Targa Resources, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Target Resources Corporation third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Sanjay Ladd. Thank you. Please go ahead.

Thank you, Michelle. Good morning and welcome to the third quarter 2020 earnings call for Targa Resources Corp. Third quarter earnings release for Targa Resources, along with a third quarter earnings supplement presentation, are available on the investor section of our website, our targaresources.com. In addition, an updated investor presentation has also been posted to our website. Statements made during this call that might include target resources, expectations, or predictions should be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in forward-looking statements. For discussion of factors that could cause actual results to differ, please refer to our latest SEC filings. Our speakers for the call today will be Matt Malloy, Chief Executive Officer, and Jen Neal, Chief Financial Officer. Additionally, the following senior management team members will also be available for Q&A. Pat McDonough, President, Gathering and Processing, Scott Pryor, President, Logistics and Transportation, and Bobby Mararo, Chief Commercial Officer. And with that, I'll now turn the call over to Matt.

Thanks, MJ. Before we get into quarterly results, I would like to say how proud we are of our employees who safely navigated through an active Gulf Coast hurricane season during the third quarter. While the overall financial impact to Targo was minimal, we had many employees impacted personally, and our heartfelt thoughts go out to them and their families. I am also proud of our collective efforts in continuing to respond to the challenges associated with COVID-19, and we'd like to thank all of our employees for their continued focus and diligence in managing our operations very successfully through an incredibly difficult year. Turning to our business results, we had a strong third quarter as we continue to benefit from the strength of our Permian footprint and our integrated asset position. Our strong operational performance combined with reduced capital spending and the significant progress on reducing costs are driving increasing free cash flow, which positions us to continue to execute on our long-term strategy of reducing leverage over time. 2020 has undoubtedly been a challenging year, but we believe that our key strategic efforts around our re-contracting and gathering and processing, reducing growth capital spending, identifying opportunities to reduce operating and G&A expenses, and focusing on integrated opportunities position us for a successful 2020 and beyond. Based on our strong performance with EBITDA projected to be at the high end and capital spending at the low end of our range, we saw an opportunity to put in place a $500 million share repurchase program and still continue to reduce leverage over time. We are always looking for opportunities around market dislocations, and we believe we have the financial strength and business profile to execute on both. Let's now discuss the business environment and our operational performance. Starting in the Permian, as a result of the quicker than anticipated rebound in prices and related producer activity across our Permian systems, our inlet volumes are on track to grow close to our initial 2020 plan, pointing to a strong 2020 exit and positioning us well going into next year. Our overall Permian volumes increased 9% compared to the second quarter, and our third quarter volumes grew 8% when compared to the first quarter average, while the overall basin experienced a 2% decline in associated gas production over this period. This points to the strength of our overall footprint in the Permian continuing to outperform basin-wide results. Our new Gateway plant commenced operations in early August, and the addition of this incremental processing capacity has allowed for improved NGL recoveries across our system. With Gateway already highly utilized, we are in need of additional capacity in the Midland Basin. With our continued focus on managing capital spending and our need for incremental capacity in Permian Midland to accommodate increasing production, we are moving our Longhorn plant from North Texas. We are also renaming the plant to the Heim plant after TARGA's founding chief operating officer, Mike Heim. This 200 million cubic feet per day plan is expected to begin operations during the fourth quarter of 2021 and is expected to cost approximately 90 million. The Heim plant will drive attractive returns for TARGA as a result of the significant capital savings combined with the incremental fee-based margin earned through our logistics and transportation assets. This type of spending is in line with our strategy going forward to focus our capital allocation on high-returning projects that leverage our integrated midstream platform. Moving on to the Badlands, our gas volumes rebounded during the third quarter and were up 23% over the second quarter. Across our Badlands crude system, volumes were down 7% sequentially as certain volumes remained temporarily shut in during the third quarter. However, we are seeing some incremental production volumes return in the fourth quarter. Turning to our central region, which continues to largely be in decline, gas inlet volumes in the third quarter declined 9% over the second quarter. We continue to have some shut-in volumes in South Oak, which we expect to come back online in 2021. Despite declines across our central regions, our third quarter total field GMP volumes increased 4% sequentially, led by our Permian region. The durability of our gathering and processing segment margin has strengthened as we have reduced our commodity exposure by adding fees and fee floors to our GMP contracts. Our Permian GMP business is now approximately 60% fee-based, which is a significant improvement from around 35% fee-based in 2018. And overall, we are about 80% fee-based across all of Targa. The financial performance of our GMP segment is now more driven by volume, throughput, and fees as opposed to direct commodity prices, which is evidenced in our year-to-date results and will serve us well going forward as we are more insulated from lower commodity price environments but would still continue to benefit when prices rise. Shifting to our logistics and transportation segment, our Grand Prix pipeline continues to perform very well. Third quarter throughput volumes on Grand Prix increased 18%, driven by increasing NGL production from Targa's Permian plants, including our new Gateway plant, and from our third-party customers. We completed the first phase of pump station additions on Grand Prix, increasing our transport capacity to approximately 400,000 barrels per day from the Permian Basin. At our fractionation complex in Mont Bellevue, third quarter fractionation volumes were impacted by scheduled maintenance and upgrades at our facilities. As a result of the scheduled maintenance, we expect higher volumes during the fourth quarter as we work off the associated inventory. Fract Train 8 commenced operations in Mont Bellevue in September, providing us with increased operational flexibility. Our Grand Prix extension into central Oklahoma is on track to be operational by the end of the fourth quarter, where it will connect with Williams' new bluestem pipeline. Our LPG export business at Galena Park continued to perform well as we moved a target record 9.5 million barrels per month during the third quarter. We expect our LPG export volumes to be higher in the fourth quarter, as we'll benefit from a full quarter contribution of our recently completed phased expansion. As we look forward, we are in a position where we expect to have the ability to capture growth volumes from the Permian without having to spend much incremental capex on Grand Prix, fractionation, or LPG export facilities. This puts Target in a position to generate strong returns going forward as increasing free cash flow after dividends available to reduce debt and further strengthen our financial position. In September, we released our second annual sustainability report, which highlights TARGA's advancements in the areas of ESG and safety. With our premier integrated asset position and our talented employees, TARGA is well positioned for the longer term. With that, I will now turn the call over to Jen.

Thanks, Matt. Targets reported quarterly adjusted EBITDA for the third quarter was $419 million, increasing 19% over the second quarter. During the third quarter, Target generated free cash flow of $189 million, or $143 million of free cash flow after dividends to our preferred and common shareholders. We continue to focus on our cost reduction efforts, resulting in essentially flat aggregate G&A and OpEx in Q3 versus Q2, despite new assets being placed in service. Looking towards the fourth quarter, we expect OpEx and G&A to be higher. While we are very tightly managing our costs, we are benefiting from increasing throughput, particularly in the Permian through our downstream assets, and we will also have more assets in service for the full quarter. Managing our costs continues to be a huge organizational focus, and we appreciate the continued efforts of all of our employees. As Matt described, our fee-based margin continues to increase, backed by our significant progress to increase fee margin and fee floors in our GMP business, combined with increasing volumes moving through our logistics and transportation assets. We remain significantly hedged for the balance of year 2020 and for full year 2021, and you can find our usual hedge disclosures in our earnings supplement presentation. We continue to estimate 2020 net growth capex to be around $700 million, with about $520 million of net spending through the third quarter. We now estimate 2020 net maintenance capex to be approximately $110 million. On a debt compliance basis, TRP's leverage ratio at the end of the third quarter was approximately 4.1 times versus a compliance covenant of 5.5 times. Our consolidated reported debt to EBITDA ratio was approximately 4.8 times as we continue on the deleveraging path that we expected entering 2020, given most of our major growth capital projects are now online. During the third quarter, we successfully issued $1 billion of 4.78% senior notes due 2031. This was essentially a debt-for-debt exchange as we were able to use the net proceeds to take out our 6.75% senior notes due 2024 and redeem our 5.25% notes due May 2023. providing significant annual interest savings. We also announced this morning that we recently closed on the sale of our assets in Channel View, Texas, which includes our crude and condensate splitter, for net proceeds of $58 million. Pro forma, for the five and a quarter notes redemption and the sale of the Channel View assets, we have about $2.1 billion of available liquidity. As Matt discussed, in early October, we announced a $500 million share repurchase program. As of November 2nd, we have repurchased 4.5 million common shares, representing about 2% of common shares outstanding, for a total net cost of $74 million. Our long-term strategy to reduce leverage and simplify our capital structure is unchanged by our share repurchase program. Over the long term, we are targeting leverage of three to four times on a consolidated basis. Over the last several months, we have received questions around our Devco joint ventures, and our strategy for repurchasing our interest in those assets. This morning, we published a slide in our earnings supplement and investor presentation that we hope is helpful and provides incremental clarity around the structure and the performance of the assets. If we assume that we repurchase the Devco JVs in a single tranche in the first quarter of 2022, which is the representative scenario presented on slide five of the earnings supplement, The repurchase price is between $900 million to $950 million, is an estimated five to six times multiple on asset EBITDA, and the repurchase would be close to leverage neutral. Repurchasing the entirety of the DEVCOs in the first quarter of 2022 is our current base case assumption, and we expect to have plenty of available liquidity to fund the full repurchase. We retain the flexibility to take out the DEVCOs in tranches and or to change the timing of takeout But the base case assumption running through our plan is a full takeout at the low double-digit fixed IRR in Q1 2022, which, again, would be close to leverage neutral. Finally, I would like to echo Matt's comments that our business is performing very well across a difficult year, and we are so proud of the exceptional performance of our entire target team. Given our performance and the actions that we have taken this year, we expect to exit 2022 in a strong position with a very bright outlook. And with that, I'll turn the call back to Sanjay.

Great.

We kindly ask that you limit the two questions and re-enter the Q&A lineup if you have additional questions. Michelle, would you please open the lines for Q&A?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeremy Tonnet with JP Morgan. Please go ahead.

Hey, good morning, guys. This is James. I'm for Jeremy. I hope you guys are doing well. I just wanted to start with the 2021 outlook. And as it relates to 4Q, obviously with all your growth projects mostly in service now, it seems in the gathering business, volumes are kind of normalizing. Is 4Q kind of a good run rate for 2021? It seems, you know, there's some growth maybe on Grand Prix, but largely speaking, do you think 4Q can be a good benchmark going forward?

Yeah, hey, good morning. Yeah, so, you know, look, as we look at 2021, I think we're encouraged by the strong performance that we've seen in the back half of this year, especially across our Permian footprint. So, You know, those volumes continue to be resilient, you know, showing good growth this quarter. And I think that sets us up well going into 2021. So we anticipate, you know, giving 2021 CapEx and EBITDA guidance in February. You know, I think when you look across some of the pluses and minuses, you know, I think in this price environment, we still see some growth in the Permians. You've got still strong producer activity on our system with higher GORs is going to set us up well, but we do have declines that are happening in the central area as well. We need to get through the planning process and see how those kind of shake out as we get into 2021, but those are some of the pluses and minuses.

got it. That's helpful. And then maybe just shifting over to the recent upstream M&A, I just wanted to get your broader thoughts there in terms of the implications to Targa and also if Targa would be interested in anything on the market at this point. Obviously, you have a lot going on with the buybacks and deleveraging, but if there's anything that you guys would consider going after here.

Sure. So yeah, Well, I guess we'll handle that in two parts. You know, first on the, you know, consolidation on the upstream. You know, we have seen a lot of that. I'm going to hand it over to Robert Marrero, our Chief Commercial Officer, who kind of gives some perspective about how that may impact us.

This is Bobby. So when we look at all the transactions that have happened recently and thinking about the parties that are doing it, it's obviously different party by party. But when you look at most of the transactions that have occurred, We have great relationships on both sides of those tables. And the consolidators, the buyers, are people that we work with every day, all day. So it's one of those things where we hate to see management teams go that we love, but the acquirers are ones we do a lot of work with that we have great relationships with as well. So we don't see a big detriment there. And then as you start to think about those companies getting bigger, as a general rule or tendency, they tend to go with the guys on the midstream side that have more integrated platforms and a bigger balance sheet to work through the tough times. And so we think that being directionally positive for us as the big guys start to roll out some of the smaller guys. Again, we have great relationships with almost all of them that we've seen acquire, and so we're excited about kind of what those integrations come, what proof comes from those integrations.

Yeah, well said, Bobby. And then on the, you know, consolidation and what it looks like on the midstream side, you know, I'd say for us, we're really focused on our integrated platform on focusing our investment on organic growth. We're not lacking a key piece of the puzzle that we're really looking to bolt on or that would make Targa complete. We have an integrated platform. We have a really good Permian position. And so we're in a strong position as we look forward multiple years really just servicing the existing assets and customers that we have. So we're going to be focused on organic growth there's a pretty high hurdle for us to go look at something that would be a pull-time.

Okay, great. Thanks for the call. In the interest of time, I'll leave it there. Thank you.

Okay, thank you.

Your next question is from the line of Christine Cho with Barclays. Please go ahead.

Good morning. Maybe if I can follow up on that M&A question. You know, some of the combinations You know, there have been a couple of combinations where both the acquirer and target are notable customers on your system. You know, how do we think about what the impact of that would be? You know, is the initial thought that the cost savings is going to enable more production with the same amount of spending? Or does the pro forma entity just pocket the savings? And could there be other commercial opportunities as it relates to either new contracts or modifying the existing ones?

Yeah, I'd say as it relates to where they're both large customers of ours, you know, to Bobby's point, we've had good relationships with, you know, really all parties involved there. I think it's going to have to play out over time for is there a change in how they're looking at, you know, what their reinvestment is, how many rigs they're going to have on the acreage, and how they're going to allocate capital. But I think to Bobby's point is over the longer term, as these companies get larger, flow assurance, being connected to a scale system like we have, we think over the longer term is going to be beneficial. Don't see any real big impacts near term. It's going to be over the longer term how it plays out, I think.

I see. Okay. And then just moving on to the Devco buybacks, I understand this slide. that you have there is illustrative. But I do think that in your prepared remarks, you mentioned that your base case is to buy it all in one tranche in 22. Can you just talk about like your thinking behind that, you know, buying it in one tranche versus buying it in pieces? And, you know, is the desire to buy it in one tranche because like the acquisition multiple is as a function of EBITDA is better the longer you wait? or wanting it to be at least leverage neutral, and you think that is best in 2022? Or are there just other factors that we should be thinking about?

Sure, Christine. This is Jen. I think there are a lot of factors that will go into our decision ultimately on how we take it out. That's the simplifying assumption that we're making, which is that we take it out in a full single tranche in Q1 of 2022. which, given our expectations for the performance of the assets, is one that structure crosses over from where we would be repaying Stone Peak a multiple on invested capital versus an IRR. So we said in our prepared remarks that with that Q1 2022 takeout assumption, we would be paying the fixed IRR on that takeout. So one, that's a benefit to us, right? If we take it out earlier, we would be paying a multiple. If we wait longer, it's a lower cost to us ultimately as we take it out at that fixed IRR. So I think that that's an important element of our decision making. I think ultimately we'll see how the business performs through next year. And if it makes sense for us to use some of our available free cash flow after dividends to take out a tranche or tranches early, then that's certainly an option. But I think the point that we were trying to make with that slide and with our additional disclosures and our scripted remarks was that we could take it out in a single tranche in the first quarter of 2022. And given the strong EVADA performance of those assets, it's essentially a leverage neutral transaction. So it becomes much more a liquidity decision, really, than a leverage decision. And for us, we expect to have significant liquidity over that horizon, which is also what gives us that flexibility to be able to take out the full devcos in a single tranche if we wanted to. But again, we do have the flexibility to do it in pieces. We have the flexibility to wait longer. We have a lot of flexibility, and that's one of the reasons that we liked the structure so much when we entered into the transaction with Stonepeak. Got it. That was helpful. Thank you.

Your next question is from the line of Michael Bloom with Wells Fargo. Please go ahead.

Great. Good morning, everyone. I wanted to go back to your comments, your updated contract to G&P fee-based cash flows. I just wanted to clarify, did you add a fee floor to your existing POP contracts? Are these actual conversions from POP to fee? And then the other part of that question is kind of where? Is this all in the Permian or is it somewhere else?

Sure. Hey, good morning, Michael. Yeah, so for the GMP contracts, I'd say it's a combination. It's largely in the Permian is where we're having, I'd say, the most success where we're continuing to invest for our customers and needing to, you know, protect the underlying investment. So in some cases, it's adding a fee floor to contracts, and others, as we look forward and get extensions and renewals and others, we're changing POPs and making it fee-based with POP or putting in floors plus a POP. It's a combo of all of those things, and it depends on the customer relationship and what they prefer. We can be flexible on it. What we're really just trying to do is making sure we can protect the underlying investment so we can continue to service our customers and hook up wells and the like.

Okay, great. And then The second question I wanted to ask was just around asset sales. So obviously here you've got another one done. The question is, are there any other meaningful potential asset divestitures that you could look at, or do you think you've kind of exhausted that at this point?

There's nothing, Michael, that we're actively considering selling at this point in time. The one asset that you had visibility to previously, because we spoke about it publicly, was the potential divestiture of our Midland crude business after we announced that we had successfully sold the Delaware crude business. So again, there is an active process underway, but that's at least an asset that you've had visibility to us considering selling before. Other than that, as we look across the asset portfolio, I wouldn't say that there are any significant assets in particular to your specific question. that we would consider selling at this point in time. But, of course, everything has to be on the table at all times. So to the extent that we get any reverse inquiry around different assets or different positions, we would certainly consider those.

Great. Thank you very much. Thanks, Michael. Yeah, thanks, Michael.

Your next question is from the line of Tristan Richardson with Truce Securities. Please go ahead.

Hi, good morning. Really appreciate the comments on how the joint ventures could play out. I think that's helpful for all of us. Just a quick question. Thoughts on the Midland. Just thinking about some of your customers talking about seeing some slight incremental growth next year. Curious your thoughts on the ramp of the relocated plant and to the extent if you remain highly utilized in the Midland area. You could see CapEx next year perhaps exceed some of maybe your just general comments that you guys have made in the past about future CapEx.

Sure. You know, I'd say in terms of, you know, the ramp and the volumes, you know, in the past when we've brought on clients out in the Permian Midland, really starting back with Joyce, Johnson, Pembroke, you know, now Gateway, is when we bring an incremental plant on, it's typically pretty highly utilized fairly quickly. I think that would be our expectation with this Heim plant, is when we bring it on, it's going to be highly utilized. And we pointed to about $90 million of CapEx for this. That's going to, you know, for the most part, almost all of it's going to be next year, you know, in 2021 with a little bit of spending this year. As you look forward to CapEx next year, you know, we pointed this year to the low end, you know, around, you know, $700 million for this year. I would expect 2021 to be meaningfully less, even with the addition of that Heim plant, meaningfully less in 2021 than 2020. We're still working through the budgeting, working through what our producers are saying, what the, you know, compression and pipeline needs and that's going to be, but I would expect it to, even with the Heim plant, be meaningfully less than this year's CapEx.

Appreciate it. And then, Just thinking about the longer-term leverage target and just balancing that between targets having been very active on the repurchase lately, could we see repurchase become a regular fixture of the capital allocation, whether that be targeted or programmatic over time, or is the priority in the medium term to really pre-fund any DevCo scenario with free cash flow net of distributions?

Good morning, Tristan. This is Jen. I think for us, we really tried to be very deliberate with the words that we used when we announced the Share Repurchase Program and really tried to liken it to the opportunity that we saw earlier this year around being able to repurchase some of our debt at what we thought were very attractive prices. For us, the Share Repurchase Program is an opportunity, in our view, to benefit from what we perceive as a market dislocation. And so as we look forward beyond the $500 million program that we announced, we'll be continuing to look at the best ways to return capital to our shareholders. We clearly are very much focused on the deleveraging plan, and we don't view the share repurchase program as a departure from that in any way, shape, or form. So we will continue on that path to deleveraging. I think an important part of trying to articulate that deleveraging story was around the DEVCOs because it sounded like there were some broad market concerns that that was going to add significant incremental leverage to the target system. So we tried to provide clarity around that today, that we don't view that as a departure either from that long-term deleveraging plan. I think ultimately we've made a lot of progress on a lot of strategic initiatives in terms of adding fee-based margin in the GMP business, in terms of rationalizing our capital spending, rationalizing costs, et cetera. And I think all of that, plus the strong operational performance of our assets this year, has just provided us with a lot of flexibility. And so hopefully we'll be able to continue to utilize that flexibility as we look forward while continuing on that deleveraging path.

Appreciate it, Tim. Thank you guys very much.

Okay, thank you. Your next question is from the line of Ujwal Pradham with Bank of America. Please go ahead.

Good morning, everyone. Thanks for taking my question. I just wanted to begin with the later part of your M&A commentary specific to midstream sector. Matt, so this year you have made good progress on reducing costs while maintaining your significant operating leverage in the pernium. One could argue that you could achieve more of the same, potentially through synergies from merger of equal transactions, maybe in your core basins, and further expand that integrated profile. Have you or would you consider such opportunities?

You know, I'd say we'll always, you know, consider and look at other opportunities that could make sense for us over the long term. And, you know, could there be something with significant synergy potential, which looks attractive to us, I guess, you know, theoretically. But I think we feel pretty proud of our Permian position and our asset position. And so, if there was anything like that, you know, MOEs or others, it would have to be very attractive for us to be issuing TRGP here for someone given our strong Permian position and our outlook. I guess any of those are not off the table. We try and be smart about all those things, look at all those things. We just feel like we're in a really good position without doing any kind of transaction like that and just execute on our business plan, focus on what we have in front of us, and it's going to deliver very good returns to our shareholders over time. And announcing the share repurchase here recently I think is evidence of how strongly we feel about TRGP and our business outlook.

Thanks for that, Matt. Very helpful. And my second follow-up is to your comments around potential asset sales in the future. I appreciate some of the comments you made earlier, question. But as we think about your non-perineum GNP systems, which are in basins with mature or declining profile, Could you maybe talk about the cash flow profile of all those systems and the market for such assets at the moment? Thank you.

I think to start, we're, one, very pleased that we were able to sell a 45% interest in our Bakken assets for $1.6 billion when we did. And I think that that transaction highlighted, at least at that point in time, our willingness to really core up around what we consider sort of our bread and butter, which is Permian through all of our downstream assets. But we do have other assets that I think also importantly bring a lot of additional benefits to us in terms of also bringing volumes further through our downstream assets as well. Really, what you've seen us liquidate at this point are assets that just haven't, in our view, made sense for us to own over the longer term and have made sense for somebody else to own. As we look across the cash flow profile of the assets that we have, again, I think we're very comfortable with the Bakken exposure that we have right now. Those assets are continuing to perform well, better in the third quarter than the second quarter, and better expectations as we look forward for those assets. I think on the MIGCON side, our teams have done a wonderful job of trying to extract savings from those assets and really optimize the positions that we have in trying to get more volumes further through our downstream assets, et cetera, to make that more of an attractive cash flow profile than it would otherwise be. I think the moving of the Heim plant highlights our engineering team's creativity to look around our asset footprints where we may have declining volumes and say, is there a better, higher use for certain assets? And that's a high visibility version of an asset moving, but we're looking all the time. Is there compression in one area that is less utilized and it could be moved to the Permian, for example, could be more highly utilized. So hats off to our engineering and operations teams that are focused on that as well. I think ultimately, we're very comfortable with the asset portfolio that we have. And ultimately, we'll continue to look at whether we're the right long-term owner of assets. That's part of our job. But again, we're very comfortable with the assets that we have and the cash flow profile of those assets.

Got it. Very helpful. Thank you, Jen.

Your next question is from the line with UBS. Please go ahead.

Hi. Good morning, everyone. It's hard to go back to the DEPCO, but I just kind of wanted to understand a couple things. First, really appreciate the transparency in the slides that you put out today. I'm trying to understand, is there a benefit in timing from acquiring the DEPCO? You know, as I sort of think about the IRR calculation and so forth and the fact that, you know, the distributions that get paid out does reduce the amount you need to purchase, if I understand that correctly. Does the timing of ramping, let's say, of Grand Prix sort of change your IRR thought process as to how the timing should be? I was wondering if you can sort of walk through how the assets ramp. Does that change your timing on when you want to acquire the asset?

This is Jen. I think that the EBITDA generation of assets is clearly a very important variable that we're considering in when it makes sense to take out the structure and repurchase those interests. So I think you're exactly right. To the extent that those assets are performing very well, which they are, and we've got good visibility, I think, to continued excellent performance from the assets that are included in the DevCos, then we get to that sort of multiple to IRR calc change more quickly, and it makes more sense for us to potentially take it out earlier as a result of that. Everything that we put out this morning was just to try to provide a lot more clarity. One, that Stonepeak is benefiting from good quarter over quarter distributions as a result of the performance of those assets. And so ultimately that reduces the overall end payment that we need to make to the important point that from our point of view, it's not a significantly leveraging transaction in any way, shape or form. It's again, really more about liquidity than anything else. And ultimately I think that our continued strong performance across Targa is helping us to feel like we've got more flexibility to potentially move more quickly on taking out those DEVCO interests. But a key element of the structure is definitely when it flips from that multiple to IRR. And that's a key variable that we are considering when we thought about the base case that we were going to present today for when we are thinking about taking it out.

That makes perfect sense. And so I guess, does that sort of drive also into your thought process around when you buy back your stock as well also? Is it kind of like stock at a certain price and you sort of measure it against versus buying chunks of the DEVCO? Is that kind of the way to be thinking about that as well also?

I think for us right now, clearly the share repurchase program is, again, a view on a market dislocation. And so that's why we moved quickly to put a program in in early October, and that's why you've seen us be active under that program already. So as we look forward, I think it's really the performance of our assets, the reduced capital spending that has given us the flexibility to put in that share repurchase program and to already be successful repurchasing shares under it. And so we'll be continuing to look each quarter at what's the best use of our free cash flow, what's the best use of our liquidity, what positions us best for creating long-term shareholder value, and we'll be making the decisions on what and when to repurchase and or to pay down on the debt side as a result of all of those variables.

And just to add to that too, as Jen said earlier, our repurchasing of the death code is more about liquidity. So it's not we need to do one expense or the other. We have enough liquidity to repurchase shares. We have enough liquidity to go out and repurchase death codes. So when we repurchase the death codes, it's going to be leveraged neutral, maybe slightly leveraging, but pretty much leveraged neutral. So one doesn't go at the expense of the other necessarily.

That makes perfect sense. And I think given that you're obviously focused on getting leverage down and you see it as kind of a leverage neutral transaction, I mean, do you see an opportunity to finance more than 50% of it actually using debt just sort of given the trajectory that you're on? Is that an option that you would consider at the time?

We've got a profile of significantly increasing free cash flow as we look out over the horizon. We also have a lot of liquidity. So ultimately, you know, it will depend on that quarter how exactly we execute on whether it's drawn all under the revolver or we're using available free cash flow. I would expect it to be a combination, Shner.

All right, perfect. Really appreciate the color today and have yourself a safe day. Okay, thank you.

Your next question is from the line of Colton Bean with Tudor Pickering-Holtz. Please go ahead. Colton Bean, Tudor Pickering- Morning.

So, Matt, just wanted to quickly clarify some of the comments there on 2021. I think you all had previously steered towards a range of about $200 million on capital spend. Can you just clarify whether there was any consideration of processing CapEx in that number, or if Heim would be fully incremental to that?

Sure. Yeah, good morning, Colton. For 2021, we gave the $200 million number that was, you know, in the, you know, kind of downturn in the second quarter. And it assumed a very kind of base level, modest level of spending, kind of the very, you know, I'd say downside case or low side case for that. And it did not have any incremental processing. So the 90 would be incremental to that. You know, as we're going through the budgeting and looking through what we expect for 2021, I would expect there to be more kind of base level spending relative to that 200, and then you'd add the 90 million of processing on top of that. So it's going to be, right now, it's going to be somewhere in between the 200 and 700. We do think it's going to be significantly less than the 700, so I'm not trying to imply we think it's going to be approaching that number at all. It's going to be significantly less than the 700, but I would expect it to be more than the 200.

Understood, and that's helpful. And then maybe a question for Scott. It looks like the TNF unit margins actually rebounded pretty strongly here, back up close to Q1 levels, despite lower volumes coming out of the mid-con, which I think is a little bit higher margin business. So any specific drivers to point to on the margin improvement?

I think really for us, when you look at the volumes across our system, we have done a good job of contracting TNF across our entire system, obviously led by by production coming from our Permian Basin from our own GMP assets. I think that that's going to continue. You can see the ramp-up that we've had on the fractionation side, the advent of our Train 7 earlier this year, and now the additive of Train 8 in the latter part of the third quarter. So we'll continue to see that. We do believe that our volumes are going to be up. in the fourth quarter as we work off the inventory. So I think overall, margins are still, it's highly competitive out there, but we've done a good job of really marketing our assets, showing that we've got flexibility on our system, that we can perform very well and reliable for our customers. So I think that is going to continue to drive margins to our business, not only on our frack business, but our transportation on Grand Prix, as well as it leads to the export business. Got it. Appreciate the time.

Okay. Thank you.

Your next question is from the line of TJ Schultz with RBC Capital Markets. Please go ahead.

Oh, hey. Shaner's question hit most of my follow-up on the dev codes, but maybe just one clarification. Is that five to six times multiple reflective of run rate EBITDA at the beginning of 2022, or what period does that reflect? It's if that may give a sense of the ramp and those assets you're expecting in your base case assumption on timing. Thanks.

It's reflective of run rate EBITDA at that repurchase timing assumption, TJ, so Q1 2022. Okay, great.

Thanks, John.

Your next question is from the line of Keith Stanley with Wolf Research. Please go ahead.

Hi, thanks. First question on the LPG exports and the volumes you saw in the quarter, and I think you said you expect it to be even higher in Q4. Should we think of that as mostly tied to greater long-term contracts with the facility expansion, or is it partially baking in some good short-term opportunities? Just curious if Q3, Q4 is a good run rate for LPG exports.

So when we look at the export business, certainly we had a very strong quarter averaging the 9.5 million barrels per month. We do expect the fourth quarter to be even stronger. We had a partial quarter on our phased-in expansion, which was inclusive of our new refrigeration unit at Galena Park at our export facility. So getting the full benefit of a fourth quarter, we expect the volumes to be up as a result of that. With that said, also, the additive of that phased-in expansion, we brought on new contracts. So we are highly contracted. We expect the volumes to be stronger in the fourth quarter. The market still has a strong demand for products across the globe. We continue to focus on the east. And so we look at that and say, well, we're highly contracted. But we will continue to look for every opportunity to squeeze the cargoes in between the contracted cargoes that we have and being very reliable to those term contracts and liftings that we have. But we'll look for every opportunity to optimize in between those.

Thanks. And second question. Just to clarify, would you look to repay debt with free cash flow over the next couple of years? I don't think the company has any debt maturities for several years. So is that an option, or is it more likely you could be building up cash for the eventual Devco buy-in? Thanks.

No, Keith. To the extent that we've got maturities that are callable, for example, we could use available free cash flow to reduce the overall quantum of debt that we have. by using that free cash flow to potentially call different series of notes. We also do expect some continued spending, and so to the extent that we've got any liquidity drawn on the revolver, which we currently do have small borrowings at both TRP and TRC, then we'll be using available free cash flow to reduce debt at both revolvers as well, which would just reduce, again, the overall amount of debt that we have in our system.

Thank you.

And your final question is from the line of Tim Schneider with Citi. Please go ahead.

Hey, thanks for all the color, guys. Just a real quick one, follow-up on the LPG export side. You mentioned the east has been pretty strong. Just wondering what is driving that? Who is your customer on the other side here? Is this trading houses? Is this end users? And also curious, as to what you're seeing in Europe and South America or your views as we kind of get into 2021?

Sure. When you look at the growth to the east, a lot of that growth is still driven by China and by India. And certainly when you look at China, the continued growth and expected growth over the next several years is going to continue to be focused on PDH plants, propane dehydrogenation plants. In India, it's really more of a domestic fuel. And as the state of India continues to really improve its infrastructure, there's still several billion people, obviously, in India, and many of those are without an appropriate energy source. And so the ability to put the infrastructure in place by other parties to get this clean-burning source of fuel into India is really where we see a lot of growth. So India and China are going to continue to be the primary source of growth that we see in the east. We've also seen good demand in Europe. You mentioned that. Some of that comes more on the backs of refinery companies. shutdowns and the need in petrochemical plants where we've seen some movements of butane and other products. So, again, global demand continues to grow. There is a need for a clean burning energy source, which is propane and butanes, much better than the use of coal or other solid waste materials. So we think the horizon looks very good for continued growth, and a lot of that incremental demand is going to come from the U.S. where the production continues to climb.

Got it. Thank you.

Okay. Thank you.

And we'll turn the call back over to Mr. Sanjay Ladd.

Great. Thanks to everyone that was on the call this morning, and we appreciate your interest in TARGO resources. We will be available for any follow-up questions over the course of the day. Thank you, and have a great day.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.