Ladies and gentlemen, thank you for standing by and welcome to the Targa Resources Corporation Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that, today's conference is being recorded. I would now like to hand the conference over to your speaker for today Mr. Sanjay Lad, Vice President of Finance and Investor Relations. Thank you. Please go ahead.

Thanks, O'Shawna. Good morning, and welcome to the Second Quarter 2020 Earnings Conference Call for Targa Resources Corp. The second quarter earnings release for Targa Resources along with the second quarter earnings supplement presentation are available on the Investors section of our website at targaresources.com. In addition, an updated investor presentation has also been posted to our website. Statements made during this call that might include Targa Resources' expectations or predictions should be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our latest SEC filings. Our speakers for the call today will be Matt Meloy, Chief Executive Officer; and Jen Kneale, Chief Financial Officer. Additionally, the following senior management team members will be available for the Q&A session: Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer. I will now turn the call over to Matt.

Thanks, Sanjay. During the second quarter, we navigated the challenges and impacts related to COVID-19 extremely well across our organization. We remain highly focused on employee safety while efficiently operating our facilities and have experienced no material impact to our operations. I would like to extend a thank you to all our employees for their continuous efforts to keep their colleagues and family safe. We appreciate all that you do on behalf of the Targa team, including delivering and maintaining first-class service to our customers. We had a strong second quarter despite impacts from reduced demand and lower crude oil prices, which resulted in producers temporarily curtailing production and meaningfully reducing their activity levels. We have seen a quicker than anticipated rebound in prices and related producer activity and forecasted activity for the remainder of 2020. Our overall Permian gathering and processing position performed well, and our Midland system even showed a sequential increase in the second quarter. This sets us up well for the second half of the year as we expect to benefit from stronger production across the Permian. We also benefited from our NGL storage position in the contango price structure, which existed for much of the second quarter. We expect to see those benefits show up in our margin throughout the remainder of the year. We made significant progress on reducing costs across Targa and expect to continue to benefit from these cost-reduction measures. Our free cash flow profile is improving and should continue to improve going forward as our capital spending comes down and our cash flow remains strong. As we look forward, we are in a position where we expect to have the ability to capture growth volumes from the Permian without having to spend incremental capital on Grand Prix, fractionation or LPG export facilities, and we have excess processing capacity in the Delaware. This puts Targa in the position to delever and generate strong returns going forward. Now a bit more color on the shut-ins that occurred in the second quarter. On our previous earnings call, we estimated the potential impacts related to our producer customer shutting in production. We saw a trough in production across our G&P systems in May and these declines were consistent with our estimates of about a 10% reduction in the Permian due to shut-ins. In the Permian, the impact was less pronounced across our Permian Midland system than our Permian Delaware system. We also experienced some declines in the Delaware due to some third-party on-load gas coming off the system during the second quarter. Despite the temporary shut-in production and reduced activity levels, quarterly inlet volumes across our aggregate Permian footprint declined only 1% sequentially. We have seen almost all volumes on our Midland and Delaware systems that were temporarily shut in come back online, and we are continuing to see our volumes in Permian and Midland prove to be resilient. We are pleased to have our gateway plant online ahead of schedule, placing this asset in service early even through the challenges presented by COVID-19, which is outstanding performance by our Targa team. With gateway online, we are currently processing volumes at higher levels than our March levels in the Permian Midland. The addition of gateway enhances our operational flexibility to move volumes across our system from other plants that we're running above nameplate. This allows us to enhance NGL recoveries and perform maintenance across our system footprint. Moving on to the Badlands. During May, we saw shut-in production impact our gas volumes by around 40%, which was at the high end of our previous estimate. Our gas volumes for July have since rebounded and are up significantly over the second quarter average. Across our Badlands crude system, we continue to have some production that remains shut in, but expect additional volumes to return as we continue to move through the third quarter. Turning to our Central region, which has already largely been in decline, gas inlet volumes in the second quarter declined 15% sequentially, primarily driven by greater-than-expected shut-in production on our South Oak system, and we also had some on-load gas expire. Despite the historically low commodity price environment, the durability of our G&P segment margin has strengthened as we have reduced our commodity exposure by adding fees and fee floors to our G&P contracts. The financial performance of our G&P segment is now more driven by volume throughput and fees as opposed to direct commodity prices, which is evidenced in our year-to-date results and will serve us well going forward. With fee floors, we also will benefit as prices begin to rise. Shifting to our logistics and transportation segment. Throughput volumes on our Grand Prix pipeline and at our fractionation complex in Mont Belvieu were slightly lower sequentially as a result of lower inlet volumes from production shut-ins and reduced activity across our G&P systems. But now with most of the shut-in production back online and the recent start-up of our gateway plant, we are currently seeing higher volumes through Grand Prix and our fractionation assets. We remain on track to bring Frac Train 8 online later in the third quarter as well as our Grand Prix extension in Central Oklahoma in the first quarter of 2021, where it will connect with Williams' new Bluestem pipeline. Our LPG export services business at Galena Park continued to perform well during the second quarter. Sequentially, volumes during the second quarter were slightly lower as a result of scheduled downtime to tie in the phase expansion at our LPG export facility. We recently completed our Galena Park expansion in early August and expect our LPG export volumes to be higher in the second half of this year as we are highly contracted for the balance of the year and beyond. While the majority of shut-in production has returned and activity levels begin to pick back up, there remains a level of uncertainty for the second half of 2020 around the pace of demand and commodity price recovery due to COVID-19. However, our assets are performing very well. Given we are more than six months through the year and have more visibility today than we had back in March, April, or May, we are revising the bottom end of our estimated full-year 2020 adjusted EBITDA range higher and the updated range is now $1.5 billion to $1.625 billion. Spending related to our announced major capital project is largely complete and Targa is well positioned to meaningfully benefit as business conditions strengthen with our best-in-class Permian supply position driving increasing volumes through our integrated midstream system. We remain focused on continued capital and operating cost discipline, and combined with the strategic measures we executed earlier this year, we expect to generate positive free cash flow after dividends in the second half of 2020 based on our revised full-year adjusted EBITDA estimate. While there may be some uncertainty in global commodity markets related to the coronavirus and other macro factors, there is strength in what we can see for Targa's core business, positioning us exceptionally well for the longer term. With that I'll now turn the call over to Jen to discuss Targa's results for the second quarter and other finance-related matters.

Thanks, Matt. Targa's reported quarterly adjusted EBITDA for the second quarter was $351 million. As Matt discussed, our results for the second quarter were impacted by the low commodity price environment and temporary production curtailments and reduced producer activity, which resulted in lower volumes across our Gathering and Processing and logistics and transportation systems offset by our significant efforts to reduce costs. In our logistics and transportation segment, while second quarter Grand Prix, fractionation, and LPG export volumes were modestly lower when compared to the first quarter, the sequential decline in segment operating margin was driven by lower marketing and other. Seasonality in our wholesale marketing businesses, combined with less optimization margin realized in our marketing businesses during the second quarter, accounted for about half of the sequential decline in segment operating margin. We are very proud of the entire Targa organization's efforts to manage operating and general and administrative expenses lower. As we said on our second quarter call, we expected to have aggregate operating and G&A expense savings of approximately $100 million relative to our plan, and we now expect to meaningfully exceed $100 million in 2020. Looking forward, quarterly operating expenses in each segment are estimated to be modestly higher in the third and fourth quarters when compared to the second quarter as new facilities begin operations in both our G&P and L&T segments. Turning to hedging. Based on a range of current estimates of producer customer activity levels, we remain substantially hedged for 2020. We have hedged approximately 85% to 95% of natural gas, approximately 80% to 90% of condensate, and approximately 75% to 85% of NGLs. Supplemental hedge disclosures including 2021 hedge percentages by commodity can be found in our earnings and supplement presentation on our website. Related to counterparty risk, we have had no material credit losses and remain focused on monitoring and managing our credit exposure. We have a large diversified customer base across our operating businesses, which includes large integrated customers, other investment-grade counterparties, and customers that are required to provide credit protection. Our 2020 net growth CapEx estimate range remains between $700 million to $800 million, and our 2020 net maintenance CapEx estimate continues to be approximately $130 million. We have spent about $400 million of net growth CapEx through the first two quarters, with growth CapEx spending expected to continue to trend lower as we move through the second half of the year with free cash flow increasing. We had over $2.1 billion of available liquidity as of June 30, and have no near-term maturities of senior notes or credit facilities, with the earliest maturity occurring in May 2023. On a debt compliance basis, Targa's leverage ratio at the end of the second quarter was approximately 4.1 times versus a compliance covenant of 5.5 times. Our consolidated reported debt-to-EBITDA ratio was approximately 4.9 times. With our premier integrated asset position and our talented employees, Targa is well positioned for the longer term. As business fundamentals improve, we expect to generate increasing free cash flow after dividends that will be available to reduce debt and further strengthen our balance sheet profile. Our business is performing very well across a difficult year, and we are so proud of the exceptional performance of our employees. Given the actions that we have taken and will continue to take this year, we expect to exit 2020 in a strong position with increasing flexibility. Lastly, before we turn the call over to Q&A, we wanted to provide an update that we are on track to publish our 2019 sustainability report during the third quarter and will include enhanced disclosures around our framework of policies, practices, and systems in the areas of safety, environmental, social, and governance. And with that operator, please open the line for questions.

We kindly ask that you limit your questions to two and re-enter the line if you have more questions.

And we kindly ask that you limit to two questions and reenter the Q&A line up if you have additional questions.

Hey, good morning, guys. This is James on for Jeremy. Maybe I could start off with a two-part question on the logistics side of the business. Your Grand Prix volumes looked pretty resilient during the quarter, I assume better than what you guys had originally anticipated. But just through July, what are you guys seeing on that pipeline? And maybe relative to Q1 volumes, if you can – or do you expect to surpass that level in Q3, and then the cadence in the Q4? And then the second part is just looking out at 2021, I understand it's very early, but just with the dock expansion now online, do you see the business mix shifting to the logistics side in 2021 versus 2020 or historically?

Good morning. Yes, I'll answer the first one just about Grand Prix and then go to the other one. Yes, the Grand Prix volumes we are seeing some strength. I'd say with gateway coming on and just the resilience that we're seeing in the Permian. With that plant coming on, volumes are continuing to ramp. I'd say we've been pleasantly surprised with how that asset has performed, the volumes going through it, and our ability to enhance recoveries across that asset and the rest of our Permian footprint is going to continue to drive better recoveries going forward. So on a recovery basis, I think we feel good about the outlook for moving those volumes down Grand Prix and just from the overall volume uplift we're going to get from putting gateway on. Both of those things are going to drive more volumes on Grand Prix. So I think it's kind of happening real-time as we're ramping up gateway. But I think we're pretty optimistic about the volume profile for gateway through the back half of the year and then into 2021. Now in terms of business mix and how that's shifting, yes, I'd say with Grand Prix going to continue to ramp volumes, fractionation, export, and the investments we made on the downstream side. I would say that over time, partially dependent on commodity prices. But yes, we see more of the business mix shifting to downstream in terms of percentage operating margin than G&P. But we expect to have really growth in both areas over time.

Great. Thanks for the color. And then just my second question, I'm just looking at Slide 29 in the updated presentation this morning. And just looking at the South Texas footprint, obviously look there's a few less rigs there from your last kind of slide presentation, not surprisingly, but just asking for an update on maybe Sanchez's activity on the footprint and how it's progressing with your expectations?

Sure. On the South Texas footprint, really amongst the whole Eagle Ford, there's not a lot of activity out there. We actually didn't see a whole lot of volume shut in on that system, but there's just really not a lot of activity. So you've seen volumes move down. We are getting some indications from producers that some activity could start picking up here. So there remains an opportunity for kind of stemming the decline and maybe going the other way here as we kind of get into the back half of the year. But we really haven't seen a lot of progress made in terms of volumes here recently. But there is some opportunity for those volumes to perform a little bit better as we go forward.

Got it. Thanks for the questions.

Okay. Thank you.

Your next question comes from the line of Tristan Richardson with Truist Securities.

Hi. Good morning guys. I really appreciate all the comments you've given around what you're seeing in the second half or volumes. I mean, I guess kind of taking that commentary from your large customers about reinvestment rates, and then balancing in some natural decline in some of the other basins. Can you talk a little bit about exit rates for the year, now that curtailed volumes are back to exit rates look to be above Q2 and more in line with what you're seeing in July or August, or is decline comes in do we start to get back to more than what you saw in Q2?

We've had productive discussions with our producers, and we're gaining a clearer understanding of their plans for 2020. The new data points we're receiving are increasingly positive, reflecting the encouraging conversations we're having. We expect that in the Permian, it wouldn't be surprising to see growth from now until the end of the year. While we still maintain a range in our EBITDA guidance due to some uncertainties, the latest data we're collecting suggests a strong potential for growth moving forward in the Permian.

That's great. Thanks Matt. And then, just on the cost side of things. Jen, you talked about some of the $100 million of incremental versus expectations. I mean certainly, new assets coming online in the second half we'll see some ramp, but curious about just sort of the concept of cost reduction permanence as you look out into 2021 and beyond?

I think, Tristan that we've done an excellent job of taking costs out really across the board. The focus of our organization, whether it be supply chain, every operations person, every group involved in G&A savings, has just been a really remarkable effort when we compare that $100 million of cost savings which we now expect to be, that's relative to our plan as we approach this year. And so I think that we see good permanence from a lot of those cost savings, partially because our expectations are that activity levels may be reduced versus where we were before. So our need to hire additional personnel and things like that. Some of that I expect will be permanent in terms of cost savings. Our management of other operating costs around production, we are doing a very good job of managing those with each and every supplier and we'll continue to be focused on that. But as we see volumes increase across our systems, those costs may be a little bit harder to maintain in the Permian. But we're working very diligently to try to do that.

It's great. Thank you guys very much.

Hey thank you.

Your next question comes from the line of Christine Cho with Barclays.

Hi. Good morning. This is Mark on for Christine. So Permian volumes held up better than what we would have thought and better than some of your peers. Could you just talk through what were the potential drivers of that? Did your customers just have better storage positions or sales agreements on the crude side that enable them to keep flowing, or were there other factors that played a part and just the impact from less shut-in?

I think we continue to just see the resiliency of our Permian Midland system. When we add plants there are more volumes that usually come in to fill those up relatively quickly. If there's other wells that are being shut in, maybe it lowers some pressures, and we see it come from other parts of the system. So I think we benefit from just having a really large footprint on the Permian Midland side, with really high-quality, well-capitalized good producers as well. So I would say on average we would expect them to outperform the Basin, and we've seen that continue to prove out. So I think it's a combination of a number of factors. I think it's the footprint system we have, but it's also the really strong producers we have behind our systems.

Got it. That's helpful. And then recognizing things are still pretty dynamic on the producer side. But just how should we think about CapEx for next year? Last quarter I think you gave a rough estimate for about $200 million in growth CapEx, but with activity holding up better across your acreage, should we still think that's a good number?

Yeah. So for CapEx as we look forward, if you look through the remainder of this year, really most of the large capital projects are coming on and going to be completed this year, adding the fractionation trains, export facilities, and processing plants. As you look out into 2021, we have the completion of our Grand Prix extension up into Oklahoma in the first quarter, but we don't have any large-scale projects announced to come online in 2021. So we'd expect that CapEx, when you look to our recent history to be much lower than the amount we've spent over the previous several years. We have capacity on Grand Prix, so as volumes ramp, we'll be able to just move those volumes down Grand Prix. We have capacity in our fractionation and export, so we're really set up pretty well to be able to capture some growth volumes. Whether it's in 2021 or 2022, going forward to capture those growth volumes, with really not much more incremental investment on the downstream side of the business. So then it's on the G&P side where we'll have a regular field and compression and other spending we'll need to have to gather those volumes to the plants. And as I noted in my comments, we have excess capacity in the Delaware side, so with Peregrine coming on, we do have processing out there. So it really comes down to the G&P side. I'd say the next processing plant we have visibility to, if there is some growth, is again in the Permian Midland where we've seen strength. So it would be a processing plant on the Permian Midland side, which depending on how volumes move as we go through the remainder of this year, there could be a need for another plant out there. And we're already trying to be even more capital efficient with the way we do that. So we're looking internally at whether there's a potential plant we could move from another area that's underutilized, repurpose that, and move it out into the Permian Midland when and if it's needed out there. And so we're already looking at that. If we do that, it will be significantly less capital than a new build get-out capital that we've had for the recent $250 million processing plants we put in.

Great. That’s helpful. Thanks.

Okay. Thank you.

Your next question comes from the line of Colton Bean with Tudor Pickering Holt.

Good morning. So maybe just a follow-up on the capital question there with a slightly longer-dated lens. I think we've seen a few of the large Permian producers highlight growth Cap, even in the event of a much higher oil price. So, obviously, still a long way out, but do you see next year's capital budget as a decent marker for 22-plus if growth was in line with that mid-single-digit type commentary?

I'd say as we look out over multi-years, what we see is the addition of processing plants is likely just going to be in the Permian. On the Midland side, likely there’ll be more plants there than Delaware just kind of given where current volumes are relative to capacity. So it's putting in a processing plant on the Permian side, shouldn't need much more capital on Grand Prix as we have capacity on that pipe. It will be just adding some pumps, but those are relatively small amounts of capital. And then is when we're going to need another fractionator after Train 8. Part of it will be the timing of what that growth looks like in 2021 and when we'll need to greenlight Train 9 on the fractionation. Does that fall into 2022? Does it fall into 2020? When do we need that? How much growth is there in 2021 and 2022? But it's going to average out, one year we might be putting one in, another year we may not right? So it's going to depend on when we put in those processing plants and fractionation facilities.

Got it. And then just on the NGL marketing downtick, I understand the wholesale seasonality. Can you speak to the optimization side of that? And how do you expect that to play out through the back half of the year?

Sure. Our marketing margin decreased in the second quarter compared to the first. This was primarily due to our wholesale marketing, which experiences normal seasonal fluctuations each year. However, we had a relatively strong quarter in our NGL marketing segment. The margins from this will not be fully realized until later quarters because there is a significant contango in some of our NGL products. We were able to purchase and store these products, and we will benefit from these margins moving forward. We have incorporated this into our updated guidance and will see advantages as we capitalize on these contango trades.

Great. I appreciate that.

Your next question comes from the line of Kyle May with Capital One Securities.

Good morning. I appreciate still a lot of uncertainty ahead. But just wondering if you can talk about some of the different factors that could put you at one end or the other of your revised guidance for this year?

Sure. At this point in the year, it really is less about I'd say commodity prices. We gave commodity prices with our updated guidance. But given our hedge position and our fee-based position, it is less about commodity prices and it really is more about volumes. So we've had positive signs from the producers in the Permian, and let's see how that plays out through the rest of the year. So I think there's still some potential variability in what the volumes look like for the Permian from now to the rest of the year. And then we also still have some shut-ins up in the Badlands, and we have some shut-ins in the South Oak segment. And so there are some signs that those are going to be coming on. When those come on, do they fully come back on? That's another variable. So it will be the return of shut-in production in our Central region combined with Permian volumes and what the growth profile looks like from now to the end of the year.

I think, Kyle there's also uncertainty around COVID as we all know. And so we're also being conservative, factoring what we don't know into account. So we've got great visibility, I think from our producers or certainly increased visibility versus where we were for back half of the year performance, which gives us a lot of confidence when we think about the strength and resiliency of our footprint. But there is just continued uncertainty around COVID. And so we're trying to factor some of that conservatism in as well.

Got it. That's very helpful. And as my follow-up, it seems like we've seen a little bit more stability in the last month or so. And wanted to get your latest thoughts around the M&A landscape and if you see any opportunity for Targa to make any changes that could improve the balance sheet?

Our focus, as we have emphasized multiple times, is on free cash flow after dividends and reducing our debt. We have several strong organic projects that are increasing volumes through our Midland and Delaware systems as we transport and export our products downstream; these will yield good returns. Our priority is to invest in organic growth around our existing and potential customers in our operational areas. This approach reflects our commitment to lowering our leverage further, which is already trending in a positive direction.

Got it. Thanks a lot.

Thank you.

Your final question comes from the line of Sunil Sibal with Seaport Global.

Hi. Good morning, everybody, and hope everybody is safe. So first bookkeeping question for me. So it seems like when I look at the equity earnings for the non-controlling interest about $96 million and then another $13 million of DD&A. So it seems like that was a drag of about $110 million on EBITDA for the quarter. So I was just curious, was there any kind of onetime item in there which impacted that number, or is that kind of a run rate number? Obviously, some assets are ramping up?

We can dig into it some more and come back to you, but I don't believe there was anything that I'd characterize as onetime in nature there, Sunil.

That's correct. To support Jen's point, if you examine the fourth quarter and the first quarter of 2019 and 2020, as well as the current quarter, the non-controlling interest reduction has resulted in EBITDA being around $100 million to $110 million. This was consistent with last quarter as well, when adjusted for impairment and depreciation, depletion, and amortization.

Okay. Got it. And then on the fractionation side, I understand that Q2 numbers had some noise in there. But now you're bringing on another fraction train online. So I was just kind of curious how should we be thinking about the volumes there? When would you expect your full fractionation capacity to be kind of 80% or so utilized? Any thoughts there?

Yes. So right now, we have excess fractionation capacity. And then Train 8 is going to be coming online. But again, with bringing on gateway we have been able to enhance our recoveries out in the Permian and do some maintenance and other things. We would expect more NGLs from here going forward and some growth in the Permian and from our third-party customers as those contracts kick in and ramp up over time. So we still have a positive outlook for being able to utilize our fractionation capacity. But the timing of when it will be full and when we'll need another fractionation facility, it really will depend on as we kind of exit 2020 what the growth outlook is from our producer customers in 2021 and beyond. We're really just now kind of getting some of those indications from our customers. We don't have nearly as many data points for 2021 and beyond as we do for 2020. But I will say the early indications from some of our producer customers have been positive, I'd say relative to maybe our expectations even just a few weeks or a few months ago. So we are seeing positive indications for 2021 and beyond but it's still pretty early to give you kind of a firm timeline there.

Okay. Got it. Thanks for all the color guys.

Okay. Thank you.

There are no additional questions at this time. I would like to turn the call over to Sanjay Lad for closing remarks.

Thank you, Hope. Well, thank everyone that was on the call this morning, and we appreciate your interest in Targa Resources. We will be available for any follow-up questions you may have. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's conference call. You may now all disconnect.