Targa Resources Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement figures are generally in millions. Targa provides natural gas gathering and processing, NGL logistics and transportation, and crude oil services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,115.1 | $1,902.5 | $5,687.5 | $6,197.2 |
| Gross margin (non-GAAP) | $811.9 | $574.4 | $2,340.7 | $1,781.5 |
| Operating margin (non-GAAP) | $630.0 | $374.2 | $1,775.6 | $1,180.7 |
| Net income (loss), consolidated | $172.2 | $32.1 | $(1,471.0) | $56.3 |
| Net income (loss) attributable to common shareholders | $36.9 | $(78.6) | $(1,684.0) | $(189.6) |
| Diluted EPS | $0.16 | $(0.34) | $(7.22) | $(0.82) |
| Adjusted EBITDA (non-GAAP) | $419.1 | $349.6 | $1,198.5 | $970.3 |
| Distributable cash flow (non-GAAP) | $294.7 | $229.9 | $878.9 | $619.4 |
| Free cash flow (non-GAAP) | $189.3 | $(218.5) | $360.4 | $(1,326.8) |
Q3 revenue rose 11%, while nine-month revenue declined 8%. Commodity sales increased in Q3, but midstream service fees fell 11%; management says some commercial arrangements shifted presentation from net fees to gross commodity sales and product purchases, without changing margin. Nine-month revenue was pressured by lower commodity prices and reduced crude marketing volumes. Nine-month results include a $2,442.8 non-cash impairment charge, primarily affecting Mid-Continent and Coastal Gathering and Processing assets; no such impairment was recorded in Q3.
For the nine months, operating cash flow was $1,095.7, investing cash outflow was $654.0, and financing cash outflow was $497.8. Cash and equivalents were $275.0 at September 30, versus $331.1 at year-end 2019. Cash outlays for capital projects were $803.1.
Total debt obligations were $7,914.1 at September 30, compared with $7,822.4 at December 31, 2019; current obligations were $261.9 and long-term debt was $7,652.2. The Partnership issued $1.0 billion of 4⅞% notes due 2031 and used proceeds in part to retire 6¾% notes due 2024 and repay revolver borrowings. The company reported compliance with debt covenants. At November 2, reported consolidated liquidity was $2,019.1, including cash and available revolver capacity, net of borrowings and letters of credit. Consolidated reporting includes Partnership debt, although Targa Resources Corp. states it is not contractually obligated to make payments on that Partnership debt.
Material changes and management commentary
- Q3 operating margin increased 68% year over year, supported by stronger Logistics and Transportation results and improved Gathering and Processing operating margin. Nine-month operating margin increased 50%.
- Logistics and Transportation margin benefited from higher Grand Prix pipeline throughput, fractionation volumes, and LPG exports. Gathering and Processing faced lower Central-region volumes and weak producer activity, partly offset by Permian growth and new processing capacity.
- COVID-19, reduced energy demand, commodity-price volatility, producer spending cuts, and temporary well shut-ins affected activity and created uncertainty about future volumes and service demand. Management said previously shut-in production had largely resumed, while the timing and extent of demand recovery remained uncertain.
- The company cut its common quarterly dividend to $0.10 per share from $0.91, stating the reduction would provide approximately $755 million of additional annual cash flow. It estimated 2020 growth capital expenditures of approximately $700 million, net of noncontrolling interests and net contributions to unconsolidated affiliates, and maintenance capital expenditures of approximately $110 million.
- Management said cash generation, borrowing capacity, and other financing sources should be sufficient for operations, capital spending, debt obligations, collateral requirements, and dividends for at least the next 12 months, subject to market conditions and other risks.
Risks, contingencies, and unusual items
- Vitol litigation: On October 15, 2020, after the quarter-end, a court awarded Vitol $129 million plus interest and $10.5 million for other claimed losses and demurrage in a dispute over a terminated splitter agreement. Targa said it would appeal. The filing text does not provide a clear estimate of the ultimate outcome or total potential exposure.
- Asset sale: Targa sold Channelview, Texas assets in October 2020 for approximately $58 million and recorded a $58.3 million loss to reduce their carrying value. Proceeds were for general corporate purposes.
- Debt and capital allocation after quarter-end: The Partnership redeemed the remaining $559.6 million of its 5⅛% notes due 2023 on November 2. In October, the board authorized up to $500 million of common-stock repurchases; by November 2, 4.5 million shares had been repurchased for $73.6 million.
- Commodity and counterparty exposure: Derivatives had a net fair-value liability of $15.6 million at September 30. A hypothetical 10% commodity-price increase would change this to a net liability of $136.8 million; a 10% decrease would result in a net asset of $106.1 million. These sensitivities do not include corresponding changes in hedged physical items.
- Other risks include continued pandemic-related disruption, commodity-price and producer-activity weakness, access to capital markets, variable-rate debt and preferred-unit distributions, and counterparty credit risk. Targa also disclosed environmental and other ordinary-course proceedings and a dispute over $129 million of Vitol payments.
Important facts for investors to verify
- Review the Vitol judgment, appeal status, interest exposure, and any related accounting or liquidity consequences.
- Assess the assumptions and asset groups underlying the $2.44 billion impairment, and the possibility of further impairments if commodity prices or production expectations weaken.
- Confirm that operating cash flow and reported liquidity remain adequate against debt service, collateral needs, capital spending, and distributions.
- Track actual growth and maintenance capital expenditures against management’s 2020 estimates, and whether new facilities and expansions deliver expected volumes and margins.
- Evaluate the sustainability of the reduced common dividend and the $500 million repurchase authorization alongside leverage and cash requirements.