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Targa Resources Corp. (NYSE: TRGP ) Q1 2016 Earnings Conference Call April 29, 2016 10:30 AM ET Executives Chris McEwan – VP & Treasurer Joe Bob Perkins – CEO Matthew Meloy – CFO Analysts Brandon Blossman – Tudor, Pickering, Holt Darren Horowitz – Raymond James TJ Schultz – RBC Capital Markets Faisel Khan – Citigroup Jeff Birnbaum – Wunderlich Jarren Holder – Goldman Sachs Chris Sighinolfi – Jefferies John Edwards – Credit Suisse Sunil Sibal – Seaport Global Securities Helen Ryoo – Barclays Operator Good day ladies and gentlemen, and welcome to the Targa Resources First Quarter 2016 Earnings Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Chris McEwan, Vice President and Treasurer. Sir, you may begin. Chris McEwan Thank you, Crystal. I’d like to welcome everyone to our first quarter 2016 investor call for Targa Resources Corp. Before we get started I’d like to mention that Targa Resources Corp., Targa TRC or the company has published its earnings release which is available on our website, www.targaresources.com. We will also be posting an updated investor presentation to the website later today. I would also like to remind you that on February 17, Targa Resources Corp closed its acquisition of all the outstanding public common units of Targa Resources Partners LP, TRP, that it did not already own. So on this call we will be discussing results as one entity, Targa Resources Corp. Please note that we will occasionally refer to the term GPL to refer to Targa Pipeline, the rename of former Atlas assets because our reported financial show comparisons back to Q1 of 2015 when we owned GPL for one month. Any statements made during this call that might include the company’s expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor Provision of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the company’s Annual Report on Form 10-K for the year ended December 31, 2015 and Quarterly Reports on Form 10-Q. Joe Bob Perkins, Chief Executive Officer; and Matt Meloy, Chief Financial Officer; will be our speakers today. Other members of the management team are available to assist in the Q&A session. With that, I’ll turn the call over to Joe Bob Perkins. Joe Bob Perkins Thanks, Chris. Good morning. And thanks to everyone for participating. Does not seem that long ago that we were reporting fourth quarter results. But a lot has changed and the short two months since the last call for Targa and for the entire energy industry. For Targa, we hosted our fourth quarter call shortly after closing the buy-in of the MLP. And also shortly after announcing the $500 million preferred private placement. Since then we announced that we upsized the private placement and had raised an attractive $1 billion of capital, in total, that we used reduce indebtedness. We also just completed the first quarter that we are proud off. With continued strong commercial and operational performance, and focus on savings, that resulted in adjusted EBITDA of $265 million and 1.2x dividend coverage. More broadly, let’s discuss the commodity, equity and debt market volatility that we have seen through the first four months of this year. Since early first quarter lows, and based on yesterdays close, crude prices have rallied more than 75%. NGL prices have increased more than 55%, and natural gas prices have increased about 10%. However, the uncertainties for our industry remain high. Significant price uncertainty remains. And since our last earnings call, just a couple of months ago, the domestic land rig count has continued to decrease from 489 to 405. And as audience on this call today undoubtedly knows, EMP companies are still figuring out what they will do for the rest of the year. We are trying to stay close to our EMP customers but they do not really have much new information to share with since this time two months ago, when we told you they were still reeling from there instances where crude had dipped below $30 a barrel. Just as the commodity prices improved, so have the capital markets improved over the last two months since our last call. Again, based on yesterdays close, the Alerian MLP Index went from 244 to almost 300, reflecting an improving outlook for the broad MLP sector, and for the midstream industry even though Targa is no longer in the index. And Targa’s common stock price went from $22.13 to yesterday’s close of $38.71. At the same time, our senior notes went from trading in the 70s to trading at about par. Of course these improved levels are a good thing from our perspective, and from our perspective it’s been a welcome change to see the commodity and capital market recently versus the first quarter lows. But as I said, there continues to be uncertainty for entire industry. All of the significant next steps that we have taken since the commodity prices started to fall in November 2014, position Targa to be successful and almost any environment. Those steps of course include our reduced CapEx spending, our significantly OpEx and G&A uncertainties, we have positioned Targa to succeed in almost any environment and we will continue to work to improve that position. Turning now to our first quarter results. We reported first quarter adjusted EBITDA of $265 million, modestly higher than last year’s reported adjusted EBITDA which included only one month of TPO volume and margins. Year-over-year headwinds resulted from reduced commodity prices and challenging market conditions. Our logistics and marketing segment produced quarterly reported operating margin of $157 million versus $191 million for the previous year. Lower as a result of the partial recognition last year, the renegotiated commercial arrangement related to our crude and condensate splitter project with Noble, lower fractionation margin, and lower export margin. We reported approximately 5.5 million barrels per month of LPGs for the first quarter of this year, which positions us well to meet or exceed our previous stated expectation of at least 5 million barrels per month for 2016. LPG exports have been particularly popular investor topic over the last month or so. As more bullish domestic NGL price sentiment has begun to emerge, and the potential impact on domestic propane supplying exports has been hotly [ph] discussed. While Mount Belvieu LPG prices are obviously key drivers for export demand, a number of other important variables must also be considered including global LPG demand, global LPG prices, particularly, in the Middle East, where LPG supply is declining. Global shipping rates, local global shipping rates, locational advantages of U.S. Gulf Coast supply, especially for the Americas market, and infrastructure growth throughout the world. Commercially the pace of dialogue around long-term contracts is picking up. Perhaps largely as a result of market perception that shipping rates are bottoming out. As evidenced by the large majority of ships leaving from Targa’s facility and staying in the Western hemisphere, Targa has advantage in exporting LPGs to Latin America, South America, and the Caribbean. And those markets tend to be priced on U.S. LPG prices. Our facility has proven customer flexibility due to our multiple docs with service of variety of vessel sizes and with simultaneously low propane and butane products. These attributes are valued by existing and potential new customers. Another recent topic of interest is ethylene exports. Targa does not currently export ethylene, and we only provide ethylene loading or unloading services for one customer. We have an arrangement with CP Chem whereby we operate assets owned by CP Chem at our Galena Park facility, and CP Chem exports ethylene from one of our docks. Targa receives a fee in exchange for operating the assets and providing access. While perhaps well positioned, we do not currently have any plans for expansion of our ethylene services. Moving to field GMP, for field GMP which is now subdivided as Permian, Central and Badlands, we expect average 2016 natural gas volumes to be about flat versus average 2015 natural gas volumes. For natural gas we continue to expect Permian natural gas volumes to be up year-over-year, offset by declines in the Central, with Badlands also about flat. We also expect that Badlands crude volumes will be about flat for 2016 versus 2015. Distributable cash flow for the quarter was $180 million, and quarterly dividend coverage was approximately 1.2x. Based on our first quarter declared dividend of $0.91 per common share, a $3.64 on an annual basis. This was the second consecutive quarter where we maintained Targa’s quarterly dividend at $0.91 per common share. And our rational for our recommendation to the Board this quarter was very similar to the last quarter. From our perspective, we have taken some very important steps to strengthen Targa and those steps mean that we have the luxury to be able to continue to monitor commodity and financial markets, the actions of our customers, and the actions of our competitors just as it didn’t make sense last quarter, growing their quarterly dividend this quarter in the face of continued uncertainty. Also didn’t make sense to management or to our Board. Similarly, making a rash decision to meaningfully change our quarterly dividend didn’t feel appropriate to us or the Board. Consistent with how we always approach quarterly dividend declarations, our ongoing analysis involves multiple commodity price and volume scenarios within a multi-year framework. We decided to stay flat. We have recently seen a number of midstream companies, to resize their payouts and that trend may continue. For Targa, we will continue to assess the environment and opportunities in front of us. And will continue to examine our place in the world as a midstream seacorp [ph]. Remember, the target is a midstream seacorp that does not currently pay taxes and is not expected to pay taxes for the near and medium term. We have time to be patient and thoughtful with our first priority obviously being the health of our balance sheet. That will wrap up my initial comments and I’ll hand it over to Matt. Matthew Meloy Thanks, Joe Bob. I’d like to add my welcome and thank you for joining our call today. Before we turn to discussing our first quarter results in more detail, I would like to describe some changes that we made to our reporting which you may have noticed in our press release this morning. We now report our results in towards segments; gathering and processing, and logistics and marketing. As Targa has increased its scale, geographic presence and diversification of operations, we have re-evaluated our financial reporting segmentations and believe that these two segment convention is more appropriate. Gathering and processing now includes both our field G&P business units and our G&P business. Our logistics and marketing segment, which we also refer to as downstream, includes both the former logistics asset and marketing and distribution segments. We will continue to provide some operational information at the business level or group business unit level. Within the gathering and processing segment, we are continuing to report the same individual system operating results. You will notice that we added some logical groping. SAOU, West Sand hills and Bersato [ph], are collectively described as Permian, and collectively I believe they represent the best position Permian, gathering and processing business in the industry. We have completed initial interconnections of SAOU, West and Sand hills improving our capabilities to operate efficiently and provide our producer customers with flexibility. Our operations personal have also realigned responsibilities across these three business units to improve efficiencies and service for our customers. South Texas, North Texas, South Stoke and West Stoke are collectively described as Central, and Badland and Coastal remain as standalone reporting systems; and the aggregate Permian, Central and Badlands will continue to be characterized as field gathering and processing. For downstream, we collapsed logistic asset and marketing and distribution into one reporting segment which we believe should be helpful. For example; on the previous state we had export margin split across the reporting segments. Now turning to quarterly results; as mentioned, reported adjusted EBITDA for the quarter was $265 million, compared to $258 million for the same time period last year. The modest increase was driven by the addition of TPL volumes and margins offset by lower commodity prices, lower fractionation and export margins, and by the partial recognition last year or our renegotiated commercial arrangements related to our crude and condensate splitter project with noble. Overall, reported operating margin was approximately flat for the first quarter compared to the first quarter of last year. Reported net maintenance capital expenditures were $13 million in the first quarter of 2016 compared to $19 million in the first quarter of 2015. Turning to the segment level, I’ll summarize the first quarter’s performance on a year-over-year basis starting with the downstream segment. First quarter operating margin decreased 18% compared to the first quarter of 2015 as a result of the partial recognition in ’15, the renegotiated commercial arrangements related to our splitter project with noble, lower fractionation margins and lower export margins. As Joe Bob mentioned, we loaded an average of 5.5 million barrels per month of LPG exports for the quarter compared to 5.8 million barrels per month during the first quarter of 2015. Fractionation volumes decreased by 13% in the first quarter of 2016 versus same time period last year. As a result of lower supply volumes in Mont Belvieu and some contract roll-offs in 2015, none of which has occurred thus far in the first quarter of 2016. Related to future contract rollovers, we want to reiterate what we said last quarter which is that over the next three years, less than 5% of progress fractionation contracts expire and less than 10% expire over the next five years. Logistics and marketing segment reported operating expenses decreased by 3% in the first quarter of 2016 versus the same time period last year as a result of both continued cost saving efforts and lower fuel and power cost. Now turning to the gathering and processing segment. Reported operating margin increased by 33% compared to last year, primarily because last year’s results include only one month of volumes and margins from TPL operations versus a full quarter contribution this year, plus a full quarter of operations of our Little Missouri 3 natural gas processing plant in the Badlands which came online in the first quarter of 2015. First quarter reported 2016 natural gas inlet volumes for field, gathering and processing were a little bit 2.5 billion cubic feet per day. For the gathering and processing segment, condensate prices were 37% lower, natural gas prices were 34% lower and NGL prices were 29% lower compared to the first quarter of 2015. Crude oil gathered increased to 105 barrels per day in the first quarter, a 4% increase versus the same time period last year. Quarter-over-quarter Badlands crude oil volumes were down about 3%, largely a result of producers shutting in existing production to frac new wells or for work overs. And as Joe Bob mentioned, we expect volumes to be flat versus – for 2016 versus average 2015. Related to operating expenses we continue to focus on cost reductions across all of our assets excluding the additional operating expenses from the TPL acquisition and system expansion, most areas were significantly lower than last year due to a focused cost reduction effort. In the fourth quarter of 2015, we benefited from some one-time reported reductions to OpEx but through our continued cost reduction efforts. Efforts, we were able to replicate a similar OpEx number for the first quarter. Let’s now move to capital structure and liquidity. On March 16 we announced that we closed on the sale of approximately $1 billion of 9.5% Series A issuing 965,100 newly authorized shares of Series A preferred stock and also issuing 13.55 million warrants with a strike price of $18.88 per common share, and 6.5 million warrants with a strike price of $25.11 per common share. The proceeds were used to reduce overall indebtedness at Targa, and importantly positions us in a time of opportunity to be able to execute on impactful projects. As of March 31, we had no borrowings under TRP’s $1.6 billion senior secured revolving credit facility due October 2017. With outstanding letters of credit of $12 million, availability at quarter end was approximately $1.6 billion. At quarter-end we had borrowings of $150 million under our accounts receivable securitization facility. On a debt compliance basis, TRPs leverage ratio at the end of the first quarter was approximately 3.5x versus a compliance covenant of 5.5x. As of March 31, TRC had $275 million in borrowings, outstanding under its $670 million senior secured credit facility that matures in February 2020. In the balance on TRC’s term loan facility that matures in February 2022 was $160 million. We mentioned this on our last earnings call and have provided detail on our leverage picture and our investor presentations but I also want to reiterate that there is no maintenance covenant related to consolidated leverage in our credit facilities. Our fee-based operating margin for the first quarter of 2016 was 77%, and we continue to expect operating margin to be more than 70% fee-based during 2016. Turning to hedges for non-fee based operating margin relative to the partnerships current estimate of equity volumes from field, gathering and processing. We estimate we have hedged approximately 50% of remaining 2016 natural gas, 50% of remaining 2016 condensate, and approximately 20% of remaining 2016 NGL volumes. For 2017 we estimate we have hedged approximately 35% of natural gas, 35% of condensate and approximately 10% of NGL volumes. Moving on to capital spending, we estimate $525 million or less for net growth capital expenditures in 2016, $110 million of net maintenance capital expenditures for the year. As it relates to taxes, our expectation is that Targa will not be paying cash taxes for at least five years as we benefit from depreciation associated with a step up in basis from the Atlas mergers and the buying of TRP; and it’s our expectation that Targa dividends for 2016 will likely be classified as a return of capital, possibly as much as 100% return of capital. That concludes my review and I will now turn the call back over to Joe Bob. Joe Bob Perkins Thank you, Matt. I will now provide some additional color related to growth capital projects and then we’ll wrap it up so that we can have some Q&A. First, our primary 2016 growth capital projects, once listed in our recent investor presentations are proceeding well. Downstream, Train5 is in startup mode at this time consistent with our original timeline, and expect Train5 to be fully operational by the end of the second quarter. As mentioned previously, Train5 was underwritten by our own needs for additional fractionation capacity based on projected equity volume growth from our field GMP operations. And we expect that Train5 will fill up more slowly than initially expected. We recently executed an EPC contract for our crude and condensate splitter project at channel views terminal, and now expect total growth CapEx for the project to be approximately $140 million. The splitter will likely be operational in the first quarter of 2018. Our gathering and processing segment, our 200 million cubic feet a day Buffalo plant in West Tex is also in the final stages of startup, providing much needed processing capacity and increasing system reliability and operational flexibility. We expect it to be fully operational within the next couple of weeks. As part of our joint venture with Sanchez Energy in South Texas, we also completed the Carnero pipeline in March which facilitated the first quarter volume growth that we saw in South Texas. As volumes from Sanchez Energy flowed from the Carnero pipeline to Targa’s existing Silver Oak facilities. Volumes in South Texas increased by about 25% in the first quarter versus the fourth quarter to more than 175 million cubic feet per day, as we received additional volumes from Sanchez earlier than we originally expected. We expect that volumes will continue to increase over 2016. Construction on the joint ventures new 200 million cubic feet per day raptor plant in SAOU County is underway, and we expect it will be operational during the first quarter of 2017. When we announced our joint venture with Sanchez in October 2015, we announced that Sanchez was underwriting the joint venture projects with a minimum volume commitment of 125 million cubic feet per day that begins in the first quarter of 2017 and lasts for five years. This is the only material non-investment grade, minimum volume commitment across our gathering and processing footprint. Using that as a segue to another important topic on investors’ minds, we continue to closely monitor our customer credit exposures on a customer-by-customer and contract-by-contract basis. Of course we are operating on high alert related to customer credit exposure and continue to believe that we are well positioned to manage the risks associated with potential counter party, default or bankruptcy. We will continue to stress our forecast, stress our analysis with full consideration to credit risk and a lower commodity price environments just as we constantly try to assess the volume implications of those same prices scenarios. Over the first four months of this year, there have been some announced bankruptcies, rating agency downgrades, and other material E&P announcement. But for Targa, none of the announced situations has had or is expected to have a significant impact on us. Moving onto some closing remarks. I continue to be incredibly proud of our employees and our accomplishments through challenging times. Our finance team, with help from many other parts of the company raised $1 billion of capital through a preferred plus warrant structure that they designed with a fundamental view that Targa was undervalued and that there were investors that would partner with Targa sharing that same fundamental view which will allow us to raise attractive capital. It did, and we welcome those investors. Our engineering and operations team have continued to identify and share best practices to reduce cost and manage dollar spend without sacrificing safety or the integrity of our assets. Our commercial teams have also continued to identify and share best practices related to contract renegotiations and additional opportunities across and between the businesses. And as expected, despite uncertainties we are continuing to work on attractive potential projects across all of our business areas, leveraging our strengths and our positioning and demanding attractive returns. Every employee at Targa has had a hand in responding to the challenges of this energy cycle and trying to rise to the occasion in their own way, in their own role, to position Targa for success. We kept collaboration that I’ve seen throughout the company has resulted in better bottom line results than expected, and has better positioned Targa for the future. In the face of uncertainty, those employees have demonstrated a focus and resiliency at all levels of the company and it makes me proud. And I would like to take the opportunity to thank each and every one of our employees for their continued efforts. So with that, we’ll open it up to questions. I’ll turn it back to you operator. Question-and-Answer Session Operator Thank you. [Operator Instructions] And our first question comes from Brandon Blossman from Tudor, Pickering, Holt and Company. Your line is now open. Brandon Blossman Good morning, everyone. Good morning, Joe Bob. I’ll take it off LPG question, probably at top of everybody’s mind as pointed out. In a world that may have increasing demand globally and decreasing supply, probably globally and in the U.S. How do your terminals fare and what is that look like on the ground in terms of contracting both contract roles and reconstructing those historic rates? Joe Bob Perkins Thanks for the question, Brandon. Adding some color to our carefully prepared remarks. We will good about our position, you’re asking about our position in that global market. The supply demand variables that I talked about, Targa is well positioned for Gulf Coast propane and butane supply. And we think that Targa and a very few others, well positioned in that market, are well positioned for the global economy. You will see in our investor presentation that over the last 12 months, three quarters of our LPGs are going to Latin America, South America and the Caribbean. That’s driven by factors different than some of the variables that people spend a lot of time looking at. We feel good about that for the near-term and the longer term, forget about our position of Mont Belvieu related LPGs and our natural share of that. Brandon Blossman Fair enough. Any thoughts about where current spot rates are for lower LPG terminals? Joe Bob Perkins It’s a dynamic market. We said publicly in the last call that spot rates were certainly lower than the spot post rates enjoyed couple of years ago. I think other people on recent calls have made the same comment but they are not unattractive and the product, services, flexibility that we’re providing our have continued interest or sport but also can turn you interest for term contracting. Brandon Blossman All right, switching topic, that looks like you time to death buybacks very nicely here. What’s the expectation on a go-forward basis, was this opportunistic or is there something structural going here? Joe Bob Perkins With the $1 billion proceeds we received, it just made sense for us to go out and repurchase our notes, that’s more attractive than just paying down revolver and we ran out of revolver capacity. So, it made sense for us to do that. We also had the $1.1 billion maturity out there in January 2018, so we wanted to just begin repaying that to reduce that size down. We’ve started doing that really late last year through the first quarter and we’ve actually continued doing some of that in April this year, too. We’ve repaid and you’ll see it in the press release, repurchased another $96 million post-quarter end of those notes and the balance on that $1.1 billion is now about $840 million. So we feel good about where we are. Brandon Blossman Okay. And we’ll just see what happens going forward? Matthew Meloy Yes. That’s right. Brandon Blossman All right. Thank you, guys. Matthew Meloy Thanks, Brian. Joe Bob Perkins Thank you. Operator Thank you. Our next question comes from Darren Horowitz from Raymond James. Your line is now open. Darren Horowitz Good morning, Joe Bob. My first question: within the comments that you made around the fuel GMP volumes – and I recognize as you said that as you said, that customers don’t have any much more to tell you relative to what they told you a few months ago – but if we look across the forward curve and just for a second think the commodity prices materialized, consistent with that outlines, if you think about the different drivers within fuel GMP, where do you think there could be a bit more volume upside? Is it specifically within west sectors around the Permian, around Versado, or across the Midland system, or do you think maybe the magnitude of Central and Badlands’ volume declined just in a state? Joe Bob Perkins It is a good question brand and I obviously felt better about the forward curve today than we did two months ago. It is a – and it really was just two months ago. We had our last earnings call. That always surprises me in the first part of the year. Customers are looking at those forward curves. They know their economics very well. It wouldn’t surprise me if this is being mocked in per customers for future drilling. That happened about maybe two months later this time last year and I shouldn’t be speaking for those producers, but we’ve tried to stay in very close contact with them. You asked about where there may be more upside based on today’s forward curve and I would add – or based on some positive movement of the forward curve in the near future? Yes, Permian Basin has some very sweet spots in it and we are across some of those sweet spots. Probably it would see the most activity increase around the West Texas system as well as further west around Versado, that core Delaware. It’s a sweet spot. Secondly, you pointed to the Badlands? Makes a significant difference. If you can get that forward curve, we’re a little bit better and how they’ll feel about their activity; and then I guess I would go to the scoop. Across that spectrum, there are several places where there are some drilled and uncompleted wells which we may benefit from and additionally, what I like is how producers right now are high-grading into drilling dollars. Drilling close to their own assets which means close to ire’s. Upside can come without a whole lot of capital expenditures if it follows the pattern we would expect it to. Darren Horowitz Okay, I appreciate the color. My final question, if you could just – I love your thoughts with regard to recoveries, the theory that there’s going to be composidential [ph] barrel price improvement, specifically the FA market tightening opportunities for you guys. From a recovery perspective, certainly on if you will, the non-fee based business, what could be the potential for uplifting the back half of this year in terms of POL and POP contract exposure? Joe Bob Perkins I think it’s a question of when, not if you get price recovery. Did pretty bad on the winds in my career. All of the factors that are well-discussed, we agree with, we try to model as well. You described towards the end of the year? I don’t know the timing. It could be then. It certainly has to occur sometime after them, it’s just that they’re not dynamics of supply and demand and the help that we’ll get from exports. Darren Horowitz Thank you. Joe Bob Perkins You’re welcome. Thanks, Darren. Operator Thank you. Our next question comes from TJ Schultz from RBC Capital Markets. Your line is now open. Joe Bob Perkins Good morning, TJ. TJ Schultz Good morning. Thanks. I guess as far as the move in commodity and your improved cost to capital and balance sheet obviously, is any of that accelerated discussions on projects in your longer term backlog, both as we think about what could potentially be higher in the 2016 bucket above that 525 and then as you think about moving to approval for projects a bit further down the road? Joe Bob Perkins I hear you, TJ. It has been a pretty good movement in the last two months on commodity prices and our equity price on improved cost to capital. We’re taking a longer term view on our cost to capital. We took that long return view and we preferred. Our project development continues in not just projects that we talked about in the past. I did say and I said it intentionally because I’m proud of the efforts. Across our business areas, call them small projects and larger projects. Not [ph] will be up there on that Nelson project page. Our businesses are working that pipeline. They’re working it based on leveraging our asset position, leveraging the strong position we have relative to our financial ability to execute, but also demanding attractive returns. It’s just necessary. Because of the uncertainties, we want to make sure that we’re getting large bang for our buck and that it has attractive spread over a longer term view of cost to capital that includes the fact that we put billion dollars on our balance sheet of that prefer. The good news is, those projects and opportunities exist. It’s kind of a timing issue, customer uncertainties et cetera, but we’re working on the pipeline. TJ Schultz Okay, thanks. And then I guess in that vein, you touched on ethylene exports. No plans now, you self-familiar are well-positioned. Is that something you may consider down the road as a potential project? Joe Bob Perkins Certainly. Actually the reason for putting the comment out there is we’ve gotten the question so many times. I wanted to clarify the facts. We don’t have it in investor presentations and certainly don’t like much about it because it’s not a big material portion of our business, but it is an important part of our relationship with CPC. That relationship is a one-company relationship right now. They have some assets, we have some assets that support that ethylene business. We did want to clarify that we don’t have a project currently planned. Your question is would we ever consider it? We consider everything. TJ Schultz Okay, makes sense. Just lastly to fall up on some of the volume discussion. If you could expand a little bit on South Texas, what you’re seeing there as you bring those same volumes into the system. It sounds like they came a little sooner and then the pipeline of March. Just your expectations to look at the run rate in the first quarter, kind of what we expect through 2016. Joe Bob Perkins Sure. First of all, the coming a little sooner is a specific shout out to the, congratulations, I’m giving all our employees for execution. We got it done sooner than we thought we’re going to. Congratulations to that team, but there are many efforts like that going on. Getting that done sooner brought the volumes to us sooner. Sanchez continues to be very, very good a drilling and completing those wells and we expect additional volumes. I do understand that the has ruled over for others and it’s not really a growth picture for others, but as we announced when we announced the project, that that does kind of make the tie for Targa better in South Texas. It doesn’t fix, but stand alone, it’s very attractive. Stand alone, it makes the system better with a plant on the west and a plant on the east, and we’re already flowing all the way from the west to the east now with Sanchez’ volumes. That’s all a good thing for the long term. TJ Schultz Okay, thank you. Matthew Meloy Thanks. Joe Bob Perkins Thank you. I appreciate it, TJ. Operator Thank you. Our next question comes from Faisel Khan from Citigroup. Your line is now open. Joe Bob Perkins Hi, Faisel. Faisel Khan Hey, thanks. Good morning. All right. I just want to ask a couple of questions. First off, with all the uncertainty that you talked about in the market, how are you looking at your dividend covered ratio? Is there a long term goal that you sort of envision in this sort of volatile commodity market that works for you, guys? Joe Bob Perkins Faisel, I don’t have an announced long term goal for the dividend covered ratio right now. Probably the best way to think about target is how we behaved in the past and that we’re working very hard to think about the future. I like our track record, I like the current covered ratio and we’re going to try to be thoughtful and continue to analyze what other companies are doing, what the investment community is saying and reflecting and what’s going on with our customers. Faisel Khan Okay, understood. Our prepared remarks, you discussed that there are long-term contracts for LPG export capacity being discussed again. Could you go a little bit more in-depth in what you mean by that? Is that our customers coming back to the table to discuss long term capacity, or is this just sort of… Joe Bob Perkins No. I believe either in the Q&A on the last earnings call, I just reflected the color that while counter-parties were interested at needs for a long-term LPGs two months ago, it appeared that they were waiting to figure out what was going to happen with shipping rates and shipping rates have been on a pretty significant trend. Depending on what shipping rates you’re looking at, that trend may have bottomed out. I don’t want to pretend to be the expert on that, but it may have bottomed out. With that, hey, if we’re not at the bottom, we’re close to the bottom, or we bottomed out sentiment coming from our contacts in the industry from existing and potential new customers, we’ve seen an increased interest to go ahead and do term deals again. They didn’t want to do that when they weren’t prepared to do the term shipping deals. Don’t mean to overstate that, but it is different today than it was two months ago – in dialog, in interest, in pace. Faisel Khan Okay, makes sense. And then one of the other prepared comments that you said is that you evaluate your place in the world as a sea corp. Can you go on to a little more depth by what do you mean by that? Clearly you’ve collapsed a structure, you’re more simplified now. Is there something that you’re contemplating with regards to structure? Joe Bob Perkins I think that also came out of – we’re not in the Alerian Index anymore – I pointed to the Alerian Index even though we’re not in it. We are a seacorp, we have tools to take care of our balance sheet and we want to take care of our balance sheet. However, seacorp doesn’t pay any taxes which makes a real difference for our investors. You heard Matt’s comments about what that return of capital treatment would look like for 2017. All of that factors into what we’re trying to deliver to our investors and how we’re trying to deliver it. That’s the color around my statement. Faisel Khan Okay, understood. I’m just trying to understand, are you happy being a Seacorp or do you want to be something else? Joe Bob Perkins Yes, we’re going to switch again. I’m very, very happy with the moves we made and how that positions us for the current environment and the range of environment that could occur over the next several years. It was very important. I may have misspoke on the year a little while ago and I apologize, I said 17 for the return of capital. Matt only described it for 2016. Now I’ve been distracted. Did I answer your questions? Faisel Khan You did, yes. Thank you. I think I’m all set. Operator Thank you. And our next question comes from Jeff Birnbaum from Wunderlich. Your line is now open. Jeff Birnbaum Good morning, everyone. Joe Bob Perkins Good morning. Jeff Birnbaum Here are just a couple of questions from me. One, just kind of bigger picture – you said you would and it sounds like you’ve added some more since the fourth quarter call. Just sort of big picture philosophically I guess in a sort of rollercoaster I have been on the last couple of years. I was wondering if you are thinking about hedging policy sort of any different going forward, then perhaps you have in the past? Joe Bob Perkins Yes, targets are give or take 75-ish percent or so year one, 50% year two and then 25-ish percent year 3 and then there are ranges around those. We did add some hedges here recently. We’re still well under those targets so as we’re adding some hedges, we’re not yet going out and adding to try and catch up to get to those target levels or exceed them, but adding those hedges are really more kind of keeping up with those targets to we don’t fall further behind. That really relates to the hedges that we put in place, so over really the fourth and the first quarter. Matthew Meloy And you asked for policy. I don’t mind describing thinking because it’s not a policy. Those are targets and goals we’ve had for a long time. The hedge committee of our board and a management are on the same page and that we do believe there’s more upside than downside on most of the commodities that we had and do not see us trying to catch up while that’s still the case. Keeping up is productive and that’s our current thinking. That thinking could change, but we don’t think about it differently than we thought about it over the entire history of Targa and we’ve got some experienced people helping the management team experience just to stay disciplined – watch it, track it, discuss it at least once a quarter. Joe Bob Perkins To add onto too, the hedges we’ve had been primarily on them say, I’m on a natural gas side of thing. For NGOs, you’re going to see we’re still well under our targets. Jeff Birnbaum Yes, and it all makes sense for me, quick, the potential exercise of the – I just wanted to ask how you are approaching that? Obviously, the stock prices had a very nice run here. I was just sort of wondering, is that something that you see likely when the owners have served the right to do that? Or are you thinking about your capital deployment leverage – things like that, all with that timing in mind? Joe Bob Perkins Sure. It is our option to settle those warranty there in cash or net settle them in shares. So it is our option. They cannot be exercised for six months, so there are still some time before those could even be exercised. Good question on when they’ll be exercised. Those are seven year warrants, so it will be up to those individual holders whether they decide they want to go ahead and exercise, or if they want to keep the time value. Good question, but we can always net settle in shares, so if we didn’t want to pay cash, we didn’t want to add leverage to the balance sheet, we could just net settle it. Jeff Birnbaum Okay. Perfect. Thanks, man. And then just a real last one for me. Liquidity is pretty strong here. I was just kind of curious – Joe Bob, you touched on sort of how you’re thinking about pursuing new projects and things like that. I thought I’d ask just a question on MNA that doesn’t get new member. Are you still out there interested in additional assets? Are you seeing any changes in the [ph] disimprovement in liquid’s prices or perhaps sellers taking in a bit more? Joe Bob Perkins It has only been a couple of months since I commented. I don’t think it has changed a lot today versus a couple of months ago. We will still look. Just as we’re being very disciplined around the organic projects, one business area at a time, making sure we get attractive returns and the way we do that, it’s leveraging our assets, leveraging our position an acquisition that would really get on our radar scope, we’d need to look the same way. Leveraging our assets, leveraging our position. We’re spending almost no time looking at the opportunity to increase foot prints. It’s just not that time for us right now. Jeff Birnbaum Okay. Thanks a lot, guys. Congrats on the quarter. Matthew Meloy Thanks. Operator Thank you. Our next question comes from Jarren Holder form Goldman Sachs. Your line is now open. Jarren Holder Hi, good morning. I just want to start off, how sensitive it is Latin American or Caribbean demand for U.S. LPG exports in your view to higher U.S. Prices? Joe Bob Perkins It has been a short history, but it hasn’t been very sensitive based on U.S. pricing today. It’s a demand that needs to be met, it’s being met from obviously a very close source of supply and not that we are transacting with the customers in those markets, but it’s our sense from our customers that that’s based on U.S. LPG pricing. That removes some of that sensitivity. That’s probably not the best color I have to and we certainly will see over the next year or two what that’s going to be because we’ve had prices move all over the place, all over tax. We were still shipping. Our percentage share increased over the last 12 months in the price environment that you saw. We feel good about it, we feel good about our position and our mix of existing customers and the opportunity with potential new customers. Jarren Holder Thanks. And how do you think about recontracting risks just given that there is increasing competition from other U.S. LPG facilities? Joe Bob Perkins The competition we feel the most are the ones who have been there for a while. That competition should sort of become a natural market share around the butane and propane that float through the systems facility further away trying to get propane or butanes from Mont Belvieu. It’s not particularly advantage for doing that, so I probably don’t worry about that competition this much and we try to be very competitive and pretty discreet on how we’re working with our customers and potential customers here in this market. Jarren Holder Great. Thank you. Matthew Meloy Okay, thanks. Operator Thank you. Our next question comes from Chris Sighinolfi from Jefferies. Your line is now open. Joe Bob Perkins Good morning, Chris. Chris Sighinolfi Hey, Joe Bob. How are you guys doing? Matthew Meloy Good. Good morning. Chris Sighinolfi Thanks for taking my question. I just wanted to I guess first circle up on that if I could? It seemed like a slight little decline in volume both on a quarterly basis. I realized what you said in regard to that contract positions on those. So I was just wondering if that decline in volume was in that area, was it due to something specific? Or was it just a function of reduced fuel volumes falling that way? Joe Bob Perkins That’s a combination of all those things. It’s a reduced volume that’s flowing in from our volumes and others but there were some contract roll off late in 2015 which when you look, I kind of see in sequential quarter-to-quarter, we’ll see some difference from Q4 to Q1 happen in the fourth quarter. Chris Sighinolfi Okay. And your earlier point was from here, there’s very limited contract change over the next three years? Joe Bob Perkins Yes, that’s right. Chris Sighinolfi Okay. And then with regard to – I really appreciate the color in the prepared remarks or timeline for in service. I think you have mentioned, or Joe Bob mentioned that you’re expecting now a slightly lower ramp on that facility than original expectations. Could you remind us how much of that facility is contracted? Joe Bob Perkins It’s largely for our own needs and we haven’t described how much it would be for third parties. Into some extent, I recognized that it’s not one train at a time even though we can contract it that way. We had volumes in Louisiana that needed to be at Mount Belleview, not in Louisiana that will be back in train 5 for example. I think that’s all of the specifics we provided. But we’ve got them some space at Train5 if anyone is interested in contacting at the right term. Chris Sighinolfi Okay. I guess the final question for me, Joe Bob, you have addressed the volumes with CP Chem and I know you spoke to TJ about it in the Q&A, and I get that you’re not actively pursuing any expansion in that line of business right now. Maybe this is just a question born from my own ignorance, but what would have to happen to get you to move forward with something? I guess what I’m going is that there is a view out there that – as an LPG facility because that’s what you’ve been doing there. But to the extent that perhaps there would become some under-utilized capacity that you might be able to repurpose to an alternate use. How do I think about that decision tree? Joe Bob Perkins Well, I would say that first of all look at our history over multiple year with that facility. When we acquired it, we thought of Galena Park as an import facility doing a little bit of export of ethylene. We’re economic animals and we will try to respond to the needs of the market. Ethylene is an interesting equation, gotten a lot smarter over it recently trying to answer people’s questions and that will be driven by the PC Chem customers linked in that ethylene market in this area and how long that’s likely to continue. Are we purposing our facilities? It’s really a way to describe it because we would not have to cannibalize any of our existing facilities. We’ve got ways of getting a little bit more out of this, that and the other piece of equipment, and if we need one or two increase ethylene, would do so without repurposing. We could move more ethylene from that dock for example. We might add some refrigeration for ethylene so that it didn’t get in the way of propane or butane loading. Before we would repurpose anything, we want to make an additive. Chris Sighinolfi Okay. Joe Bob Perkins That’s not saying I’m doing a project, didn’t mean to imply that, but if CPC has a need, we’re going to try to fill it and if another counter-party believes that we can effectively service our ethylene needs, we may do that. Chris Sighinolfi Okay. So all you’re saying before is there is nothing active right now, but there is no active opposition to anything should there be a market need? Joe Bob Perkins Sometimes when I’m working on prepared remarks, I can be unclear. I was not trying to say opposition, I was just trying to get the facts out there for people. Chris Sighinolfi Right. And the clarification is helpful because I didn’t know if it was, okay, we’re going to do this and that’s going to make it less possible to do what has been the core function of that facility. It seems like from what you’ve just said, you can readily do both? Joe Bob Perkins Yes. Chris Sighinolfi Okay, got it. Well, thanks for that clarity. I appreciate the time and good luck. Joe Bob Perkins Okay. Thanks. Operator Thank you. Our next question comes from John Edwards from Credit Suisse. Your line is now open. Joe Bob Perkins Hey, John. John Edwards Yes, good morning, everybody. Just a couple house-keeping items. Maybe you’ve said this or I missed it, any change or what’s the EBITDA guidance now and then what’s the sensitivity now to commodity price changes? Matthew Meloy The commodity price changes, we’ll have that in our updated investor presentation, but I actually don’t think it was changed from our last. I think it’s a five – we the $0.05 NGL move, I think is about $25 million of EBITDA, but it will be in our investor presentation like for crude gas and NGLs. Joe Bob Perkins And we did update it. Matthew Meloy Yes, and we did update it. And then for EBITDA guidance, we have not provided or updated 2016 EBITDA guidance other than what was – just previous EBITDA numbers that are out there, forecast information that’s out there. So we have not provided new EBITDA guidance on its own. John Edwards Okay, no new guidance on that. And then I was just curious. Maybe it’s just a timing issue, but your maintenance capital drop quite a bit sequentially. Is that just the timing issue? I guess with the 110, you’re guiding to – we should be thinking about significantly higher numbers – as it’s going to spread pretty much equally across the quarters, or is there already seasonality embedded in that? Matthew Meloy The maintenance CapEx – as you go back and look, it could be pretty lumpy. Q1 does seem to be a bit lower than the other quarters and you look last year it was relatively, I think, low, too. I think 110 for the year is still a pretty good number. Could we come in a little bit lower? Sure, but I think it’s still probably a decent number. John Edwards Okay. Is that going to be relatively equally balanced though for the rest of the year, do you think? Matthew Meloy We usually spend more in Q4, but it will just depend on that activity as well. John Edwards Okay, that’s it for me. Thanks. Joe Bob Perkins Thanks, John. Operator Thank you and our next question comes from Sunil Sibal from Seaport Global Securities. Your line is now open. Sunil Sibal Yes, hi. Good morning, guys and congratulations from a good quarter. Couple of questions for me. Going back to your prepared comments regarding balance sheet, remaining a top priority of management team. Clearly, you made a lot of progress there and I was just wondering with the $2.1 billion of liquidity that you have, how should we be thinking about next liquidity. Joe Bob Perkins I think I got that. We want to have a lot of liquidity in this environment, in an uncertain environment. Whether or not the capital markets with a high-yield markets are open and shut, in the last six months I’ve got pretty much close and now they’re pretty open. So we want to operate with a lot of liquidity. We don’t necessarily think of that liquidity as a just usage to go out and buy things necessarily with it. We are focused on keeping liquidity and were also focused on a leverage ratio. So we want to keep our leverage ratio as strong as possible in this environment. So I view having that liquidity as providing additional flexibilities for CapEx and timing of when we raise additional capital but also for refinancing and taking care of our other debt obligations. Sunil Sibal Okay, that’s helpful. And then just one housekeeping for me. It seems like your past G&A has been understandably quite in the last couple of quarters. How should we be thinking of that now that on a go forward basis? Matthew Meloy Yes, the G&A has moved around a little bit over the last couple of quarters. Fourth quarter of last year it was kind of a catch-up for the remainder of the year relatively low. This quarter’s DNA is a better kind of indication of closer to a run rate number so I would focus more on the Q1 kind of G&A number than it would look at necessarily a fourth quarter. Sunil Sibal Okay, got it. That’s good. Thanks guys. Matthew Meloy Okay, thanks. Operator Thank you. Our next question comes from Bill McKenzie [ph] from Seaport Global. Your line is now open. Unidentified Analyst Hi guys, thanks. What are your competitors reported kind of attractive levels of LPG export volumes going to Asia. I know with your mix of Latin America South American gradient is a decent amount of seasonality. Are you seeing within that pretty percent other part of the world enough incremental volumes driven – given the shipping prices right now to offset some of the seasonality. Joe Bob Perkins There is some all use the term seasonality broadly. Not every month is the same. Based on our short history of exports so I understand what you are saying. With our published LTM will show that it is 75% Latin America Caribbean and South America for Targa now. We believe that there is sufficient business for that 75%. That’s why a quarter inch year attractively. And the 25% is also attractive. I mean people are looking at this over the long term and I just over the short term. That 75% share I’m reminded has been sued benefit from the Panama Canal which the sooner decide closer and closer you get to their best estimate of when it’s supposed to be complete the less they will be wrong about it. But it will soon be open. And it will make a difference or at least some of our customers believe it will make a difference. We like our position to that market. And we like the mix. Unidentified Analyst So if your nameplate Desha looking at the Q4 presentations on the website. 9 million barrels a month excuse me in operating 6.5 to 7. At what point given that the rest of the world given some long-term contracting do you have to evaluate the potential expansion. Matthew Meloy I know by saying this I’m going to be asked more and more for details the numbers on it but I’m not going to give them. We have improved our ability to operate that facility since we last put numbers out with creative and operationally experienced solutions to the bottleneck. Second ago we talked about the ability to continue to utilize our facilities without having to make choices about repurpose and something. And we will keep doing that. If there is additional demand for our assets we are to figure out how to squeeze more out of our assets. When I say we should take me out of the equation. It’s a bunch of talented engineers and operations folks. But I’m proud of that and I know that we will continue to get benefits from that kind of work. Unidentified Analyst So you’re basically, talking about squeezing instead of 75% of operating capacity on nameplate something in the 80s or better for less turnarounds or more efficient turnarounds or whatever, getting closer to that time? Matthew Meloy Those are examples of it. We also said we could do an ethylene project without really cannibalizing will be party doing or do in the future. We’ve got an ethane project that we could add to the facility without cannibalizing or reducing what we think we could do in the future on propane and butane’s. So it’s a very good facility and we try to think about the future for it. Unidentified Analyst All right. And then the fascination volumes, I know another better talk about decline had been at least for them have been impacted by planning opportunities. I assume you guys have seen the same thing. At what point the commodity price spectrum that this opportunities return to market. Joe Bob Perkins I think I know what you are referring to. Part of the margin was impacted by planning opportunities because you have less volume a different planning opportunities coming off the frac’s. Less planning opportunities hit us to but it doesn’t impact the front and volume going through the frac, just the profitability coming out of the frac. Unidentified Analyst Okay. All right. Thank you. Operator Thank you. Our next question comes from Vein [ph] from BMO Capital. Your line is now open. Unidentified Analyst Good morning. Most of my questions have been hit. I have one quick one. Joe Bob, you mentioned that you definitely see constructive ethylene fundamentals and that you guys are modeling that internally. Can you quantify the potential impact, positive impact, that you see from ethane reinjection to the gas stream? Joe Bob Perkins Our modeling has quantified that impact under multiple scenarios and I’m not going to provide a public a number of that plus I just don’t know what the right inputs are at this point. Unidentified Analyst Okay. That’s it for me. Thanks. Joe Bob Perkins Thank you. Operator Thank you. And our final question comes from Helen Ryoo from Barclays. Your line is now open. Helen Ryoo Good morning. Just a follow-up on the ethane recovery in missionary where we have to recover all the ethane given the tractor demand, trying to look – think about the upside to Targa, obviously the NGL the POP margins going to better but on your frac plans, the surplus capacity that exists today is that all economic upside if you were to fill all that capacity or are you currently collecting some NBC volumes on capacity that’s not being – Joe Bob Perkins We think that is pretty much upside, there may be some small NBC makeups but I think it would pretty much be upside to our volumes if we were to start recovering more and having more ethane going through our fractionators. Helen Ryoo And what about on the marketing side of the NGL downstream business, if NGL pricing shoots up driven solely by ethane does the marketing segment also benefit or is that more driven by propane and butane prices? Joe Bob Perkins Yes, there will be some benefit there as well. There will be some there as well. Helen Ryoo Okay. And then just lastly, your NGL production dropped a deeply and I was wonder if there was a one-time affect or if it reflects some changes in the wetness of gas there? Matthew Meloy We go in and out of recovery of those facilities based on economic benefit and some of our contractual requirements downstream in the facility. So you will see variation in those volumes throughout different quarters because of the contractual structure that we have at those facilities. Helen Ryoo Okay. So it is not something sort of a permanent level we will see going forward? Matthew Meloy No, nothing has changed as far as the gas quality coming into the plants. It will – the way the contracts work it will be intermittent. It won’t be throughout the quarters. We will have periods will we will have higher recovery that during other periods. Helen Ryoo Got it. All right, thank you very much. Joe Bob Perkins Thank you, operator. If anyone has follow-up questions, please feel free to contact Chris, Jen, Matt or any of us. We appreciate your interest this Friday. Operator Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. And have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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