Targa Resources Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Targa is a North American midstream operator with Gathering and Processing and Logistics and Transportation segments. Unless stated otherwise, financial amounts are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,896.6 | $5,360.1 | $11,820.8 | $16,375.0 |
| Operating income | $505.1 | $430.0 | $1,990.9 | $1,177.6 |
| Net income | $279.0 | $279.3 | $1,221.7 | $1,135.5 |
| Net income attributable to Targa | $220.0 | $193.1 | $1,046.3 | $877.5 |
| Net income attributable to common shareholders | $220.0 | $193.1 | $555.6 | $578.9 |
| Diluted earnings per share | $0.97 | $0.84 | $2.43 | $2.50 |
| Adjusted EBITDA (non-GAAP) | $840.2 | $768.6 | $2,570.1 | $2,060.8 |
| Distributable cash flow (non-GAAP) | $602.2 | $594.9 | $1,907.6 | $1,623.2 |
| Adjusted free cash flow (non-GAAP) | $8.6 | $290.8 | $319.1 | $998.4 |
Q3 operating income was about 13% of revenue and net income about 7%; these are simple calculations from reported figures, not company-reported margin measures. Segment adjusted operating margin was $694.6 for Gathering and Processing and $546.2 for Logistics and Transportation in Q3. Year to date, the respective amounts were $2,106.7 and $1,642.3.
Operating cash flow for the nine months was $2,253.9, investing cash flow was negative $1,673.8, and financing cash flow was negative $659.6. Cash ended the period at $139.5. Cash outlays for capital projects were $1,665.4, versus $815.4 in 2022.
Total debt obligations were $12,920.4, compared with $11,536.4 at December 31, 2022; cash was $139.5. Current debt obligations were $602.0. Current assets of $2,139.3 were below current liabilities of $2,682.1. Reported total liquidity, including cash and available facilities, was $1,757.2. Targa said it was in compliance with debt covenants.
Material changes versus prior periods
- Q3 revenue fell 27%; commodity sales declined 30%, primarily reflecting lower natural gas, NGL and condensate prices. Higher volumes and favorable hedge impacts partly offset the price declines. Midstream service fees fell 7% in Q3, but increased 9% for the nine months.
- Despite lower Q3 revenue, operating income rose 17% and adjusted EBITDA rose 9%. Logistics and Transportation adjusted operating margin increased 29% in Q3, while Gathering and Processing adjusted operating margin declined 6%, reflecting lower commodity prices.
- Nine-month adjusted EBITDA increased 25% and distributable cash flow increased 18%, while adjusted free cash flow fell 68%, mainly alongside increased growth capital spending. Interest expense rose to $509.8 from $300.5 for the nine-month period.
- Common-shareholder earnings for the nine months declined 4%, despite higher net income attributable to Targa. The comparison includes a $490.7 premium on repurchase of noncontrolling interests in 2023 and preferred-stock dividends and deemed dividends in 2022.
- Targa completed the $1.05 billion purchase, plus a $41.9 million closing adjustment, of Blackstone’s remaining 25% interest in Grand Prix in January 2023, bringing its ownership to 100%. It issued $1.75 billion of senior notes in January and used part of the proceeds for the acquisition and to reduce borrowings.
Outlook, risks and contingencies
- Management estimated 2023 net growth capital expenditures of $2.0–$2.2 billion for announced projects and maintenance capital expenditures of approximately $200 million. This is capital-spending guidance, not earnings guidance.
- Expansion plans include additional Permian processing plants, Mont Belvieu fractionation capacity and the Daytona NGL Pipeline. Expected in-service dates range from late 2023 through 2025, including Greenwood, which the filing says commenced operations in Q4 2023.
- Management stated that available liquidity and anticipated cash generation should be sufficient for operations, capital spending, debt obligations, collateral needs and quarterly dividends for at least the next twelve months, absent disruptive events. The $0.50 quarterly common dividend was equivalent to $2.00 annualized; future dividends remain subject to board decisions and financial conditions.
- Commodity prices, interest rates, counterparty performance, capital-market access, producer activity and project execution are key risks. Targa had $3.2 billion of variable-rate borrowings; a 100-basis-point rate increase would raise estimated annual interest expense by $32.1 million, based on period-end balances. Commodity hedge fair value was a net liability of $38.7 million; a hypothetical 10% price increase would make it a net liability of $195.7 million, before considering effects on hedged items.
- The Vitol dispute remains significant: the Texas appellate court upheld recovery of $129.0 million in prior payments, while deleting a separate $10.5 million damages award. The Texas Supreme Court denied review on October 20, 2023; Targa was seeking rehearing. Interest on the award through September 30 would have been approximately $52.3 million if accrued; the filing text does not provide a clear value for any related accrual. Separately, an October 26, 2023 judgment awarded approximately $6.9 million, plus prejudgment interest, in a winter-storm contract case. Targa estimated potential losses in three other related cases of $0–$10 million in aggregate.
- A New Mexico environmental notice concerns alleged air-permit violations; management did not expect related expenditures to be material. The filing also describes routine legal and environmental proceedings.
Important facts for investors to verify
- How lower commodity prices, hedge settlements and production growth affect segment margins and cash generation.
- Actual growth and maintenance capital spending, project timing and returns, and the effect of that spending on adjusted free cash flow.
- Debt balances, refinancing needs, variable-rate exposure and continued availability of the revolving, commercial-paper and receivables facilities.
- The accounting, potential cash impact and subsequent legal developments in the Vitol matter and winter-storm cases.
- Whether announced dividends and share repurchases remain consistent with liquidity, investment requirements and leverage objectives.