Targa Resources Corp. — Q1 2023 Form 10-Q
Business and period: Targa is a North American midstream infrastructure company providing natural gas gathering and processing, NGL logistics and transportation, and crude oil services. This unaudited filing covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Dollar amounts are in millions unless stated.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $4,520.5 | $4,959.1; down 9% |
| Midstream service fees | $495.5 | $392.9; up 26% |
| Income from operations | $836.7 | $295.8 |
| Net income | $555.2 | $168.6 |
| Net income attributable to Targa | $497.0 | $88.0 |
| Net income attributable to common shareholders / diluted EPS | $6.3 / $0.03 | $13.1 / $0.06 |
| Adjusted EBITDA | $940.6 | $625.8; up 50% |
| Distributable cash flow | $729.4 | $494.6; up 47% |
| Adjusted free cash flow | $314.0 | $373.2; down 16% |
| Cash from operating activities | $1,169.8 | $748.2 |
| Cash outlays for capital projects | $475.7 | $204.4 |
Commodity sales fell 12%, mainly reflecting lower commodity prices; increased volumes and favorable hedge impacts partly offset the decline. Segment adjusted operating margin increased to $719.8 in Gathering and Processing from $514.2, and to $605.6 in Logistics and Transportation from $419.0. Higher volumes, service fees, marketing opportunities, and export and fractionation activity supported growth.
At March 31, cash was $211.8; total debt obligations were $12,178.6, up from $11,536.4 at year-end. Targa reported total liquidity of $2,623.6, including availability under its revolving credit and receivables securitization facilities. The company and Partnership were in compliance with debt covenants. Net interest expense rose to $168.0 from $93.6.
Material changes and capital allocation
- Targa acquired Blackstone’s 25% interest in the Grand Prix Joint Venture in January for approximately $1.05 billion plus a $41.9 million final adjustment, bringing ownership to 100%. The $490.7 after-tax premium paid over the carrying amount reduced income available to common shareholders; it is not an operating expense.
- Targa issued $900 million of 6.125% notes due 2033 and $850 million of 6.500% notes due 2053, receiving approximately $1.7 billion in net proceeds. Proceeds funded the Grand Prix transaction and general corporate purposes, including debt reduction.
- Q1 growth capital expenditures were $410.3; maintenance capital expenditures were $44.0. Common stock repurchases cost $52.0, and the declared common dividend increased from $0.35 to $0.50 per share effective for Q1.
Outlook, risks and unusual items
- Management estimated 2023 net growth capital expenditures of $2.0–$2.2 billion for announced projects and maintenance capital expenditures of approximately $175 million. These are capital spending estimates, not earnings guidance.
- Expansion plans include new Permian processing capacity, Mont Belvieu fractionation trains and the Daytona NGL Pipeline. The Legacy II plant began operations late in Q1; other projects have expected start dates from Q2 2023 through Q1 2025.
- Management said available liquidity and anticipated cash generation should be sufficient for operations, capital spending, debt obligations, collateral needs and dividends for at least the next 12 months, assuming anticipated operations and no disruptive events.
- Key exposures include commodity prices, interest rates, counterparty and customer credit, producer activity, market access, regulation, weather, project execution and broader economic conditions. A 100-basis-point increase in rates on Q1 variable-rate debt would increase annual interest expense by an estimated $25.1.
- The Vitol dispute remains on appeal to the Texas Supreme Court. The appellate court upheld the $129.0 million award for return of prior payments but removed the separate $10.5 million award for crude-oil losses and demurrage. Potential interest on the upheld award was approximately $45.8 million through March 31 if accrued; the filing states the appeal is pending.
- In May 2023, after quarter-end, the board authorized a new $1.0 billion share repurchase program. The company also disclosed a $251.4 million balance of surety bonds supporting performance obligations.
Most important facts to verify
- Whether operating cash generation and planned project returns support the $2.0–$2.2 billion growth-capex program while maintaining dividends and managing debt.
- How the Grand Prix acquisition affects future earnings, cash flow, debt and the comparison of common-shareholder earnings, given the substantial one-time repurchase premium.
- The status and possible financial outcome of the Vitol litigation, including the upheld award and interest.
- Whether new processing, fractionation and pipeline projects meet their stated schedules and spending estimates.
- How commodity prices, hedge settlements, variable interest rates and counterparties affect cash flow and liquidity.