This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk14: Good day and welcome to the TARGO Resources second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Sanjay Ladd, Vice President, Finance and Investor Relations. Please go ahead, sir.
spk09: Thanks, Cole. Good morning and welcome to the second quarter 2022 earnings call for Targa Resources Corp. The second quarter earnings release along with the second quarter earnings supplement presentation for Targa Resources that accompany our call are available on our website at targaresources.com in the investor section. In addition, an updated investor presentation has also been posted to our website. Statement 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 be available for Q&A. Pat McDonough, President, Gathering and Processing, Scott Pryor, President, Logistics and Transportation, and Bobby Mararo, Chief Commercial Officer. I will now turn the call over to Matt.
spk06: Thanks, Anjan. Good morning. This is an exciting time for our company, and given the recent close of our Delaware Basin acquisition, I want to take this opportunity to publicly welcome our new colleagues to the target team. I would also like to thank all of our employees for their collective efforts, as it has been a very busy first seven months of 2022, and the team has already accomplished a lot. And our strong execution continued across the second quarter, including record high quarterly EBITDA, record volumes in the Permian, record NGL transportation and fractionation volumes, redemption of Series A preferred stock, completing the successful sale of our interest in Gulf Coast Express Pipeline, integration of our acquired South Texas assets, successful negotiation of our Delaware Basin acquisition and subsequent financing, and $74 million of common share repurchases. Looking ahead, continuing to execute on our strategic priorities will drive increasing EBITDA, reduced common share count, a higher common dividend, while maintaining leverage within our target range. Our performance this year has been strong, and we expect that to continue. We are updating our financial guidance for the year to account for the completion of the Delaware Basin acquisition effective August 1st. We now estimate full year 2022 adjusted EBITDA to be between $2.85 and $2.95 billion. We continue to expect volumes to grow across both our Permian Midland and Delaware positions for the remainder of the year and well beyond. We have several gas plants under construction, Legacy 1 and Legacy 2 in the Permian Midland and Midway and Red Hill 6 in the Permian Delaware.
spk00: And
spk06: Given our line of sight to increasing GMP volume growth, we are continuing to invest across our MGL business. We are announcing two new projects, a new 275 million cubic feet per day processing plant in the Permian Midland, which we are calling the Greenwood Plant, and a new 120,000 barrel per day Train 9 Fractionator in Mont Bellevue. Investing in organic growth projects across our integrated footprint provides Targo with attractive returns and puts us in a strong position to continue to return capital to our shareholders. Turning to our Delaware Basin acquisition and our combined Permian Basin footprint. On a combined basis, we now have about 2.8 billion cubic feet per day of processing capacity in the Permian Delaware, complementing our 3.6 BCF per day processing position in the Permian Midland for a combined total of 6.4 BCF per day of processing capacity. Our assets in the Delaware Basin overlay some of the most economic acreage in North America with the acquisition increasing our size and scale by extending our reach into the highly active and productive Eddy and Lee counties of New Mexico. We now have several million acres dedicated to us across the Permian Basin providing decades of future activity that will result in increasing volumes moving across our integrated assets. We acquired the Delaware Basin assets at an attractive 7.5 times multiple of estimated 2023 EBITDA and expect volume growth as well as near and long-term synergies to reduce the acquisition multiple. We expect to capture downstream synergies over time as existing contracts come up for renewal and from new target processing expansions. We funded the acquisition with cash on hand and debt and expect to end the year with leverage around 3.5 times, comfortably around the midpoint of our three to four times long-term leverage target ratio. Let's now discuss our operations in more detail. Starting in the Permian, our systems across the Midland and Delaware basins continue to perform well, averaging a record 3.1 BCF per day reported inlet volume during the second quarter. In Permian Midland, our systems continue to run full, and we expect to bring online our next 275 MMCF per day Legacy One plant later this month, which is expected to come online highly utilized. A special thanks to our engineering and operations teams for working diligently and safely to bring Legacy online ahead of schedule. Our Legacy 2 plant in Permian Midland remains on track to begin operations during the second quarter of 2023, and we similarly expect it to be highly utilized when it comes online. In Permian Delaware, volumes across our system are also continuing to ramp. Our new 230 million a day Red Hill 6 plant is expected online in September, And our new $275 million a day midway plant is expected to begin operations during the third quarter of 2023. We expect Red Hills 6 to essentially be full when it comes online, and we have flexibility across our Permian Delaware system to handle additional near-term production growth from Eddie and Lee counties with connections to target plants. Shifting to the badlands, Late winter storms impacted our natural gas and crude gathering volumes for the second quarter, but volumes have since rebounded. In our central region, the acquired assets in South Texas and an uptick in activity levels in Oklahoma and North Texas drove a sequential increase in volumes during the second quarter. Shifting to our logistics and transportation segment, NGL transportation volumes were a record 492,000 barrels per day to Mont Bellevue during the second quarter. Throughput volumes sequentially increased 7%, driven by increasing NGL production from Targa's Permian plants and third parties. Fractionation volumes at our Mont Bellevue complex during the second quarter were a record 737,000 barrels per day. And the fractionation market in Mont Bellevue continues to tighten. We are moving forward with Train 9, given our outlook for continued supply growth from our Permian GMP systems and third parties. Train 9 is fully permitted and is expected to begin operations during the second quarter of 2024 with an estimated cost of around $450 million. In our LPG export services business at Galena Park, we loaded an average of 10.4 million barrels per month during the second quarter, providing a consistent outlet for our customers despite continued volatility in global commodity markets. We continue to expect to complete our previously announced low-cost expansion project to increase our propane loading capabilities with an incremental 1 million barrels per month of capacity by mid-2023. Lastly, year-to-date, we have purchased almost 2.4 million common shares at a cost of around $154 million. Our balance sheet is strong. We are continuing to invest in our business both organically and through acquisitions. We are returning an increasing amount of capital to our shareholders, and we are excited about Targa's outlook. Before I turn the call over to Jen, I would like to extend a final thank you to our employees for their continued focus on safety while executing on our strategic priorities and continuing to provide best-in-class services to our customers. Jen?
spk01: Thanks, Matt. Targa's reported quarterly adjusted EBITDA for the second quarter was $666.4 million, increasing 6% sequentially as we benefited from higher commodity prices and higher volumes across our gathering and processing and logistics and transportation systems, partially offset by lower marketing margin and higher operating expenses. Higher operating expenses were primarily attributable to increasing activity levels across our GMP systems, our recently acquired assets in South Texas, and inflation. While costs are higher, inflation continues to be a net tailwind for us across our businesses as we benefit from inflation-linked fee escalators across our commercial contracts. Target generated adjusted free cash flow of $334 million in the second quarter. During the second quarter, we completed the redemption of all of our outstanding Series A preferred stock for approximately $973 million and also received the proceeds associated with the sale of our interest in Gulf Coast Express Pipeline of $857 million. Our consolidated net leverage ratio was 3.1 times at the end of the second quarter, and we had about $2.3 billion of available liquidity. We repurchased about $74 million of common shares in the second quarter and repurchased an additional $30 million during July. We have approximately $215 million remaining under our $500 million repurchase program. Since the inception of our common share repurchase program in the fourth quarter of 2020, We have opportunistically repurchased $285 million of common shares or about 8.6 million shares at an average price of $33.12. We continue to expect to pay a common dividend per share of $1.40 for 2022 with our next dividend increase likely to be announced in early 2023 concurrent with when we expect to provide 2023 operational and financial guidance. Throughout the year, we have added hedges and we are significantly hedged for the balance of 2022. We have also continued to add 2023 hedges at higher weighted average hedge prices than 2022. It has been a very active couple of months for the finance team as we were able to attractively finance our Delaware basin acquisition through a combination of five-year and 30-year senior notes issued in the investment grade market, a three-year term loan, and availability under our revolver. Pro forma for the acquisition, we have about $1.1 billion of liquidity available on our revolver. Benefiting from now being an investment grade issuer, we also recently entered into a commercial paper program. As Matt mentioned, we are updating our financial estimates to account for a partial year contribution from the Delaware Basin acquisition and now estimate full year 2022 adjusted EBITDA to be between $2.85 billion and $2.95 billion and continue to estimate a year-end leverage ratio of around 3.5 times. With the addition of spending in 2022 for the Greenwood plant and Train 9 announced today, plus spending to support the newly acquired Delaware Basin assets, we now estimate 2022 net growth CapEx to be between $1 billion and $1.1 billion. Our estimate for 2022 net maintenance CapEx remains unchanged at approximately $150 million. Our continued investment in growing Target's underlying businesses, supported by solid business fundamentals and the strength of our balance sheet, means we are in excellent position looking forward to continue to return an increasing amount of capital to our shareholders. Lastly, I'd like to echo Matt and thank our employees for their dedication and for continuing to prioritize safety. And with that, I will turn the call back over to Sanjay.
spk09: Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and re-enter the lineup if you have additional questions. Cole, would you please open the line for Q&A?
spk14: Thank you. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. And our first question today will come from Jeremy Tonnet with JP Morgan. Please go ahead. Hi, good morning.
spk12: Hey, good morning, Jeremy. Good morning. Just wanted to dive into capital allocation thoughts a bit more. You know, big spend this year with the acquisition and all. As you start to look into 23, it seems like there's a lot of available cash flow. And just wanted to kind of get your thoughts with where you see that landing. It seems like the opportunity for buybacks would only increase. And when you think about buybacks, is it more price sensitive to the stock, or is it more balance sheet capacity that drives timing of buybacks?
spk06: Yeah. Hey, Jeremy. You know, we really are in a good position where we're going to have a lot of flexibility. You know, as we move through this year with strong EBITDA growth and then as we get into 2023 expecting, you know, continued growth in our business. I think we'll continue to focus on investing organically, which is driving some of the, you know, really good returns for Targa and then really increasing our ability to return more capital to shareholders over time. But we'll have a lot of flexibility in 2023 to increase that return of capital to shareholders. So, yeah, this fall we'll discuss with our board what the right dividend level is. We'll kind of look at our peers. We'll look at, you know, broader industry peers, S&P 400 or 500. You know, and then come up with a recommendation for a dividend. That'll be one piece of the equation. And then we'll also look at you know, continuing our share buybacks. You've seen us actually ramp that up here even in light of the Lucid acquisition. We've been increasing our share buybacks. I would still like to say that it is an opportunistic program. I don't see us just setting a level and say it's going to be this. We're going to look at the macro environment. We'll look at our organic growth projects where we set our dividend and then come up with a plan that makes sense but have flexibility in that such that if we see some good opportunities to increase that, then we can do so.
spk12: Got it. That's helpful. And just wanted to kind of clarify two points there as my follow-up. When you think about the dividend, is it relative to midstream peers or more kind of like S&P 500? And I guess, you know, there's concern in the marketplace with regards to this much free cash flow coming out next year and whether that be returned to shareholders or put to M&A. And just wondering any thoughts you could provide on that.
spk06: Yeah, I think as we look to the dividend, we will look towards broader industry peers. We will be informed by what our midstream peers do. We'll take a look at that. But I think, you know, we talked about, you know, when we moved our dividend to $1.40, having modest growth. We certainly have the ability to do that and a lot of flexibility in the ability to do more if we so desire to do more than modest growth. That'll be a discussion with our with our board. Either way, we're going to prioritize financial flexibility as we go forward to continue to invest in our business organically. And then I view M&A kind of similar to how we've talked about it. I think we continue to have a high bar for M&A. We need something that's going to put us in really strong position coming out of the other side of the M&A, which both, you know, the South Cross and the Lucid acquisitions. You know, our balance sheet is strong. We reported 3.1 times leverage ratio. We're estimating 3.5 by year end. So we want to make sure we have a strong balance sheet if we do any M&A. I'd say right now with as active as we've been this year, our focus is going to be on integrating those acquisitions. and making sure we do those well and extract the synergies that we think we can get from those acquisitions. So I think our focus is going to be on integration here for a little while, even while we have significant cash flow to invest in our business organically and then increase return of capital to shareholders.
spk12: Got it. That's helpful. Thank you.
spk14: Okay.
spk12: Thanks, Jeremy.
spk14: And our next question will come from Brian Reynolds with UBS. Please go ahead.
spk11: Hi. Good morning. I was curious if you could just talk a little bit on commodity exposure post the recent Lucid acquisition and how we should think about the evolving kind of 60-40 GMP logistics and transportation earnings mix over time. Is it kind of fair to assume that we should see growth in fee-based in the L&T business going forward relative to GMP and POP exposure? Thanks.
spk06: Yeah, sure. You know, our commodity exposure... With Lucid really being, I'd say, entirely fee-based contract, there still is some embedded commodity exposure in there with just the way those contracts are settled, but it's primarily fee-based. So all things equal, that's going to marginally increase our fee-based margin over time. You know, as we look at that mix, what's GMP and what's downstream, we kind of think of it more as we're going to continue to invest in both of those businesses. It's an integrated business. We're going to invest in GMP, and we're going to invest like we are with Train 9 and the export dock, you know, as needed to handle those volumes. And then so the mix is just going to kind of be a result of investing in our integrated platform. to the extent we get higher commodity prices and we move above our fee floors, then it ends up shifting a little bit more margin into our GMP business. That's really a result of just excess earnings and having a higher commodity price environment. So we don't have a target we're going for. We're just gonna continue to invest in both businesses. That said, we see increasing fee-based margin just on an absolute basis continuing to grow. We're going to continue to have growth in our GMP business from fees. We're going to continue to have fee-based margin increase in our downstream business from fees.
spk01: And we'll also continue to look to add fee-based elements or floors to any existing contracts where we don't already have those, particularly as contracts come up for expiration or there's some catalyst to be able to renegotiate those contracts. So that will also help provide additional cash flow stability on the downside going forward.
spk11: Great. I appreciate all that incremental color. Maybe as my one follow-up, the Lucid acquisition appeared to include some, you know, carbon and CCUS capabilities. Just given the recent 45Q credit increase included in the Inflation Reduction Act proposal, you know, how should we think about the potential opportunity set for TARGA as the largest process for me? Thanks.
spk06: Yeah, thank you. You know, we have been working, you know, prior to LUCID just on working on carbon capture to see if there's something we can, you know, commercialize across our Permian footprint. LUCID has made really good progress on that as well. And so I'd say, you know, I'm excited about the opportunity to be able to develop that both in the Delaware and on the Midland side. They have some really good people over there who are really smart and knowledgeable about how to do this. And, yeah, you're right, with the 45Q, you know, if that gets passed, you know, increasing it, you know, it makes those projects easier to get over the finish line. So I think with their expertise plus the work that we have done, it kind of, you know, increases our ability to commercialize that opportunity.
spk11: Great. Appreciate the color. Have a great rest of your morning.
spk14: Okay, thank you. And our next question will come from Keith Stanley with Wolf Research. Please go ahead.
spk08: Hi, good morning. I guess to start just on Lucid synergies, can you talk a little more about near-term, long-term opportunities and how impactful it might be, I guess near-term you referenced, potentially shifting some Lucid volumes if it's above your capacity onto other TARGA assets, just any color along those lines and how you're thinking about that over time.
spk06: Yeah, sure. You know, we think near term there will be some synergies on the NGL side, but just moving some volumes over to excess capacity we have out in our far west Delaware processing plants. We have excess capacity, lucid running over capacity. And so when we, you know, tie, they're already tied together. We're actually working on putting in some more pipes to expand the capability to move more gas to and from. So some near term just from what we call offloads onto our existing target system that then pushes those liquids down Grand Prix. And we expect over time as we add processing plants, those processing plants will be undedicated. We'll be able to capture some of those volumes and move those into our downstream business. That's another opportunity. And then as existing NGL dedications roll off over time, we'll be able to move those on to ours as well. So I'd say there's some short-term, some medium-term, and then some longer-term where it's contracted or tied up. So I think it'll be similar to how we think about that from our previous acquisitions we have done. It's going to be kind of a gradual increase in the ability for us to capture those liquids versus probably a cliff or just a really large amount coming all at one day. It's going to be a gradual move of NGLs onto our system over time.
spk08: Great, thanks. And second question, just with the Inflation Reduction Act, Jen, can you just give an update on when you expect the company to be a material cash taxpayer and how that bill as currently written could impact the company?
spk01: So currently, Keith, it depends on ultimately what our earnings and profits are and the amount of growth capital spending that we undertake. But our current assumption is that we wouldn't really pay any cash taxes of any material amount until 2024, and then it would ramp from there. So it's probably, call it 2027 before we've worked our way through our existing NOL. And then again, that could be shifting depending on growth capital spending, et cetera. With the Inflation Reduction Act, we could potentially be paying a minimum tax in 2024, but that would really be available. Those taxes would then be available to reduce regular income taxes in the future. So it would really create more of a timing shift of when we pay cash taxes versus anything else. Thank you.
spk14: Thank you. Okay, thank you. And our next question will come from Colton Bean with Tudor Pickering and Holt. Please go ahead.
spk03: Good morning. So I apologize in advance for a few bundled questions here. But it looks like Grand Prix reached nearly 500,000 barrels a day during Q2. So one, can you frame the mix between Permian and MidCon? And then two, to the extent that Permian utilization continues to climb as new plants come online, is there any ability to push beyond that 550,000 barrel a day upside capacity? And if not, what sort of lead time would you need to loop the line to the 30-inch interconnect in North Texas?
spk07: Hey, Colton, this is Scott. I'll start it off and see if Matt has some other comments that he would want to add. But I would just say that we've not described exactly what the mix is from the west leg of our Grand Prix pipeline versus the northern leg coming from Conway in and through the Kingfisher connection that we've got with the Williams pipeline with Blue Stem. But it is a contributor to that, and that is one contributor that will grow over time as existing contracts with some of our customers roll off with competitors. and those volumes roll onto us. We're certainly aware of the need of the west leg that we have today, and we are continuing to add pumps where it's necessary to pump up that pipeline. We are always evaluating what the needs are relative to increasing over and above maybe the 550,000 barrel limit that we have kind of stated publicly. And then we are obviously evaluating what the needs are to add additional transportation needs out of the Permian. It is our goal as we add gas processing plants in the Permian, both whether it's with the Delaware acquisition that we recently did or new plants on the Midland side, our goal is to make sure that those volumes run along our transportation legs, whether it's current Grand Prix pipeline or future expansions that we may do.
spk03: Great. Maybe just on that last piece, any early expectations around what sort of lead time you would need to be able to loop the line to that larger interconnect?
spk06: Yeah, so, you know, we are working through that. You know, we've got a number of processing plants underway now that are going to add significant liquids to us. We still have, you know, a fair amount of capacity that gives us, you know, a lot of lead time to be able to capture those. So I'd say right now we're kind of working through looking at the timing of our, you know, transportation volume in the build. and kind of evaluating when the right time to, you know, add additional, you know, transportation capacity is. So that's kind of something we're actively working on. And so just kind of we'll have to just kind of look at that as we go forward.
spk03: Got it. And then just switching over to the GNP segment, fairly material step-up in OPEX, Q&Q, any detail on the trajectory expecting here through the balance of the year?
spk01: This is Jen. I think you should expect an increased Q3 relative to Q2 just as a result of the Lucid acquisition. We are seeing inflation across our businesses on the cost side in terms of chemical costs and things like that. I think our teams are doing a really good job of trying to manage through that, but costs are higher. And then just as activity levels increase, that also results in higher costs as well, and we certainly have an expectation of activity levels on the GMP side continuing to increase rest of this year, both Delaware Basin plus standalone TARGA.
spk03: Great. I appreciate the detail.
spk14: And our next question will come from Neil Dingman with Truth Securities. Please go ahead.
spk04: Hi. Good morning. This is Danny Puig. I'm filling in for Neil today. My first question is really about on expansion. You guys have some attractive plants and fractionaries coming online. Do you guys see any material demand for additional products? And if so, which region would you say is the strongest?
spk06: Sorry, just to clarify, you say regional demand for products? Are you kind of just referring to the fractionation demand?
spk04: Yeah, that's correct.
spk06: Okay. As I kind of said in the scripted comments, we do see a tight frack market. Our volumes have ramped. A lot of the competitors' volumes, third parties' volumes have ramps. We're seeing a lot of Y-grade hit Bellevue, and so that market is tightening up. You know, a lot of that is coming from the Permian, from growth. A lot of it's also coming with some operational upsets. We've had the industry coming from other areas as well. So that's, you know, causing it to kind of tighten up a bit. You know, we still have some flexibility with our, you know, fractionation complex, you know, with Train 7 and 8 coming on and giving us some excess capacity. We have flexibility to Lake Charles. And we also are, you know, looking at what the right timing for a GCF, you know, potential restart is. So we're, you know, kind of sorting through that. So I think we'll be able to provide some outlets for that increased Y grade. But it is tightening up. And we do expect it to be tight for a while.
spk04: Okay, great. Thank you for the color. And my last question is on capital allocation. Specifically, is there a leverage level where you would become more aggressive with stock buybacks? I know you guys are at your midpoint or expecting to be at your midpoint by your end, but if you could give any color on that, that would be it for me. Thank you.
spk01: This is Jen. I think it's easier to be more aggressive if your leverage ratio is trending towards the lower end of your long-term leverage target range, but that may not be when the best opportunity presents itself in the market. So if you rewind it back to October of 2020 when we put the repurchase program in place, I wouldn't say that we had our leverage where we wanted it to be, but we saw a unique opportunity in the market to go and repurchase shares, and so we stepped into that. I'd expect that it's an important part of how we'll return capital going forward, The most important element of how we want to manage the profile of the company is with maintaining a very strong balance sheet. So if our balance sheet is strong, which we really believe is within that long-term leverage target range of three to four times with a preference for that leverage ratio to be towards the bottom end of that range, I think you'll see us continue to have the flexibility to be active, and then it'll just be a matter of what opportunity do we see presented in the market.
spk04: That makes sense. Thank you very much.
spk14: Thank you. And our next question will come from Chase Mulvhill with Bank of America. Please go ahead.
spk05: Hey, thanks for getting me in. I guess the first question is really just coming back to Permian processing capacity. Obviously, we've seen a lot of announcements recently for a lot of your peers adding processing capacity in the Permian. So if we kind of think about that in relative to yours, I think you've got about 1.2B a day of incremental capacity that you plan to bring online by the end of next year. Could you talk about the confidence you have of filling that, you know, once you bring those plants online?
spk06: Sure. Hey, Chase. Yeah, no, we've got a lot. I mean, we're adding five plants right now across the Permian area. You know, I'd say we feel, kind of starting with the nearest term ones, we feel really good about those being full. I think Legacy One and Red Hills are both going to be highly utilized really the day they turn on. We are running, you know, we're absolutely full in the Midland, and it was actually over full in the Delaware on the Lucid asset. So I think those are going to be full, you know, kind of day one. Then when you go to the midway plant, that is a partial, you know, that's a replacement. We're going to be idling the Sandhills plant. So we'll move those volumes over and then have available for growth there. So most of that's going to be utilized just from the Sandhills volumes day one. And so then that leaves two more processing plants in the Midland Basin. You know, we've added a number of plants in the Permian Midland, and it's really been the same story for us as soon as we bring it on with the flush production coming from kind of lowering overall field pressures plus the growth. we feel very optimistic we're going to be able to, you know, have those highly utilized when they come on and then, you know, fill up very quickly. So I think really the next question becomes, you know, when do we need, you know, more, you know, what's the cadence beyond that? We feel like hopefully on the Midland side with adding Legacy 2 and adding Greenwood, maybe that gives us a little bit of time, but I think we'll be quickly looking out in the Delaware for when we're going to need another plant out there. So I think we're more thinking about when we're going to need another one as opposed to are we going to be able to fill the ones we've announced.
spk05: All righty. Well, good to hear. And then can I ask on a Waha basis real quick, you know, obviously there's some risks of widening out kind of 2Q, 3Q, or maybe even before next year. You know, I'm just kind of curious on kind of your thoughts on the risk, more just the basis risk and the volume risk, but the basis risk that you have out there and maybe how much you've kind of hedged of that risk.
spk06: Sure. Yeah, I'd say our risk out there is we want to make sure that we can flow the volumes. So when Waha tightens out, if it gets difficult moving it out, we want to make sure that we can move it. So we've been active at taking out transportation and making sure we can get the volumes away from our plant and to market. As far as the overall Waha basis risk, You know, our length and natural gas, when we hedge, we hedge it at Waha. So, you know, really what we want is kind of an absolute, you know, higher Waha price versus a whole lot of, you know, exposure to the spread. So we want, you know, absolute Waha prices to be high. We want to make sure we can get volumes out.
spk05: Okay. Makes sense. I'll respect the two questions, and hopefully somebody will ask about Medford. Thanks. Thanks.
spk14: And our next question will come from Sunil Subal with Seaport Global Securities.
spk13: Please go ahead. Yes, hi. Good morning, folks, and thanks for taking my question. So I wanted to start off on the capital side of things. So obviously you raised 2022 budget. I was kind of curious, you know, how should we be thinking about, you know, puts and takes for the 2023 capital spend, you obviously have outlined a few expansion projects. So from that perspective, what kind of cost inflation you're seeing and then how should we be thinking about the 2023 budget?
spk01: Neil, this is Jen. For 2022, We've really accelerated projects that were in our five-year plan, but just we need them sooner given the visibility that we have to volume growth. When you think about Train 9 spending shifting into 2022, think about Greenwood spending shifting into 2022, and then the adder would be the Delaware Basin Acquisition and the continued build out of those assets. As we look into 2023, I think that part of what will impact our growth capital budget for next year will be potential spending on next plants, whether that be on the Delaware side or the next plant needed on the Greenwood side. But I'd expect that we will be spending capital at levels very much commensurate with the size of the company. And so as we've gotten bigger, we just have more flexibility capacity to spend more. But we also don't have a lot of visibility to what I call additional large projects beyond those that we've already announced, other than incremental processing expansions. a looping or other project associated with Grand Prix and NGL transportation down the road, that would be the one that just depending on what we're seeing on volume growth, the next large project that we have on the radar screen and the timing of that, again, will be dependent on the continued growth of NGL transport volumes.
spk13: Just to clarify, so what you're saying is that unless you announce more projects you should see a bit of a step down in 23 CapEx based on, you know, all that we announced?
spk01: I don't know if I'd say that we'll see a step down. We'll provide formal guidance in February, typical with our timeframe of when we provide CapEx guidance for the following year. But we do have some spending that's shifting into this year, and that's spending on Fract Train 9 that otherwise may have occurred next year. We've got spending on Greenwood shifting into this year that otherwise may have occurred next year. But I think we're very comfortable with spending around these levels. And then ultimately, it's our visibility to increasing volume growth and where the next pinch point is within our asset footprints that will result in us needing to move forward with the next project. But I say that there isn't something large looming out there that would have a material impact on growth capital spending at this point in time.
spk13: Got it. Thanks for that. And then my second question was related to the IRA. I understand that there are some provisions in that, you know, with regard to limiting methane emissions from processing facilities. So I was curious, you know, if you had a chance to look through that and, you know, how do you think that impacts, you know, your footprint? You've obviously, you know, highlighted plans to reduce methane emissions, but, you know, does your plans kind of tie in with new requirements in IRA or how should we think about that?
spk06: Yeah, sure. So our, yeah, our ES&H group, you know, has been, you know, really active at kind of evaluating what that methane, you know, tax or what the, you know, regulations could entail. We actually were looking at it quite a bit in the last round this came about. We took a look at it. We are focused on reducing our emissions, improving our intensity. We have a lot of projects that we're, you know, moving forward with to try and reduce that. So we'll You know, we're very good at compliance, very good at meeting, you know, rules and regulations, and I think our S&H group is up to the task on that. And we'll see what the ultimate, what the fee or what the, you know, all the operating parameters are for, you know, setting those limits and everything else. So it's early. We'll have to see what ultimately gets passed, but I'd say, you know, we are actively focused on it, working on it, and we'll, you know, perform very well.
spk13: Yeah.
spk06: Thank you.
spk13: Got it. Thanks for that.
spk14: And our next question will come from John McKay with Goldman Sachs. Please go ahead.
spk02: Hey, all. Thanks for your time. I wanted to start on L&T. You guys touched a little bit on marketing being weak, but just given how strong volumes were, could you just talk a little bit about what's going on this quarter? Was it a kind of one-off on margin dipping, or is this kind of the runaway, you know, unit margins we should think about going forward?
spk07: First off, I would say, John, that we had a very strong first quarter as it relates to some of our marketing and optimization around that. Not quite as active in the second quarter, and that would be somewhat seasonal and typical for us when we roll into the second quarter. With that said, when we look at the growth that we've had on the fractionation volume side, obviously record volumes there. We've had increased volumes flowing down our transportation assets in and through Mount Bellevue. So we've seen some nice increases on that. And then our export business continues to be very consistent quarter in and quarter out. Obviously with pricing the way that it is today, with the backwardation that we're seeing across really the U.S. pricing as well as international pricing, that presents itself some challenges. But All in all, with the volume growth that we're seeing on our GMP side of the ledger, those volumes are going to be steered toward our transportation assets to our fractionation footprint. We're going to continue to see volumes increase over time. So we feel very comfortable where we sit. Obviously, we've got a lot of work to do as it relates to our announcement around Train 9 and bringing that fractionation train back on. And we see opportunities there just to continue to grow with the volumes.
spk02: All right, thanks for that. Maybe just unpacking a little bit what you said there. Just in terms of the export business, you know, we've seen some softness in pet chem demand overall. Maybe you could just share kind of where you see that sitting right now and how that should trend for the rest of the year. Thanks.
spk07: From an international perspective, is that what you're referring to?
spk02: Yeah, for the export business.
spk07: Thanks. Well, again, from our volumes, we've seen consistency quarter in and quarter out. There was probably – been more of a challenge on the butane export side of the business. Some of that's related for backwardation, again, that we're seeing on propane as well as butane. But internationally, yes, it's been a little bit more, a little tougher on the butane side. Spreads have been compressed. We have also seen that internationally, butane prices are actually trailing behind propane prices. And so when you look at the risk of waterborne traders, when you look at the consumption overseas, obviously dealing with potential issues just with the economies, we'll be facing some challenge. We feel very comfortable, though, with our term contracts. We've not had any cancellations across our dock. So we, again, believe that we'll see consistency with that. We feel very comfortable also with our expansion that will come online mid-next year, adding some additional flexibility. So all in all, I think the cadence of our export business looks very smooth relative to overall expansions that we're doing across our entire downstream business that complements our upstream side.
spk14: All right, looks great, appreciate it.
spk00: Okay, thank you.
spk14: And our next question will come from Michael Cusimano with Pickering Energy Partners. Please go ahead.
spk10: Hey, good morning, everyone. On my numbers for 22, you have realized almost 300 million of hedge losses year-to-date on the GMP system. And, you know, disclosures are kind of stale, but my math shows a couple hundred remaining for the rest of the year. So I was hoping you could talk about 23 hedges. You know, we're not sure where they're priced necessarily, but, you know, given the recent commodity weakness, you know, are those looking like potentially even a net benefit next year, even if, you know, spot prices stay high? It just seems like there's, you know, almost a $500 million tailwind going into next year just from hedge realizations rolling off. I was hoping you all can give some more clarity there.
spk01: We have hedged at higher prices in 2023 relative to 2022. So that will provide a nice tailwind for us. If you look across all commodities, I'd say that our hedge prices right now are call it 25% plus higher than where they are for 2022. So I think you're right in saying that that will be a nice tailwind for us as well as just continued volume growth as well. So if we have continued higher prices like we're seeing more prompt given the backwardation in markets, then as we realize those higher prices on additional volumes, that will be a nice tailwind as well.
spk10: Okay. Got it. That's very helpful. And then I'll kind of take the bait in asking about just Medford impact that you've seen on your system and if part of the strength in the frack volumes are a direct result of that.
spk06: Yeah, so I really kind of answered the overall frack market question previously. The frack market is tied. It's a combination of increased volumes from Y-grade and you have some operational upsets from the industry that is moving more volumes to Bellevue. So yeah, that is
spk00: you know, tightening up Bellevue to some extent.
spk14: And this will conclude our question and answer session. I'd like to turn the conference back over to Sanjay Lod for any closing remarks.
spk09: Great. Thanks to everyone that was on the call this morning, and we appreciate your interest in TARGA resources. The IR team will be available for any follow-up questions you may have. Have a great day.
spk14: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Disclaimer