Targa Resources Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Targa provides natural gas gathering and processing, NGL logistics and transportation, and crude oil services. Unless noted, amounts are in millions of dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,523.5 | $1,995.3 | $3,572.4 | $4,294.7 |
| Gross margin (non-GAAP) | $662.9 | $633.7 | $1,528.8 | $1,207.1 |
| Operating margin (non-GAAP) | $479.5 | $423.5 | $1,145.5 | $806.6 |
| Net income (loss) | $177.1 | $48.9 | $(1,643.2) | $24.2 |
| Net income (loss) attributable to Targa | $81.0 | $(10.2) | $(1,656.8) | $(49.1) |
| Net income (loss) per common share | $0.21 | $(0.18) | $(7.38) | $(0.48) |
| Adjusted EBITDA (non-GAAP) | $351.2 | $306.5 | $779.3 | $620.6 |
| Distributable cash flow (non-GAAP) | $273.7 | $192.0 | $575.5 | $388.8 |
Cash flow, debt and liquidity
- Six-month operating cash flow was $738.9, compared with $552.3 in 2019. Investing used $472.1, versus $1,962.4; financing used $401.7, versus providing $1,404.5. Cash ended June at $196.2, down from $331.1 at year-end 2019.
- Cash capital outlays were $615.9 for the first half, including $420.1 of growth and $53.7 of maintenance capital expenditures; the remainder reflects capital project accrual movements and related adjustments.
- Total debt obligations were $7,841.5 at June 30, including $261.9 current debt and $7,579.6 long-term debt. The company reported compliance with debt covenants.
- At June 30, availability was $235.0 under Targa’s revolver and $1,703.2 under the Partnership revolver; the $250.0 receivables securitization facility was fully drawn. Targa reported consolidated liquidity of $2,013.5 as of August 3, 2020.
- Current assets were $1,225.0 and current liabilities $1,319.7 at June 30. Management said working capital improved by $119.6 from year-end, primarily due to lower product-purchase payables.
Changes versus the comparable period
- Q2 revenue fell 24%, mainly as lower commodity prices and certain lower volumes reduced commodity sales; fees from midstream services also declined. Product purchases fell faster than revenue, and gross and operating margins increased.
- For the first half, revenue declined 17%, while gross margin rose 27% and operating margin rose 42%. Increased Logistics and Transportation margin and lower expenses contributed; these gains were more than offset in GAAP results by a major impairment charge.
- Targa recorded $2,442.8 of non-cash, pre-tax long-lived asset impairments in Q1 2020, primarily affecting Mid-Continent gathering and processing assets and Coastal operations. No new impairment indicators were identified in Q2. Six-month net loss also reflected a $318.5 income tax benefit, including effects of the impairment and tax valuation allowance.
- Q2 interest expense increased to $96.7 from $72.1, principally due to higher average borrowings and lower capitalized interest. First-half interest expense was $194.7 versus $152.7.
- First-half capital expenditures were substantially below 2019, when major projects were under construction. The Partnership repurchased $303.3 principal amount of notes for $239.8, recognizing a $61.1 net gain.
Outlook, management commentary and risks
- Management cited COVID-19-related demand reductions, volatile and depressed commodity prices, producer capital-spending cuts and well shut-ins as risks to future volumes, service demand and commodity margins. It said some Permian production shut in during Q2 had largely resumed, and reported no material workforce or supply-chain disruptions at the filing date.
- 2020 growth capital expenditure guidance was reduced to approximately $700–$800, net of noncontrolling interests and net contributions to affiliates, from $1.2–$1.3 billion previously. Maintenance capital expenditure guidance was approximately $130. No earnings or revenue guidance is provided in the supplied filing text.
- The quarterly common dividend was cut from $0.91 to $0.10 per share beginning with Q1 2020; management estimated the reduction would preserve about $755 annually in direct cash flow. Q2’s $0.10 dividend was scheduled for payment August 17. Series A preferred stock carries a cumulative 9.5% dividend.
- Growth projects included the Peregrine processing plant, which began operating in Q2, and Train 8, expected to start by the end of Q3 2020. The Gateway plant began operations in Q3 2020; an LPG export expansion lifted effective capacity to as much as 15 million barrels per month early in Q3, depending on operating conditions. The Grand Prix Central Oklahoma extension was expected to be completed in Q1 2021.
- A lawsuit between Targa Channelview and Vitol concerns $129.0 of prior payments under a terminated splitter agreement, with both sides seeking relief. Targa disputes Vitol’s demand for repayment and additional damages; the filing does not state a clear ultimate loss estimate.
- Commodity prices, producer activity, counterparty performance, collateral needs, and access to capital markets remain material risks. Petredec accounted for approximately 13% of Q2 consolidated revenue. Targa also disclosed exposure to variable-rate debt and had no interest-rate hedges at June 30.
Important facts for investors to verify
- Whether commodity prices, producer drilling and system volumes recover sufficiently to support Gathering and Processing margins and asset carrying values.
- Liquidity availability, debt maturities, borrowing levels, covenant headroom and the extent to which Partnership resources are accessible to the parent.
- Delivery, utilization and returns of growth projects, and whether the reduced capital program remains consistent with management’s outlook.
- Progress and potential financial exposure in the Vitol litigation, as well as any further asset impairment or tax valuation allowance changes.
- The sustainability of common and preferred distributions, including the cumulative Series A preferred obligations.
Gross margin, operating margin, Adjusted EBITDA and distributable cash flow are non-GAAP measures; the filing cautions that they should be considered alongside, not instead of, GAAP results.