Targa Resources Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise. Targa provides natural gas gathering and processing, NGL logistics and marketing, and crude oil services.
Financial performance and condition
- Revenue: Q2 revenue was $1,995.3 million, down 18% from $2,444.4 million; first-half revenue was $4,294.7 million, down 12% from $4,900.0 million. Lower commodity prices drove the declines, partly offset by higher volumes and midstream service fees.
- Profit: Q2 net income was $48.9 million, versus $121.1 million. Net loss attributable to Targa was $10.2 million, compared with income of $109.1 million; loss attributable to common shareholders was $41.2 million, or $0.18 per share, versus income of $79.0 million, or $0.36 per share. For the first half, net income was $24.2 million versus $160.0 million; loss attributable to Targa was $49.1 million and loss attributable to common shareholders was $110.9 million, or $0.48 per share.
- Operating measures: Non-GAAP operating margin increased 15% to $423.5 million in Q2 and 14% to $806.6 million for the first half. Adjusted EBITDA was $306.5 million in Q2, down 3%, and $620.6 million for the first half, up 2%. Distributable cash flow was $192.0 million in Q2, down 15%, and $388.8 million for the first half, down 12%.
- Cash flow and investment: First-half operating cash flow was $552.3 million, compared with $543.7 million. Investing activities used $1,962.4 million, including $1,751.0 million of property, plant and equipment outlays. Financing activities provided $1,404.5 million. Cash decreased $5.6 million to $226.5 million. Operating cash flow less capital outlays was negative $1,198.7 million.
- Debt and liquidity: Total debt obligations were $6,948.3 million at June 30, including $309.3 million current and $6,639.0 million long-term. Cash was $226.5 million. The company reported covenant compliance. At August 2, consolidated liquidity was $2,145.2 million, including cash and available borrowing capacity; the receivables securitization facility had no availability at June 30. Partnership debt is consolidated, but Targa Resources Corp. stated it is not contractually obligated to make payments on Partnership debt.
- Margins and dividends: Q2 Gathering and Processing operating margin declined 20% to $193.1 million; Logistics and Marketing operating margin rose 42% to $184.4 million. The quarterly common dividend was $0.91 per share. Series A preferred stock carries a 9.5% fixed dividend.
Material changes versus the prior comparable period
- Commodity sales fell 22% in Q2 and 15% in the first half, while fees from midstream services rose 7% and 11%, respectively. Management attributed lower commodity sales primarily to weaker NGL, natural gas and condensate prices.
- Higher Permian throughput and NGL recoveries supported volumes: total plant natural gas inlet was up 13% in Q2, and NGL production was up 21%. Lower commodity prices and higher operating costs weighed on Gathering and Processing margin.
- Logistics and Marketing benefited from higher export, transportation and fractionation activity. Train 6 began operations in Q2, and portions of Grand Prix started up. Total fractionation volumes increased 24% in Q2.
- Interest expense increased, reflecting higher average borrowings. Depreciation and amortization and G&A also rose, with management citing growth projects placed in service, system expansion, compensation, and professional services.
- First-half capital outlays increased substantially as construction continued on processing plants, fractionation trains and pipelines. The 2018 comparison included a $46.7 million Q2 gain on the sale of the inland marine barge business and $60.6 million of income from a contingent-consideration fair-value change.
Outlook, risks and unusual items
- Capital outlook: Management estimated approximately $2.4 billion of 2019 net growth capital expenditures and net contributions to unconsolidated affiliates for announced projects, excluding acquisitions, and approximately $130 million of net maintenance capital expenditures. The filing does not provide earnings guidance.
- Projects: Management expected the Pembrook processing plant to begin operations in Q3 2019, Falcon in Q4 2019, Peregrine in Q2 2020, and Train 7 and Train 8 by the end of Q1 and Q3 2020, respectively. Grand Prix’s Central Oklahoma extension was expected to be completed in Q1 2021. These are forward-looking expectations, not guarantees.
- Financing and asset transaction: The Partnership issued $1.5 billion of senior notes in January 2019, using proceeds in part to redeem its 2019 notes and repay revolver borrowings. In April, Targa sold a 45% interest in Targa Badlands to Blackstone for $1.6 billion, retained operating control and continued consolidating the business. Proceeds were used for debt repayment and general corporate purposes, including growth capital.
- Unusual items and disputes: A $317.1 million Permian Acquisition contingent-consideration payment was made in May. The company recorded a one-time $12.5 million depreciation expense in Q1 2019 to correct an error relating to assets that should have been placed in service during 2018; management said it was not material to previously issued statements. Vitol disputes Targa’s entitlement to $129 million of deferred payments connected with a terminated splitter agreement; revenue recognition depends on resolution of the dispute.
- Risks: Commodity prices, producer activity and volumes, interest rates, capital-market access, counterparty credit, collateral requirements, weather, regulation and execution of growth projects could affect results. Petredec accounted for approximately 13% of consolidated revenue in Q2 and the first half of 2019. The company also disclosed ordinary-course legal, administrative and environmental proceedings and an IRS examination of its 2014–2016 federal income tax returns; management did not anticipate material changes in prior-year taxable income.
Important facts for investors to verify
- Whether new capacity and Grand Prix ramp up on schedule and generate expected fee-based volumes and returns.
- How commodity prices, hedge settlements and the customer and contract mix affect operating cash flow and segment margins.
- Whether planned capital spending, distributions and debt service remain supportable by internally generated cash and committed liquidity.
- The terms and cash priority of Blackstone’s Targa Badlands investment, including minimum distributions and liquidation preference.
- Developments in the Vitol deferred-revenue dispute, IRS examination and environmental or other legal proceedings.