Jeffrey J. McParland - President, Finance and Administration
Matthew J. Meloy - SVP, Chief Financial Officer and Treasurer
Gary Stromberg - Barclays Capital, Research Division
Targa Resources Partners LP (NGLS) Barclays Capital 2012 High Yield Bond and Syndicated Loan Conference March 27, 2012 3:30 PM ET
Gary Stromberg - Barclays Capital, Research Division
Okay. Why don’t we get started? Thank you for hanging around for the last presentation of the day. We have Targa Resources Partners here to present and Jeff McParland, who is the President, and Matt Meloy, the CFO, is here.
Thanks, Gary. Thanks everybody for sticking around, so we have more than just bankers in the room with us for the wrap-up here. I’m Jeff McParland. I’m going to do the overview piece of this and then turn it over to Matt for a closer look at some of our businesses. For those of you who may not be familiar with Targa, we’re a natural gas midstream Company.
We operate in two divisions in the natural gas – in the midstream natural gas space. The first is gathering and processing, where we serve producers, handle their natural gas production process to extract the natural gas liquids, send the gas – the residue gas to the pipeline systems and the natural gas liquids, then go as a mix stream down generally to the Mont Belvieu area, where we also have our logistics and marketing asset concentration. That’s our second piece where we fractionate that is separate the natural gas liquids into the constituents ethane, propane, and so on and then deliver those products to markets. We are one of the few midstream companies that has a substantial presence in each of these areas, gathering and processing and NGL logistics.
Simplified corporate structure here, we have two public companies now with the IPO of Targa Resources Corp in 2010 that was the end game for Warburg Pincus a private equity sponsor. They still have an ownership interest, but we’re no longer controlled by Warburg and they’ve been monetizing their position since the time of the IPO.
The Targa Resources Corp is a holding Company, its sole assets are the general partner interest, the Ides and some of the LP units of the partnership. Targa Resources Partners has been public since 2007. It’s a master limited partnership, approximately 84% owned by the public. All of our businesses are now at the partnership and Matt will walk you through a description of those, we show them here grouped according to our two divisions and four reporting segments.
The partnership is also the issuer of our senior notes with approximately 1.4 billion face value of double BB Ba3 notes outstanding. We’ve got little market cap data here on the equity side. On the left we have the partnership of about 3.8 billion equity market cap, 5.3 total on a standalone basis, Targa Resources Corp is 1.9 billion. If you eliminate the equity owned by the parent, the consolidated enterprise value is approximately $6.8 billion.
The price performance of both Companies here is shown on the bottom relative to a couple of indices, reflects the strong industry fundamentals that we have around our businesses and the solid position that we have for growing our assets in that environment. We will talk more about that.
The Targa story has really been execution and growth. The industry dynamics that are feeding our businesses and driving volume growth are twofold. First, we have an incredible activity on the exploration and production side as the shale technologies are being deployed in places like the Permian Basin, to increase oil production. We’re seeing volume increases throughout many of our businesses. But more importantly that volume increase on the gathering and processing side drives volume increases in natural gas liquids, which as I mentioned earlier all liquids essentially go to Belvieu over the second largest player. Those dynamics are driving volume growth and investment opportunities for us to cross our business.
We put $300 million of growth capital in service in 2011. We have a $1 billion in 2012 and 2013 of projects underway now that we’re coming online in that timeframe. That provides clear visibility to EBITDA growth for the enterprise.
We manage our growth with discipline and we’re very well positioned for that growth as we stand today. We did a couple of financings in January and so we stand at 2.8 times debt-to-EBITDA pro forma for those financings and have $1.1 billion of liquidity.
That track record of disciplined financial management and execution around our growth gives us very good ratings momentum. We had upgrades from both agencies over the last 12 months and as a scale of the Company continues that’s certainly something we would look forward to over the next couple of years. And importantly the visibility of our growth projects allows us to have clarity on what we see is – as a growth in EBITDA for the enterprise and distribution growth of 10% to 15% for the partnership for 2012.
Capital formation, this slide shows on the up right about $3 billion of investment in expansion and acquisitions and dropdowns at partnership since its formation in 2007. Our target is about a 50/50 mix of debt and equity and we show the funding for those growth investments on the bottom. The red line represents the cumulative run rate and that number tags out at about 55% on the conservative side of our 50/50 target.
Take a look at high level dynamics here around the industry. We show our operations here, starting on the west gathering and processing operations in the Permian Basin and not in the Barnett Shale in North Texas, processing plants across the Louisiana Gulf Coast. And importantly and very hard to show here a significant asset concentration in the Houston area, Mont Belvieu fractionation and storage, the marine terminal on the ship channel. And that’s the hub of our NGL activities.
I mentioned earlier, the volume increases we’re seeing in oil and gas production. Oil production in the Permian bringing rich associated gas and the Barnett we have rich gas and we’re seeing activity increase onshore Louisiana with the potential for the Tuscaloosa Marine Shale. So, high levels of activity across all the businesses.
The important thing is that all these NGLs, natural gas liquids that come from our gathering and processing business and NGLs from other peoples operations come to Belvieu. And second largest player there we’ve got our second expansion of fractionation capacity under way right now and expansion of our marine terminal and future expansions on the boards here to try and pull together and get rolled out. So, very strong dynamics across the business.
This is the slate of growth project, the results. As I mentioned, $300 million in service in 2011 and a $1 billion to come online in ’12 and ’13. Important take away here, if you look at the check marks, three quarters of this CapEx is associated with fee-based businesses. So, that’s increasing the fee-based portion of our operating margin.
We see some of the dynamics reflected here on our distribution profile, we’ve communicated with the visibility of these growth projects, 10% to 15% distribution growth next year as I mentioned and obviously some pretty good clarity on ability to continue growing distributions following 2012. The conservative financial metrics show up in the coverage ratio on the bottom, significant free cash flow before our growth CapEx in the enterprise.
I talked about the fee-based mix. Here is a quarterly roll of fee-based operating margin for 2010 and 2011. The cumulative number for ’11 is a $186 million. That’s a 36% increase in fee-based margin compared to 2010. And as our fee-based projects come online in ’12 and ’13, we see that number approaching 50% fee-based contribution to the business.
So obviously the scale and diversity continues to grow and significantly the fee-based portion of revenue or margin alone has significant underpinning to the financial footing of the enterprise compared to a number down in the sub 20% level several years ago.
Hedging has been a component of our management – of our field gathering business where we receive a portion of the natural gas and natural gas liquids as our fee for services. So when we sell those to generate our revenues, we have some price variability there. These bars represent the notional amount of liquids and gas hedges we’ve had on historically, you can see a fairly consistent program there, a disciplined approach of hedging our specific NGL components in our gas bases so we have highly correlated hedges, no collateral demands or margin calls to put liquidity pressure on the Company. And this program has established under parameters set by our Board and execution is handled by the executive team.
If you look at the red line, those are our realized prices under the hedges. A whole little different than the actual underlying movements in oil gas and natural gas liquids prices over those time periods. That’s important to us in providing stability to our cash flow forecasting for the business.
In today’s environment with our increased diversity in the business and a sort of natural hedge on the gas side between short natural gas in our coastal business and long in our field business. Low absolute natural gas prices and limited liquidity on the light end of the NGL barrel, we would expect to see these volumes, these hedge volumes off a little bit for the next couple of years or the next period in this current environment. We always are looking for opportunities to layer an additional hedges though and keep that kind of wedge profile going as we move forward.
If you think about the diversity in the business combined with our hedging, this is a look at cash flow stability compared to commodity prices. The charts, the bars in the charts represent our EBITDA, look at ’07 through ’10, basically a flat line kind of EBITDA with the red line representing the movement in oil prices on top and natural gas prices on the bottom. You can see that the combination of hedging our field exposure and the business diversity that we have across all of our businesses, provide a very stable cash flow profile for the company. Obviously, the uptick in ’11 represents lot of the growth investments coming online.
So one of our favorite charts about balance sheet management, the dash line here represent our stated target leverage range, 3 to 4 times debt-to-EBITDA. The light blue area represents our actual reported leverage quarter-by-quarter since the partnerships IPO. You can see that we operate at the low end and often below the low end of the stated range. Again, managing our financial capacity and liquidity with a lot of head room so that we can both be opportunistic and play defense when and if required.
And our financial metrics are on a conservative footing not only against our stated targets, but against our peer group as well. If you look at a set of midstream peers here on the upper right, our leverage at 3.0 at year-end ’11 is on the strong side of the fleet and similarly if you look at coverage ratio, we see strong distribution coverage again compared to group of midstream peers.
So a story of strong fundamentals, conservative, and disciplined management and execution inside those is a good set up for Matt to take us through businesses.
Matthew J. Meloy
Okay. Thanks, Jeff. I’m now going to go over and starting on page 18, Targa’s integrated midstream platform. You can see here we have assets all the way from coast to coast, whether it was the sound acquisition we made in the third quarter of last year over to the Baltimore on the East Coast. But most of our assets are really positioned in field gathering and processing in the Texas and Mexico area or along the Louisiana Gulf Coast and then as Jeff mentioned a substantial position in the Mont Belvieu area. It’s important to note, what’s Targa is often gets lumped in comparable companies as a gatherer and processor and that is the substantial portion of our business, we also do have a significant liquids business. So, we do have some internal diversity as Jeff was talking about from the well ahead, all the way through processing and fractionating the NGLs and serving our petrochemical customers.
So starting first with the gathering and processing division, this map really just lays out the two segments we have in this division, the field gathering and processing segment primarily in the West Texas, North Texas, New Mexico and the coastal gathering and processing segment along the Louisiana Gulf Coast. So, just important to note here, we got 20 natural gas processing plants and over 12,000 miles of pipes. So we’re dependent upon one particular pipeline or one processing plants to generate our operating margin from the segments.
We do have some good internal diversity within this division. It’s also important to note, given this where the assets are positioned we do have minimal dry gas exposure in this segment. Most of the drilling activity out in the field segment is driven by their oil prices or NGL combo plays and along the coastal straddle volumes, there is onshore production, there is also just inter-state and inter-state gas moving up from the Gulf of Mexico going to serve their markets, and its not necessarily driven by short-term movements in commodity prices.
So starting first with the field gathering and processing segment, this makes up 38% of our total operating margin. It is the largest segment. And this is the segment that’s really benefiting from the shift in the E&P technology that was developed in the natural gas fields like the Barnett Shale and the dry gas production is now being deployed in the oil and liquids rich technology.
So starting on the West, you have the Versado, Permian, SAOU. This is where they’re drilling for oil and we’re processing – gathering and processing the associated natural gas. So even with gas prices at $2, we’re seeing activity out here continue to increase and business go very well out in the West Texas, lot of expansion opportunities.
And in North Texas, it’s not oil they’re focused on, but it is the NGLs they’re focused on. This is about five gallon gas out here in North Texas and the companies that are out there drilling is called combo plays, where yes, they’re processing natural gas, but its really the liquids that they’re after. And again with low gas prices, we continue to set records quarter-on-quarter in North Texas in terms of volumes out there. And it is important to note that in this field gathering and processing segment, this is we have the line share of commodity price exposure, it is the largest segment and we’re long natural gas and long natural gas liquids and oil prices in this segment. And then with all the activity that we’re seeing, we’re forecasting 2012 inlet volumes to be approximately 10% higher than they were in 2011.
So real quick, I will touch on each one of these quickly without going into too much detail, but North Texas we say in 2012 we expect inlet volumes to be meaningfully higher than 2011. This is going to be our highest area of growth 2012 versus 2011. We’ve announced $150 million capital program for that area and we’re adding a $200 million a day plant that should be on in mid-year of 2013. Again, we’re in the Northern side of the Barnett where we had high liquids in the 4 to 5 GPM range and that’s driving activity up there.
Now for SAOU we expect volumes to exceed 2011. We’re seeing continued growth out here. They are targeting the Wolfberry primarily out there and we see a continued development and expansion in that area.
Moving to the Permian business, primarily our Sandhills plant is the biggest asset within this business. We see similar economics driving this business or driving the SAOU. They’re – again, they’re targeting oil and we see 2012 volumes is expected to be higher than the 2011 volumes out in the Permian. And there is some additional upside too, with SAOU, Permian, and Versado even in the Bone Springs, Avalon that are continuing to be developed. We do see a significant upside in future opportunities and whether its additional processing plants, but right now the E&P customers are constrained with pipeline, liquids pipeline coming out of the area. So some of the liquid pipelines get built and come online, we will see continued additional volumes coming in over the next several years.
And then moving to Versado, this is the one business unit that has been down year-over-year. There is a pocket of dry gas drilling out here that really see several years ago, but you’re seeing some of the decline in that business. It’s more of gas drilling, lower margin gas. But we do see that reversing itself in 2012, not because they’re going to be drilling anymore dry gas, but because most of that’s already declined and we’re seeing activity just through the drill targeting the oil and more profitable zones. And we’ve also had some operational issues in 2011, which hurts the volume. So we do see that stabilizing and even increasing in 2012. So, all four of these pieces should be higher.
Then moving to the coastal segment, that’s a different set of economics that drives the coastal. A lot of the field of this technology that’s driving our Permian and North Texas business, it’s a separate area in the coastal. Its not really benefiting from a lot of this technology, its primarily processing Gulf of Mexico gas and that activity as we know has been hurt with the issues out in that area. But we’re seeing permitting activity start to increase, so we do see some level of activity kind of over the next several years getting back to normal or whatever normal means.
But some of the upside we really see in this area is related to the LOU, which is our onshore processing. This onshore wellhead gas has been on declining in our LOU system basically since we bought the assets back in the ’03 timeframe. It’s been year-over-year down every year. We’re actually starting to see that increase. They’re targeting the Wilcox and Chalk regions and we’re seeing that level out and start to increase and then there is upside potential from the Tuscaloosa Marine Shale or called the Louisiana Eagle Ford in that area, but that’s very early. It is preliminary, but we’re seeing some positive signs here for the coastal gathering and processing segment. And here it’s really less about inlet volume too, not all volumes are created equal. So, it’s really about NGL production. And so relative to 2011, 2010, our inlet volumes were down, the NGL production was approximately flat and we expect 2012 to see the NGL volumes actually increase versus 2011.
Turning now to the logistics and marketing division, I will touch first on the larger piece, which is the logistics assets. We have a map here and then we expand the map and highlight the CBF going over to the Galena Park area. I will touch on that on the next slide.
So the logistics assets makes up 19% of our 2011 margin and this is where a lot of the growth CapEx is being spent in this area. So that piece is going to continue to increase over the next several years and our focus really in the third bullet here that the Targa logistics assets benefit greatly from the strong NGL dynamics. Those red arrows Jeff showed you, which are the volumes coming to Mont Belvieu. They’re going to flow through the fractionation plants, the storage, the terminaling, the assets we’ve here in both Mont Belvieu and Galena Park. So this asset base is positioned nicely for the increase in NGL production that we’re having in this country.
And if you look at the pipeline, we have pipelines to and from Galena Park, Mont Belvieu, we have multiple customer connections in and along the Houston Ship Channel and around Mont Belvieu complex. These assets aren’t easily replicated. We are – we have a strategic position here in Mont Belvieu which is the hub for NGLs. You can just go and drop in all these assets, we have next door and say I want to compete. We have a natural advantage here along with some others.
So the logistics assets performance trends you can see here on the top graph 2008, 2009. This is the processing Y-grade capacity at CBF. We basically got full in 2008, 2009. So with that we’re able to increase fees as we got two replacement costs, so the fees needed to get up to a point to spur additional investments in expansions and that what happened in 2010 and 2011. CBF Train 3 came on in 2011. We have the 43,000 barrel a day GCF expansion coming on the second quarter of 2012. And then our larger 100,000 barrel a day CBF Train 4 is expected to come on later in – second quarter of 2013, and you can see the margin here for – both dollars of margin and unit margin have been steadily increasing over the last several years because of the dynamics going on in the NGL market.
So moving to the Mont Belvieu fractionation pipeline capacity, really the point of this slide if you look at, there is the blue bars and the red bars. Right now the pipelines, fractionation capacity is basically full at Belvieu until 2013 when the energy transfer in the same DCP Sandhills pipeline get full, it’s going to be pretty tight coming out of the Permian to get additional liquids to Belvieu. But we see that correcting itself in 2013 with additional pipelines and it’s also – that’s synced up with a bunch of the additional fractionation capacity coming on. So we see a tight fractionation and tight pipeline market for the next several years.
This next slide is a game changing global LPG dynamic and it really is with this flood of NGLs that are being produced in this country, well the world is seeing that. It’s relatively politically stable and they’re looking to diversify their supply from traditional Middle East supply of LPGs, propane and etcetera to other sources and they’re seeing the U.S. as a very good option for that.
So the propane – and that takes me to the next slide. You can see the propane exports really over the last several years 2009, ’10, ’11, that’s the red bar on this top chart. It’s been increasing and we’re spending out as much propane, us and Enterprise, we’re the only two companies that can really send out propane right now. We’re sending out as fast as we can, as much as we can propane. There is a huge demand of international market for U.S. propane and that leads us to our expansion. Right now we’re sending out HD5 propane in relatively small ships, about a 140,000 barrel a day navigator class ships. And we’re sending out as much as we can there.
But to be able to send out the world scale international propane VLGC ships which are 550,000 barrels or so. We need to get that HD5 propane into an international grade propane, which has a lower ethane content. So, we’re adding a deethanizer at Mont Belvieu and we’re adding some refrigeration capacity at Galena Park. We already have the existing pipelines going to and from. So we will be able to handle 3 to 4 VLGC starting in about the third quarter of 2013. And the demand for this – for export facility is high.
If you look at the basis differential here, that’s the green line. You can see the average in 2010, 2011, was kind of bouncing around between $0.10 to $0.20 on an annual basis. Well, right now the Middle East price versus Mont Belvieu is over $0.70. So there is a huge incentive to move as much propane as possible out of Belvieu and into the world market.
Next I will talk about the petroleum logistics. This is a new growth vehicle that we’ve – some call it kind of new leg to the stool. It’s a nice addition – additional business, it has some synergies. We have a bunch of terminal assets across the country and so we made about a $150 million in acquisitions last year, the Channelview, Baltimore and Sound to add additional growth for the MLP. This is multiyear contract, largely fee-based, so it’s a nice complimentary business and we think given that some of the ships and the movements in refineries being shutdown in the Northeast and elsewhere, there is a good opportunity for additional storage and terminaling business for crude and refined products across the country.
The marketing and distribution segment, this makes a 17% of our operating margin. The way we characterize this business as critical and something we manage on a daily basis is absolutely necessary to manage the physical distribution of the volumes coming off our fractionators. CBF and elsewhere in the Mont Belvieu and managing the logistics to get to the petrochemical customers in and out of storage through the pipeline and get the distribution to the end market.
And that takes us to the last slide, kind of the wrap slide. I just want to start with some of the highlights on Targa. The first box there is strong industry dynamics. The fundamentals for Targa across the gathering and processing and in the NGL business are very good. We’re also adding diversity. We had good diversity now, but of the CapEx we have over a $1 billion, we’re going to add further diversity to our business. A favorable contract mix, we have percentage of proceeds that we hedge as Jeff talked about and with the hedges and the fee-based margin that’s increasing, we’re going to have about 2/3s of our operating margin today is either fee-based or hedged.
And we have a relatively conservative capital structure. We’re positioned well to deliver on this growth; it’s over $1 billion of CapEx. We have a $1 billion of liquidity or in excess of a $1 billion; we have a 2.8 leverage ratio. So we’re set up well to take advantage of the growth opportunities we’re seeing around all of our assets.
So, that wraps up the prepared remarks we had and now we will open it up for Q&A.
Matthew J. Meloy
Okay, we have the question here.
Could you update us on the terminaling side of your business especially Baltimore? I think you had bought some properties in Baltimore to expand there, if I’m not mistaken?
Matthew J. Meloy
Yeah, we did. We bought – it was in the third quarter of 2011, we bought the Sound and the Baltimore. We announced that as simultaneous. We’re continuing to look at all these acquisitions that we’re making in these areas. We not only look at dollar amounts of the investment upfront, but they all have growth opportunities with them. So we’re looking in the Baltimore and Sound and all along the East Coast for additional acquisition opportunities and to further develop and utilize the existing terminals that we have there. So, this is a strategy where we think there was additional opportunities around Baltimore and around some assets in that area as well as we’re continue to look along the West Coast and the Gulf Coast. So it’s not just about Baltimore. It’s about our kind of total strategy for the – for this new growth area. [Next] question?
What do you think in terms of NGL pricing, particularly ethane and what’s your outlook?
Matthew J. Meloy
Sure. We’re seeing ethane really be pretty volatile over the last six months. Prices were relatively strong in the fourth quarter of last year, up as high as $0.90 or so. They’ve come down into the $0.50 recently. We think the turnaround of lot of the petrochemical customers has impacted short-term ethane prices. It moves pretty quickly. Ethane prices do with pet chem demand, but we think once the petrochemical customers finish up there turnaround, we’re pretty bullish on short-term ethane prices over the back half of this year. We think when they come online ethane prices will rally.
And then you talked about the $0.70 difference between Middle East propane and U.S. propane. How are we supposed to think about break even when you factor in all costs of transportation and the like?
Matthew J. Meloy
Good question. We are – we aren’t the transportation or shipping experts, we’re trying to as best we can figure out what the cost are to go to and from Japan and the Middle East. And what we’ve been able to decipher is those transportation cost move around quite a bit as well. And so you don’t have a great break even for it, but what we do is we just look at history.
So if you look at 2010 and 2011 on that chart, the price, the CP versus Mont Belvieu price was $0.10 to $0.20 and we were spending out basically as much as we could. And so with prices at $0.70 or $0.80 its certainly – we’re going to be – there is significant demand to send out as much propane as we can. And then in 2014 when the Panama Canal opens up, it will make it even cheaper. It will significantly cut the amount of time it takes to get over, to the Far East. So that will just make it. That would bring whatever that cost is, it will bring that cost down significantly.
Any other questions? Okay. Well, thank you for sticking with us here to the bitter end and have a good trip home.