I want to quickly touch on the basics here. First of all what regions we’re exporting LPGs, you can see some of the major ones there, certainly the Middle East being an important player. You see the U.S. share of exports 2011 through this year growing, 6%, 8%, 14%. Even with that increasing market share over time, the U.S. share of worldwide waterborne LPG is expected to be less than 20% by 2020, so it’s not beginning to get too large on a world scale and by the way where does it sits on the cost curve, sits by comparison, first we should look at who are those other large propane exporters are.

U.S. larger than any single country in the Middle East that you have multiple other Middle East countries, seeing at Norway, Algeria, Kuwait, Venezuela, Nigeria relative to our cost curve, the U.S. is lower cost than many of those to the right. Now where are those exports going? The chart at the bottom left shows you some of the regions in Latin America, Northwest, Europe the Far East, the U.S. LPG exports primarily have been going to Mexico, South America and Europe, and you look at waterborne reports, increasingly particularly with the Panama Canal completion, you’re seeing some of those exports going to the far east as well.

So moving to our specific capacity. Our Targa’s export capabilities in Galena Park were in the middle of $480 million expansion project. We’ve gotten a nice chunk of it already done. If you look back to the second quarter, before September what we were doing was HD-5 and butane at about a 1 million barrels to a 1.5 million barrels a month. As of September, we can do low ethane propane again HD-5 and butane at a rate of a combined 3.5 million barrels to 4 million barrels per month. The work that’s still going on already started for the second Phase of the export project or add at least 2 million barrels, bringing total capacity to 5.5 million barrels to 6 million barrels a month. I would also say that from the first of the year through the third quarter when that second phase is supposed to be completed, we’ll be bringing additional capacity to bear as we do pieces of the work in that – and that adds capability.

With that I think I covered our upstream highlights, our downstream highlights. We have a satellite picture of all of our operations and hopefully a summary of some of the points that we made today.

With that I’d like to turn it over to questions. Operator would you queue those up please.

Question-and-Answer Session


Thank you. (Operator instructions) And our first question comes from James Jampel from HITE. Please go ahead.

James Jampel – HITE Hedge Asset Management LLC

Well, thanks for taking the call. If you could just comment on the revised 7% to 9% distribution growth for next year and how that dovetails into the eventual 1.1 coverage target? When should we be expect to see coverage actually moved significantly north of 1 million barrels?

Unidentified Company Representative

There were two parts for the questions. The first part was how we would comment on the 7% to 9% distribution growth guidance. We believe that that is a reasonable range. Our guidance will usually hit 2% wide I expect to be within the 7% to 9%. How does that dovetails into our coverage, we expected that the improving coverage across 2014 and we’re ultimately headed towards that target about a 1.1 million barrels to 1.6 million. The back end of 2014 for example will have better coverage than the front end.

James Jampel – HITE Hedge Asset Management LLC

Would 2015 be run at 1.1 coverage in total in your anticipation?

Unidentified Company Representative

Well when we look at the coverage, the 1.1 to 1.2 long-term Targa covered does not necessarily any one-year, but if you look at 2014, there is about $900 million worth of projects coming on line in 2014, but we’re spending the capital be up in the door, but we won’t full credit for all the EBITDA. So we’ll still have continued growth and continued CapEx and our planned outlook for years. We don’t have as much visibility and don’t get into 2015, 2016 guidance. But as we look through three years, four years, five years and a forecast we look when the capital has turned out the door when the EBITDA is up and kind of about 1.1 times to 1.2 times out multiple years.

James Jampel – HITE Hedge Asset Management LLC

Okay, thank you.


Thank you. And our next question comes from Stephen Maresca from Morgan Stanley. Please go ahead.

Unidentified Company Representative

Hi Stephen, good morning. I’m on the phone line. You can listen to this. Hello.


Stephen. It looks like he has disconnected. (Operator Instructions)

Stephen Maresca – Morgan Stanley


Unidentified Company Representative

Hello, Stephen. Are you there?

Stephen Maresca – Morgan Stanley

Can you hear me?

Unidentified Company Representative


Stephen Maresca - Morgan Stanley

I do not know why the shit I disconnected, sorry about that. Badland, the additional gas processing plan, can you talk a little bit about what the ballpark type of CapEx that could be for 2014, is that what happened? I don’t know if you can mention that.

Unidentified Company Representative

What I mentioned is we haven’t yet decided the size that is necessary and that will impact the call

Stephen Maresca – Morgan Stanley

Okay. Just on the M&A front, you haven’t done anything major since badlands in 2012, is that just a sign of where we are in the M&A cycle in terms of the expensiveness of the assets, do you see that dynamic changing or you just feel that organically you’ve got enough on your plate right now?

Unidentified Company Representative

We’re still looking, but we do have a lot on our plate and we don’t need an acquisition today anymore than we did when we did our last acquisition, don’t expect us to be doing a major acquisition in the near future. The market that is always a funny market, sometimes people are paying too much for assets, sometimes people hang around the net and get a better deal.

Stephen Maresca – Morgan Stanley

Okay. On the export side, obviously volumes are up a lot and you’re seeing some of the differential between the U.S. and international pricing come down a bit. I mean, how do you think that changes your abilities for another expansion project going forward or the types of returns that you’ve been able to receive there. I mean, how deep is this market for the next couple of years do you believe?

Unidentified Company Representative

I think, I’ll answer the short one instead of taking the microphone back to the people who have been working on that, but I know from them that interest, negotiations are still very robust across some range of types of players. So, there is a lot of demand being expressed for our export capabilities. We’ve contracted fully for the first phase and we’ve got a nice return second phase already underway and that will be adding to our capability across 2014. Once that’s in place, we do have attractive returns, expansion would be bottlenecking, capacity additions on the market, we’re not announcing any of that. I think the market is deep enough for the best players.

Stephen Maresca – Morgan Stanley

Okay. That’s all for me, thanks a lot.

Unidentified Company Representative

You need to look out and see where Scott is sitting. Did I miss something? He said it was fine, he’ll correct me later. We got one from...


And there…

Unidentified Company Representative

Go ahead, what you got?

Unidentified Analyst


Unidentified Company Representative

Your microphone ball is not that good. I actually would not expect any of, many of those major projects to contribute in EBITDA in 2014 with the exception of the Badlands gas plant which we mentioned, so our projects that we’re spending money on that aren’t on the list of the 590 to 600 that will contribute EBITDA in 2014, I would say that we are at the $590 million of projected approved projects and that will add to that across the year. Is that okay. I didn’t repeat the question I’m so sorry the question was about the backlog and what percentage of the backlog might be spent in 2014 and what percentage of the backlog might be contributing to EBITDA in 2014 and so now you have the context for my answer, I apologize for those on the phone.

Unidentified Analyst

And a quick follow up on the backlog, you’ve mentioned that the condensate splitter has the potential add on to your export footprint, now that we’re starting to see some of the crude pricing on the Gulf of Coast back off, global prices maybe signaling that there is a bit of bottleneck around the Gulf Coast. Have that accelerated the amount of demand for that condensate splitting for other project and just a bit of the final one for me would be do you think we’d see ethane export as part of this LPG export boom and if we do just Targa participate in those ethane export projects?

Unidentified Company Representative

Okay, taking the pieces of that. First there was additional interest or not on the condensate splitter projects that we’re working on and that separate and apart from LPGs. But I’ll look out in the room and I will just ask say Vince Di Cosimo to give me an up, down or even.

Vincent Di Cosimo

You said there’s more interest on condensate splitter that we’re talking about and that’s about as much I would want to say about. And you said ethane exports is going to be up a part of the LPG export boom, I think ethane exports are profitable and there is certainly one already there from the east coast facilities like ours could be a part of that. Those projects will have to have backing and the commitment of whatever counterparties who are that one ethane exports that spent a lot more dollars on the other side of the water that need to be spent on this side of the water, so it’s say its probably good capital. Did I missed anything in the question, okay great.

Unidentified Analyst

Could you comment on what type of activity you’re seeing in the Gulf of Mexico? And what that could being for target in future years?

Vincent Di Cosimo

Some of the people in this room know that I really like to talk about the Gulf of Mexico but I didn’t pay him to say that and I am not trying to hide the Gulf of Mexico. We’ve just got such a great set of assets across the Gulf of Mexico, the best characters that I believe for near shore Louisiana and offshore Louisiana. And we keep figuring out how to get more liquids and make more money would vest in with volumes. And I think we benefit from the consolidation that’s going on.

I’m hopeful of renewed activity and renewed production particularly oil rich liquids oriented which is whether it will be. But I don’t see that in 2014, the research projects and the E&P work that you can read publicly also and I know from my petroleum engineering friends of my age and class that could lead to some thing. And that would be very attractive for our – for that small portion of our business. To give you an idea, we didn’t bring someone from the coastal segment to answer Q&A, but there is no one in the back of the rook shaking their head, nodding their head at.

Unidentified Analyst

I would appreciate.

Unidentified Company Representative

Well, Mike did. Mike remains me of Mars be which is dedicated to Venice it is coming on and the shale has been committed to it and there hasn’t really been any slip in their schedule. That is certainly meaningful for the coastal segments and we see lots of other projects. We are working with those customers, I’m just not trying to oversell the 14, 15, 16 essential for that. But I think you’ll see it continue to help that segment, which is very good in making money.

Unidentified Analyst

Hey, can you talk a little bit just your approach, how you see the long-term demand story playing out, for liquids and you highlighted what’s going on up in the Bakken, and what’s going on in the Permian and now you mentioned the potential longer-term potential growth for the catchers mid in the Gulf region. And all I see is supply, supply, supply, supply. We know there is crackers come on board, but are we getting to the point where we aren’t be in a perpetual over supply situation. How do you see the demand catching up to the supply I know we are going to run out of runway?

Unidentified Company Representative

That’s a risk question and we’ve probably spend six slides talking about it, but I’ll give you my summery review and then we can talk about it more later. The supply side of equations in this country has driven by the drill build, 80% dominated by drilling on oil right now. And on the global scale, that supply increases in the United States are not changing the macro supply and demand. So we are going to in my opinion exist in the world of pricing, the balance of supply demands for world oil that continues to cause the drill test to be as active in this country as it has been in this country. And just got to take you out to the innovativeness of U.S. E&P to continue to find and improve the productivity of horizontal oil wells. So I believe that continues.

On the other side of the equation, the gas well inventories at pretty low prices becomes economic in my interpretation of what we saw in 2013 was even some spike in Haynesville drilling, dry gas drilling occurs when gas prices got a little bit up. So I suspect the natural gas supply demand will stay in balance, I don’t know exactly where and if that balance has been assisted by conversion to gas and then gas exports and price will be the valve that turns on how many dry or gas wells get drilled relative to their economics.

Than you got it stuck in between and that comes with and that’s NGL that comes from natural gas wells and that comes from big gas from oil wells, those NGLs come, we could try to show the forecast of what’s happening and in the macrosense exports balance that also on the global scale where we’ve got long life, low cost or relatively low cost NGLs on the world scale.

First ethane that becomes ethylene takes a few years to get that build, but it’s globally advances except for a few Middle East countries and if you are building a new pit camp to keep up with global demands, you might rather build this here than in the Middle East. So that’s taking care of exports at ethane and maybe you get the question all the time, maybe you export ethane not as ethylene that could occur.

Than all of the other LPGs, so it’s not the content to get export it as well from gasoline to butanes and propane as a price clearing mechanisms. And that’s working and when it doesn’t work, prices will go down and then it’ll adjust. I’m not trying to predict prices I’m just trying to show this as multiple needs. Our company is pretty well positioned to do okay through this – sometimes over supplies, sometimes over supplied, sometimes exported then one catches up, as far as I can say.

Unidentified Company Representative

So is that a reasonable short answer, I’m happy for any of team to give the better one because I often forget things.

Unidentified Analyst

So seems it long-term you see it in balance?

Unidentified Company Representative

In balance, but always being a little bit long and then a little bit short and then having something compensate, there is only brief moments when it’s in balance. But not exports balance.

Unidentified Analyst

But there is no future, you are not afraid of any future tipping points of the permanent in balancing supply demand?

Unidentified Company Representative

All right, I think there is a tipping point on ethane thing right now. We are tipping up to a lot of rejection which is compensating and handling this until the pet chems get built. And the same sort of things might happen in another LPG in there, just some one was talking about the condensate in oil, those are little tipping point that cause something to happen. But I think it works.

Unidentified Analyst


Unidentified Company Representative

And it works because we are low cost relative to most of the rest of the world supply and that’s important.

Unidentified Analyst

If I may just turn a little bit somewhere in the same regard, I’d allow the chart that you draw up here with a lot of separate triangles about the active rigs around the different systems. I’m just curious a little bit, how much of those – how is it all play out, I mean are those rigs where they are operating for the operators, have they already dedicated acreage of the volumes that you know, what’s common to you and what’s not common to you. Are those operation still jump walls where you can allow five of those volumes, you’ve shown all those rigs, clearly some are right overlapping the pipes and some are two, three inches away from where the current systems are, but are on the map. So I’m just trying to get it right and how that plays in?

Unidentified Company Representative

You are right, we sell all of those to give you a macro view of the activity and if we actually went to on the people running into those area not on that scale of markets, circles the ones that are already dedicated and the ones that they competed for and maybe lost or compete for and one. If you trying to draw a circle around our system, the more you are in the centre of our system that more you can be pretty sure of it, that we didn’t even have to compete for.

Further out from our system, the more might have been a competitor and might have been in the middle of their joining system and we have some system overlaps. So I’m not trying to say, please no one interrupt that we’re saying we get everyone of those, little triangle. But in our areas we can compete pretty going well, because when we say yes to our customer we take all the gas, we don’t have rolling brownouts and we have a pretty good reputation, if you hear anything about our reputation we maybe a hard negotiators, but we get the job done. Okay, thank you.

Unidentified Analyst

[Inaudible Question]

Unidentified Company Representative

And with that, you are wrong when you talked about that’s going outside. With that we are as the producers come in this entire uses and good example. If you look back four years ago, they were drilling operator well. They were all vertical wells, we were connecting 300 to 350 wells, this is going to be less wells connected, that they are definitely will get a huge step for the number of horizontal rigs that we are seeing. It has higher IPs and I think that those dedication are fairly long-term and they are large areas, that chunk that came in at 10,000 and 20,000 to 30,000 acres.

Unidentified Company Representative

For the people we didn’t hear when Mike picked up the phone, repeating just a piece of it for the people on the phone across our systems.

It should not sound like, we’ve got a lot of jump balls going on within our system sort of system footprint, we’ve got lots and lots of dedication. That’s how we do business. That’s how the business is done and those dedications have been increased over the last several years.

Unidentified Analyst

Joe Bob, couple of quick questions as it relates to everything that you just laid out around liquids export, I’m curious over the next 18 months to 24 months. How do you see the development of the Patriot Terminal and Channelview, obviously Channelview more suited to doing if you will find product exports, and obviously there is a big opportunity t there, may be ultimately that’s were the splitter goes and it become so light after gas or oil export facility.

Patriot is a little bit different, it can do those capabilities as well as propane, butane. So across the opportunities that if you could just rank it in terms of returns, how do those two terminals look in two years?

Joe Bob Perkins

You sort of asked the question and then probably he gave a pretty good answer to it. Those are nice add-ons to our petroleum logistics, the Patriot dock has the potential down the road after other expansions of a 50% [Ph] of LPG exports. Our terminally work will be around whatever contract that is the most profitable maybe exports, maybe just been movement. But I really don’t want to say more than that relative to negotiations that are going on for those terminals. When the projects are up in running or do you see increases from talk about it.

Unidentified Analyst

Joe, I know the answer is great, but that’s all I want to know.

Joe Bob Perkins

Let me add one thing about Patriot in particular, if you take a helicopter and you fly out into the Gulf of Mexico and then look at the mouth of Calis Bay and you see all the ships that are queued up there.

Oil imports refined products, imports and exports that emerged on those ships are huge, the average weight is similar between 9 and 10 days out there for those ships to get into the port. That creates huge demand for utilization of large ship dock and we’ve got Patriot and we are working in our second Phase of the LPG export.

We are building dock 4, it’s under construction and we’ve done engineering to build another dock. So that we can on the other side of our existing larger ship dock. So there is lots of demand out there, we are talking to a large number of companies that see the opportunities with all the pipeline our plump through that area plumbed through that area of Mont Belvieu to do all types of exchanges and exports.

Unidentified Analyst

A couple of years ago, I may have time a little bit, but a couple of years ago you guys assembled a team of people that where going to working on tunnel acquisitions doing M&A in terminal space. It was fairly consistent for your activity through 2011, into 2012 in terms of tunnel acquisitions it’s been very quite since. What happened to that team and what’s your strategy in that business?

Joe Bob Perkins

Vince Di Cosimo from that team is about three people behind it, and what has happened since then, those were three quick acquisitions we’ve spending the capital on those acquisitions that we told you we would be spending. So from the initial acquisition price I think we basically doubled our capital employees through projects expanding and add tanks and even add acreage around them.

So there is another project that’s out there, that’s the public because we have permits and options around it and that is stock-based and the team is certainly working on other things that would say and there is another little thumbprint that we’re turning into multi-fingerprint, and we are still interested in doing that. What some people have asked us about always do we look at the great big acquisitions like the health acquisitions. We don’t look at that one very long, but we would have been interested in pieces of parts. Vince, do you have anything you want to add to that?

Unidentified Analyst


Vincent Di Cosimo

Still active and still making those more profitable.

Unidentified Analyst

Patriot is part of that group.

Vincent Di Cosimo

Yep. So there was one other little acquisition there and just assets like that.

Unidentified Analyst

I have a question on the regions. You’re working on now. You’ve had a pretty toward pace of growth in the gathering side. I’m curious as to, is there a point where you see the demand – the activity having on your fields where you are gathering the gas. I’m just staying, when the build out – is there a point when the build out is close to an end of the beginning?

Vincent Di Cosimo

I need to take that by parts. Certainly, the Permian Basin, as far as, my rate our step goes, I don’t see the activity having there and around our assets being very well positioned across that Permian basin. North Texas, I think, I said in the past, I should have that activity in North Texas has decreased, the growth of it has decreased somewhat. We’re still growing volumes and that’s because resources have shifted to the Permian Basin pure oil versus very wet gas now.

As an example, the Marble Falls is an oil play for smaller guy who have a position there and don’t have the position in the Permian Basin that’s very attractive economics. In the Bakken, I don’t want to see need for gathering slowing down there at all, we are slower. And for example, we talked about the later potential of our customer segments, there are just very few wells going on in Southwest Louisiana or on the offshore for immediate connections compared to other periods of time and that could improve versus getting slower. So that’s my kind of broad what does it look like.

No more questions here, we don’t have anymore on the phone coming up. I’m actually going to say bye to the operator. Thanks operator. Anybody online who are sort of waiting for a question and didn’t get it in feel free to give us a call Matt, Jennifer or any other rest of the team and we’ll try to help you later. Okay. We’re going to still…

Joe Bob Perkins


Vincent Di Cosimo

Hang on a second are we cut off?


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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