Earnings Call Transcript - TRGP Q2 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Targa Resources Corporation Second Quarter 2023 Earnings Webcast Presentation. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sanjay Lad, Vice President of Finance and Investor Relations.

Sanjay Lad, Vice President of Finance and Investor Relations

Thanks, Tes. Good morning, and welcome to the Second Quarter 2023 Earnings Call for Targa Resources Corp. The second quarter earnings release, along with the second quarter earnings supplement presentation for Targa Resources that accompany our call are available on our website at targaresources.com in the Investors section. 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 also be available for Q&A: Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer. And with that, I'll now turn the call over to Matt.

Matt Meloy, Chief Executive Officer

Thank you, Sanjay, and good morning. The second quarter results met our expectations, reflecting strong business performance and record volumes for the quarter, positioning us well for a robust year ahead. Adjusted EBITDA decreased sequentially due to significant marketing achievements in the first quarter. However, as previously mentioned, we anticipate EBITDA to increase throughout the year and we remain optimistic about our full year 2023 adjusted EBITDA estimate of $3.5 billion to $3.7 billion. In the second quarter, we achieved record volumes in the Permian, leading to unprecedented NGL transportation and fractionation volumes downstream. We successfully brought online our Legacy II Plant in Permian Midland and began operations at our Midway plant in Permian Delaware. We also executed a quarterly record of $149 million in common share repurchases, highlighting our confidence in the future of our business. Gas volumes across our Permian systems are continuing to rise, and the recent completion of our Legacy II and Midway Plants has increased our processing capacity in Midland and Delaware to accommodate this growth. With our escalating Permian volumes and as noted earlier, we are already ordering long lead items. Today, we officially announced plans for our next plant in Permian Midland and another in Permian Delaware to fulfill the infrastructure needs of our producer customers. We still forecast 2023 growth capital expenditures between $2 billion and $2.2 billion, and all our previously announced projects remain on schedule and within budget. Looking ahead to 2024, we will continue investing in major projects, including Frac Trains 9 and 10, a significant portion of capital for our Daytona NGL pipeline, and five Permian gas plants, which will impact spending levels for 2024, likely similar to 2023. However, we anticipate that growth capital expenditures beyond 2024 will decline as we complete major projects on the downstream side. Investing in organic growth across our integrated footprint offers attractive returns, allowing us to continue returning additional capital to our shareholders. Now, let’s delve deeper into our operations, beginning with the Permian. High activity levels are sustained across our dedicated acreage, with our systems in the Midland and Delaware basins averaging record inlet volumes of 5.1 billion cubic feet per day in the second quarter, a 5% sequential increase. In Permian Midland, producer activity remains strong, and our system operates near capacity. Our new Legacy II Plant reached full capacity mid-second quarter and is currently operating near full. Our next Midland plant, Greenwood, is on schedule to begin operations in late fourth quarter 2023 and is expected to be highly utilized upon startup. In Permian Delaware, we see strong activity and volumes as well. The Midway plant began operations late in the second quarter and is now providing essential processing capacity, becoming fully operational this week as we idle our Sand Hills facility. These measures will enhance operational reliability and improve recoveries for our customers. Our Wildcat II and Roadrunner II Plants are on track to start operations in the first and second quarters of 2024, respectively, both expected to be highly utilized due to robust activity in our Delaware footprint. We are currently offloading about 70 million cubic feet per day of gas in the Permian, and we are in the process of adding significant compression horsepower throughout the year. We continue to witness strong producer activity across our acreage, which gives us confidence that our average 2023 Permian inlet gas volumes will rise by 10% over the fourth quarter of 2022. In the Central region, our combined natural gas volumes increased by 3% sequentially, and we have not observed any significant changes in producer activity despite lower commodity prices. Moving on to our Logistics and Transportation segment, Targa's NGL pipeline transportation volumes reached a record 621,000 barrels per day, while fractionation volumes hit a record 794,000 barrels per day in the second quarter. The increase in supply volumes from our Permian systems and third parties fueled this record sequential growth in NGL transportation. Furthermore, Grand Prix pipeline volumes benefitted from the conclusion of certain medium-term commitments on third-party pipes. Our fractionation facilities in Mont Belvieu remain highly utilized, and the restart of GCF will add much-needed capacity when it resumes in the first quarter of 2024. We also expect our Train 9 fractionator to be highly utilized once it begins operations in the second quarter of 2024. Our recently announced Train 10 fractionator is essential, considering the anticipated growth in our gathering and processing business and plant expansions, and is set for the first quarter of 2025. At Galena Park, we loaded an average of 9.2 million barrels per month of LPGs in the second quarter. In the third quarter, our loading capability will see a temporary reduction for about a month due to required 10-year inspections at part of our facility. Our low-cost expansion project has increased our propane loading capacity by an additional 1 million barrels per month, with completion expected this quarter. We anticipate ramping up our loadings post-inspection and throughout the remainder of 2023. We are optimistic about Targa's long-term prospects and remain focused on executing our strategic priorities. Our unique value proposition for shareholders and potential investors includes growing EBITDA, increasing dividends, and reducing share count while maintaining leverage within our target range. Before I pass the call to Jen for a more detailed discussion of our second quarter results, I want to express my gratitude to the Targa team for their unwavering commitment to safety and execution, ensuring best-in-class service and reliability for our customers.

Jen Kneale, Chief Financial Officer

Thanks, Matt. Good morning, everyone. Targa's reported adjusted EBITDA for the second quarter was $789 million. The sequential decrease was predominantly attributable to the significant optimization opportunities we benefited from in our marketing and LPG export businesses during the first quarter. Higher volumes were offset by lower realized natural gas and NGL prices and higher operating expenses. As Matt mentioned, we expect adjusted EBITDA to be higher in the third and fourth quarters as we benefit from strong volume tailwinds across our Permian and downstream assets, and are comfortable with our full year 2023 adjusted EBITDA estimate of between $3.5 billion and $3.7 billion. We are well hedged across all commodities for the balance of 2023 and continue to add hedges for 2024 and beyond. Coupled with our fee floor contracts, we have significantly derisked our earnings and cash flow outlook while preserving the upside when commodity prices increase. Inclusive of our newly announced Greenwood II and Bull Moose plants in the Permian, there is no change to our estimate for 2023 growth capital spending of between $2 billion and $2.2 billion. Our current year estimate for net maintenance capital spending remains $175 million. At quarter end, we had $2.2 billion of available liquidity and our pro forma leverage was at the midpoint of our long-term leverage ratio target range, which provides us with a lot of flexibility looking forward. We continue to expect year-end leverage around the midpoint of our long-term leverage ratio target range of 3 to 4 times. Maintaining a strong investment grade balance sheet across cycles continues to be a priority. Our balance sheet strength remains the foundation that affords us the financial flexibility to continue to execute on our strategic priorities, that is investing in high-returning integrated projects and prudently returning an increasing amount of capital to our shareholders. The strength of our balance sheet and outlook were recognized recently by both Fitch and S&P that placed Targa on positive watch. We repurchased a quarterly record of $149 million of common shares in the second quarter at a weighted average price of $71.37 per share and have repurchased over $200 million in common stock through the first half of the year. During the quarter, we exhausted our $500 million share repurchase program and had about $943 million remaining under our $1 billion share repurchase program as of June 30th. Looking ahead, we have significant flexibility to continue to execute under our opportunistic repurchase framework and further increase our return of capital to shareholders and reduce our share count over time. Lastly, I'd like to echo Matt and extend a thank you to our employees for their continued focus on safety and commitment to Targa. And with that, I will turn the call back over to Sanjay.

Sanjay Lad, Vice President of Finance and Investor Relations

Thanks, Jen. For the Q&A session, we kindly ask that you limit to one question and one follow-up and reenter the line up if you have additional questions. Tes, would you please open the line for Q&A? Tes, we’re ready for the Q&A session.

Operator, Operator

Operator Instructions. Theresa Chen from Barclays.

Theresa Chen, Analyst

First, I'd like to touch on the CapEx outlook over the medium to long term. To your comments earlier, Matt, about 2024 being similar to 2023, and then beyond that, the expectations for CapEx to step down. Do you have a sense of what do you think a post-2024 run rate CapEx could look like? And then on the heels of that, in terms of capital allocation, what do you view the split in the return of capital to shareholders between dividend growth and buybacks as that free cash flow generation becomes more visible?

Matt Meloy, Chief Executive Officer

I discussed our capital plans for 2024, particularly focusing on some key projects. Let's address Daytona specifically. The majority of our spending on Daytona will occur next year. We're working on two fractionators, Train 9 and Train 10, and there's also some expenditure this year on GCS. This level of fractionation being added is above our usual cadence, particularly in our NGL pipeline. We also have considerable spending in 2023, which is why we identify these major projects extending through both 2023 and 2024. Once Train 9 and Train 10 in Daytona are operational by the end of 2024, we expect a gradual decline in spending thereafter. I don’t have an exact run rate estimate at this time, but we anticipate a decrease as most of the major project expenditures will conclude, leading us to invest in our processing plants and other regular capital projects. Regarding capital returns, our primary aim has been to invest in our core business, which yields strong returns. We will continue to prioritize investments in both the Gathering and Processing (G&P) and downstream sectors to support volume demands from our customers. This strategy should foster good EBITDA growth and enhance our capacity to return capital to shareholders through increased dividends and share repurchases. I believe our approach will encompass a mix of investing in our business, raising dividends, and buying back shares, as evidenced by our significant share repurchase in the second quarter. It will be a combination of all these strategies.

Theresa Chen, Analyst

And then looking to the second half of 2023, clearly, there's been a lot of volatility on the NGL side, whether in terms of pricing or volumes or different parts of the value chain across the industry. What is your implied contribution in the second half for NGL marketing to hit your guidance for the year?

Matt Meloy, Chief Executive Officer

We experienced a very strong first quarter in marketing, particularly across our export business, gas marketing, and NGL marketing, although our wholesale marketing business does have some seasonality. In the second quarter, our marketing activities were relatively modest, likely representing a low point for us during the year. We anticipate a return to more standard marketing levels as we move into the third and fourth quarters, although we do not expect it to reach the levels we observed earlier in the year. We are beginning to see opportunities to take advantage of spreads, but we are not projecting any significant contributions for the second half of the year.

Jen Kneale, Chief Financial Officer

And on the LPG export side, you may have heard that we announced on this call that we expect the facility or parts of the facility on the export side to be down for a month as we complete a required 10-year review of the facilities. So that will impact the third quarter. And to the extent, though, that we see good demand internationally in the fourth quarter, we will have completed our million barrel per month expansion at Galena Park, and we'll have that inspection behind us. We'll have a lot more flexibility to move additional cargoes in the fourth quarter on the LPG export side to the extent that there is global demand for additional volumes.

Operator, Operator

And then we will have our next question, Jeremy Tonet from JPMorgan Securities.

Jeremy Tonet, Analyst

I appreciate that we are not giving '24 guidance at this juncture, but just wondering if you could help us sketch out the future a little bit more. Clearly, a lot of capital being deployed, very accretive terms, a lot of growth in the Permian. But is there any flavor you could give us for what post-2023 Targa trajectory could look like, just given the amount of capital being deployed?

Jen Kneale, Chief Financial Officer

I think that part of our conviction around all things Targa right now is the fact that we do see such a strong multiyear growth outlook on the EBITDA side. I don't think we're at a point where we want to articulate any advanced guidance for 2024. Really, it will largely be dependent on the producer forecast that we receive as we go through our planning forecast this fall. But certainly, we expect the assets that we have in progress right now to be very highly utilized when they come online, that's part of what we said this morning. And with that volume growth filling those facilities, we would certainly expect meaningful underlying EBITDA growth in a commodity environment that looks anything like we have seen this year.

Jeremy Tonet, Analyst

So is it fair to say the volumes would deliver strong growth year-over-year, this is not like a step down with the hedging book, that's a big offset. Just trying to think gives and takes as we look forward here.

Jen Kneale, Chief Financial Officer

As I think about hedge prices right now for 2024 relative to where they are this year, I wouldn't say that there's a step down. Both natural gas and NGL prices sort of approximate the same prices for '23 in 2024. So I really think it's the volumes that are going to drive significant underlying EBITDA growth for us. It begins in the Permian Basin and then increasing Permian Basin volumes, of course, moving through our transportation and fractionation assets and then having those volumes available either to sell domestically or into the export market is really what positions us so well not only for 2024 but beyond that and is part of what is driving our conviction in the Targa story.

Jeremy Tonet, Analyst

And just looking at the midstream industry more broadly, we've seen some kind of bigger moves take place, some mergers out there. And just wondering if we're in the midst of a period of industry consolidation, how does Targa think about that, what's Targa's role moving forward here?

Matt Meloy, Chief Executive Officer

Jeremy, we are really focused on investing in our core business. We have a lot of really attractive organic growth opportunities with a budget of $2 billion to $2.2 billion this year and significant capital spending next year as well. Those are really good projects for us. We've seen significant volume growth. You saw our volumes really move up across Permian, across the NGL footprint here in the second quarter. We expect continued growth the back half of '23 and into '24 and '25. So we're really focused on what we can do on an organic growth basis. That's the focus, that's where we're going to get the best returns. And so what others are doing, it's interesting, we pay attention, but our focus is on our core business.

Operator, Operator

And then we will have our next question, Michael Blum from Wells Fargo.

Michael Blum, Analyst

I wanted to just go back to LPG exports for a second, notwithstanding the planned downtime in Q3. I was wondering if you could just speak to what you're seeing in end market demand for the balance of the year?

Scott Pryor, President, Logistics and Transportation

We continue to see good demand across our dock. Obviously, in the first quarter, we benefited from the outline that Matt communicated earlier, and then in the second quarter, we've seen less spot opportunities. Some of that's just been driven by a less arb in the overall marketplace. We've seen some headwinds as it relates to freight economics that have tightened things up, and just when you think about just the overall seasonal demand that we came off of from the first quarter. When we go into the third quarter, again, we continue to extend the existing contracts that we have, adding contracts to our portfolio, especially as we have the expansion project coming on during this third quarter where we are getting some benefit as it relates to that today. When we look at the third quarter, despite the downtime that we were going to have because of the mandatory inspection that we have on some of our vessels at the facility, we would expect our third quarter volumes to be similar or better than what we saw in the second quarter. And then as Jen alluded to, when we look at the fourth quarter with the expansion online, with a ramp-up in demand, the seasonal demand that we typically see in the fourth quarter and first quarter, we just really see a good outlook for that. Volumes through our systems will continue to ramp up and we just view that as very positive for us overall.

Michael Blum, Analyst

Also just wanted to ask about this recent spike we've seen in ethane prices. It's had some impacts on some processing plant efficiencies, some frac outages. Just curious if that impacted Targa at all for Q3 either positive or negative?

Scott Pryor, President, Logistics and Transportation

I would say it did not impact us negatively. Ethane found itself really in a volatile market during the month of July and some of that was brought on as the market was pinched between weeks of rejection and improved petrochemical operating rates. The petrochemical operating rates probably were likely just above 90% operating rates in the month of July and along with that, with increased ethane exports. As the price ramped up that improved some of the recovery economics as it relates to ethane rejection recovery, but there's some time lags with that. So I think the market found itself in some opportunities where it spiked in order for folks to cover various positions. For us, as we see those opportunities, we can utilize our storage, we can take advantage of the storage position that we have. So I would say that it was probably a net benefit to us to a certain degree but I would suggest that some of that may come later in the year than it would be in kind of the prompt month. So things feel like they're a little more balanced. Prices have now really come back down to more of a moderate level around $0.27 per gallon this morning. They feel a little more balanced. September is trading a little bit stronger than August currently, which would suggest there may be some mild tightness. But again, I think overall, things have balanced themselves out with the recovery economics improving.

Operator, Operator

And then we will have our next question from Neel Mitra at Bank of America.

Neel Mitra, Analyst

I just wanted to drill down a little bit more on the ongoing CapEx needs and two particular topics. First, it seemed like you were maybe two processing plants behind on lease when you acquired them. Are we trending on that? And then second, when we look at the Grand Prix expansion from North Texas to Belvieu, when would that be necessary from the volumes that you're getting from Daytona and Grand Prix?

Pat McDonie, President, Gathering and Processing

We are behind schedule and are working hard to catch up. The Red Hills plant began operations shortly after the acquisition, and we've increased capacity at Midway and are rapidly adding capacity with Wildcat II and Roadrunner, along with our announcement regarding Bull Moose. These efforts aim to align with the activity levels of our producers in the Delaware Basin. We have significant compression building up between now and the end of the year, and while we are still somewhat behind, we anticipate being caught up by year-end. The production and drilling activities are present; we just need to execute and connect everything online. The capacity additions in the Delaware are directly tied to the producer activity levels we are closely monitoring. We are not fully caught up yet, but progress is being made.

Scott Pryor, President, Logistics and Transportation

As it relates to Grand Prix and Daytona, certainly, we welcome the expansion project that we have with Daytona coming online that will complement the western portion of our Grand Prix pipeline that feeds into our south leg moving into Mont Belvieu. Recognize that the south leg has a little over 1 million barrels a day of capacity moving into Mont Belvieu. In the second quarter, we moved just over 600,000 barrels a day. So we've got a lot of operating leverage as it relates to that south leg. When Daytona comes online, we had announced initially they would have a capacity of roughly 400,000 barrels a day with a couple of pump stations that would be a part of that expansion project. So we've got a lot of operating leverage as it relates to that. With that said, obviously, we are evaluating what is the next step for us. For additional pipeline requirements, we're certainly going to watch and see how plants on the Western side in the Permian continue to ramp up over time, the additive of plants over time, but we'll certainly be in a position to expand when it's necessary and evaluate that.

Neel Mitra, Analyst

And then as a quick follow-up on the ethane question. We were in rejection, I guess, for most of June. So did that impact results negatively for 2Q? And then I think I heard that you would benefit later in the year from some of the higher ethane prices, and I was just wondering how you would benefit and some commentary behind that.

Scott Pryor, President, Logistics and Transportation

I think what I would allude to there is we saw some opportunities where we actually saw some contango in the marketplace on ethane that was priced later in the year and actually into 2024. So utilizing our storage, we were able to benefit from that contango market that was presented. So I would say that it's moderate levels at this point. That's something that we, obviously, with our storage have the ability to take advantage of when there are contango plays in the marketplace. Those are not present today per se but that's where we get some slight benefits when the market moves in those directions.

Neel Mitra, Analyst

And was there a negative hit on volumes on your systems just from rejection that we wouldn't otherwise have seen from the heat in Texas in June?

Scott Pryor, President, Logistics and Transportation

I would say not really on our system. Certainly, as we watch the percentage of ethane that's contained and the raw that comes into our Mont Belvieu facility it usually is more impactful in the third-party pipelines than it is on the Grand Prix pipeline. I will say that we saw in the latter part of July and here in August that the percentage has moved up a little bit, probably more on the third-party pipes than on Grand Prix. So that is certainly an indicator that the industry as a whole is recovering more of the ethane and the field, which should benefit us over time. I think the other thing that you'll see is that given the fact that we've had a couple of industry players have brought on some additional frac capacity, that also lends to calming down, if you will, the spikes that we saw in the month of July on ethane.

Operator, Operator

Colton Bean, please proceed to your question from TPH & Company.

Colton Bean, Analyst

Just on the G&P segment, a decent drop in sequential processing margins. Can you comment on where Q2 results sit relative to fee floors, and then just any general expectations for margins through the balance of the year?

Jen Kneale, Chief Financial Officer

In the second quarter, I'd say that our fee floors kicked in, reflecting, I think, the importance of them. I think the second quarter is illustrative of how well Targa can perform even across a lower commodity price environment, where we even saw Waha prices first of month in April print was $0.08, $0.09. So again, I think it is reflective of the importance to us of the fee floors that we are able to continue to invest because with those floors in place, we can at least get a required minimum rate of return on that invested capital. But where we sit today, we're seeing improved prices here in the third quarter. For full year, I'd say that commodity prices on the NGL and natural gas side are, call it, 5% lower than the guidance that we set out. So we'll have to see how the rest of the year plays out. And hopefully, prices can be more of a tailwind than a headwind given we are very well hedged and given, again, in the second quarter, we were at fee floor levels.

Colton Bean, Analyst

And then shifting over to the Logistics and Transportation segment. You had some very impressive NGL throughput across Grand Prix and the frac fleet, but it looks like the weighted average F&P rate moved lower quarter-on-quarter. Any basin mix shift or recontracting impacts that drove the drop and then again, your expectations for that rate trajectory moving forward?

Matt Meloy, Chief Executive Officer

So yes, we had really good volumes across the downstream segment. You saw a significant ramp in Grand Prix, which was part of a contract. Part of it was just the organic growth, part was a contract roll-off we had on transport. And so you saw also really good volume increase on frac. No, I don't think there was really a mix or a degradation in our overall margins. Typically, these TNF contracts are kind of escalate over time and move up. So there just might be some volatility with marketing or what all you're including in the overall L&T margin and how much you're attributing to transport and frac.

Operator, Operator

We have Keith Stanley from Wolfe Research.

Keith Stanley, Analyst

I wanted to ask about the big step-up in buybacks during Q2. Should we view that as a kind of unique opportunity because the stock fell in May and June, or is this possibly kind of a normal pace and how you think about buybacks and your capacity to do that going forward?

Matt Meloy, Chief Executive Officer

I believe our buybacks have contributed to how we are returning capital to shareholders. This approach is really supported by our strong outlook for not only the rest of 2023 but also as we look towards 2024 and 2025. We have assessed our overall cash flow and leverage profiles, which prompted us to increase our repurchases in the second quarter. This was very appealing to us. Previously, in the first quarter, we had just completed the acquisition of a 25% stake in Grand Prix. This is a combination of our overall spending for the quarter and our outlook. We are confident about not just the latter half of the year but our multiyear outlook for Targa, which is why we decided to boost the repurchases in the second quarter.

Keith Stanley, Analyst

Second question, just the Grand Prix volumes are really high, as you said, in part from a contract roll-off on transportation. Are there any other major contract roll-offs coming up, I guess, through the end of next year that we should be mindful of that could cause another big pop in Grand Prix volumes?

Scott Pryor, President, Logistics and Transportation

I would say that no, not really. We certainly benefited in the second quarter as we had some of those midterm contracts that had rolled off. I would say that going forward, there's not really a large step up. We will basically benefit from the additive of new plants that are going on in the Permian Basin for us. Certainly, the next two plants that were announced today are something that will contribute to our Grand Prix pipeline over time.

Operator, Operator

Brian Reynolds from UBS, please proceed with your question.

Brian Reynolds, Analyst

Just a quick follow-up on the CapEx cadence in the outer years with the focus on natural gas takeaway opportunities in Apex. Is this natural gas takeaway opportunity included in that kind of outer year CapEx decline and perhaps can you update us on perhaps Targa's equity interest or ability to fund the whole pipe on its own?

Jen Kneale, Chief Financial Officer

On the financing side, I think that we've consistently said, Brian, that if Apex was a project that got commercialized, it's one that lends itself really nicely to bring in JV partners and also to consider project finance. So I think we've been very consistent that if that is a project that does move forward, the likely outcome is that we would be funding it with a small portion of the equity of the project and would then utilize either joint ventures and/or project finance for the bulk of the financing.

Bobby Muraro, Chief Commercial Officer

When you look at the parties sitting around the table, both on the producer shipper side and on the market side, it's kind of a who's who and great parties, which lends itself to what Jen is talking about, the line out the door relative to the ability to raise capital in a multitude of ways to do it.

Brian Reynolds, Analyst

And maybe just a quick follow-up on the NGL market. Thanks for all the prior color. But kind of just curious if you can provide a little bit more color around your propane outlook. We're trading at historical lows for propane relative to WTI. Just looking ahead into winter and a lot of the PDH demand that's going online in China and competition with naphtha, just kind of curious of what you're seeing across your system in terms of interest going into wintertime this year?

Scott Pryor, President, Logistics and Transportation

Currently, today, pricing sits around $0.72 we view the outer months currently today is slight contango. Fourth quarter is around $0.78. First quarter is around $0.79. The challenge that propane has today is that our current inventories stand around 88 million barrels, which is about 25 million barrels above this time last year. So that is part of the reason why you're seeing pricing relative to WTI from a percentage basis down from what you've seen of late. I think really, when you look at it, production obviously is moving up. I think as overall global demand continues to increase, albeit there are times where you see some lulls in that. But the PDH plant additives that you see in China that you mentioned, obviously, is a big pool of propane over time. So for us, I think it's as an industry, I think we've got adequate inventory, certainly, and I think that will provide us. The inventories have been higher historically. So this is not like it's a high watermark for us, and we've been able to pull the inventories down. The other thing when you look at it from an export market perspective, you're seeing the industry continue to add vessels for LPGs, current fleet size is around 360 VLGCs. With the second half of this year, we're adding another 25 or so vessels, and probably in 2024, we'll exceed 400 vessels on the water. So that clearly is an indication as an industry and as a market demand that the market is gearing up for increased demand globally as more markets mature.

Operator, Operator

We have Tristan Richardson from Scotiabank.

Tristan Richardson, Analyst

Just a question. You just mentioned on offloading levels that you're seeing now. Should we think of those as sort of normal levels that you would see in any given year, or are those perhaps elevated currently in anticipation of Greenwood, Wildcat, Roadrunner? Maybe just your thoughts on offloading as a part of the portfolio?

Pat McDonie, President, Gathering and Processing

I mean, I think you're going to see it in periods, right, where we're in the process of adding capacity and we need to move some gas off the system until we get our incremental plant started up. So I don't know that there's a normal cadence to that. Obviously, we're building a lot of additional plant capacity with the hopes that we're out in front of our producer growth and that we're going to be able to take 100% of it. But frankly, our producers, even though we have a robust outlook on their growth, they've outperformed and it means that we've needed more capacity than we've even built. And obviously, we've built a lot. So hopefully, our offloads will remain only as needed and for short periods of time and kind of an emergency situation. And outside of that, we'll have plant capacity in place to provide those services on our own.

Tristan Richardson, Analyst

And then just on your point there on customers, just always kind of curious about producer dynamics and customer activity. Like certainly, your view on inlet growth this year hasn't changed and we know your large scale customers are the major drivers. But maybe just anything on the smaller to midsize customers and change in behavior, shifts in activity, etc.

Pat McDonie, President, Gathering and Processing

No. I mean, obviously, you've seen a little bit of consolidation through the acquisition market. Short term, it has no impact. And even longer term, the impact on growth on our systems is inconsequential. We really have seen a continued high activity level across both the Delaware and Midland sides of the basin. So no material will change.

Operator, Operator

We have Neal Dingmann from Truist Securities.

Jake Nivasch, Analyst

This is Jake Nivasch on for Neal. Just a quick one here for me, and I know we've kind of touched on this a couple of times. So if I can tackle it a different way. Just the CapEx on the outer years, I'm just trying to get a sense strategically what that implies, I guess, from a capital allocation standpoint. It doesn't sound like especially the comments today, there's a big M&A appetite, and given that the CapEx spend is coming down and the fundamental backdrop that you guys have with cash flow generation. Just trying to get a sense of what that means either for the target leverage ratio, if you think maybe bring that down or I guess, even from a buyback standpoint, would you consider going into a formulaic program? Just trying to get a sense of, I guess, how you guys are thinking about that just in general.

Jen Kneale, Chief Financial Officer

I think from our perspective, it really all begins with the Permian growth and the cadence of Permian growth, and how much additional infrastructure that we'll need to service our Permian customers based on that, call it, medium and longer term growth rate and then what larger assets we’ll need on the downstream side to help manage those volumes through our integrated system. But certainly, part of why we've got so much conviction in our target story is as we look out to 2025 and beyond, we expect significantly higher EBITDA growth capital coming down. That means that we'll have a lot more free cash flow available to allocate and return more capital to shareholders while also continuing to invest in the business. I think that you've heard currently the appetite for M&A is very, very low. We did two excellent acquisitions last year that are performing very, very well for us this year. And we expect, particularly the Lucid assets to perform very well for us on a growth basis as we move forward through really the short, medium and long term. I think that's all setting us up to be in an excellent position looking forward and then we'll have to figure out the ideal mix of increasing dividends and also repurchases. We like the opportunistic share repurchase program right now. I think that it's working for us, particularly as we are trying to manage leverage, a leverage ratio today of about the midpoint of our long term leverage ratio target range. I think we've spoken to our preference to manage our leverage ratio in the bottom half of that long term leverage ratio target range, but we're very comfortable running this business between 3 to 4 times. And I think again, that's what gives us a lot of flexibility going forward on that, all of the above approach that says we will continue to invest in the business in really attractive returning projects and that will help underpin an exceptionally strong balance sheet with the flexibility to return more capital to shareholders across a multitude of ways.

Operator, Operator

We have Sunil Sibal from Seaport Global.

Sunil Sibal, Analyst

So I just wanted to understand a little bit better the gas takeaway situation in Permian. So obviously, you're developing your project and you also announced a number of processing additions. So from a gas take rate perspective, when do we need to see new pipelines announced to basically really service this gas out of the basin?

Bobby Muraro, Chief Commercial Officer

We are fairly confident in the short to medium term regarding gas takeaway. Recently, a pipeline went offline, and while it's tight enough that losing a whole pipeline is challenging for the basin, we expect two expansions to come online soon and another next year, which should meet our needs in that timeframe. Additionally, we anticipate the need for another pipeline by 2026, which likely means we need something in early 2024. We're hopeful for further investment decisions if there’s alignment between shippers and the market regarding Apex. Ultimately, Targa wants to ensure that infrastructure is developed, whether we lead it or not. We will support the development of our pipeline or another entity's pipeline to ensure that gas flows effectively by 2026.

Sunil Sibal, Analyst

And then my second question was related to returns. So obviously, I think in the last few years, you've posted 26% of ROIC. I was curious, when you're looking at new investments, you're approving new projects. What's a good way of thinking about your threshold on returns for those proven projects?

Matt Meloy, Chief Executive Officer

The returns have been very good for Targa across our integrated gathering and processing and then following the NGL molecule through Grand Prix frac and export. So when you put that slide together, I said 26% ROIC is investment in our core business, and that's what we're investing in now. So a lot of those contracts are the same contracts, really long term, 10, 15-year contracts. So we're doing the very similar kinds of things that we did kind of last build cycle. So we feel good about the returns going forward being well in excess of our cost of capital. Typically, in the past, we have described organic growth as kind of 5 to 7 times multiple, there's perhaps a little bit of sand in there. You saw us do about 4 times, which was kind of what we were able to execute on. I don't know that we'll hit exactly 4 times. I think if we say 5 to 7, perhaps kind of the lower end of that is something I think we could kind of target and be able to get there. Part of it will be dependent on when you're investing what our commodity prices doing throughout that time period that can move up, can move down, that can kind of move that overall multiple. But either way, we're becoming less commodity price sensitive. With the fee based and fee margins we have in there, we see really strong returns for us on these projects, investing in our core business, GMP and then following the NGL molecule to the water.

Sunil Sibal, Analyst

And just one clarification on that. So the new contracts that you're signing are basically helping you push more towards fixed fee or are they just keeping the fixed fee versus the commodity sensitivity constant where it is?

Matt Meloy, Chief Executive Officer

We're always entering into new contracts. We're amending, we're extending, entering into new contracts on the G&P side and on the downstream side. So it's a constantly moving and changing dynamic. But as we're talking with our producer customers, we have been successful and we're going to continue to push for more fee based components in our gathering and processing contracts where we had just direct straight POP exposure, we are now putting floors in place. Some of them as they come up, we're moving to fee based, there's hybrids, it's a mix. And so as those come up, as we extend, as we modify those contracts, we'll be adding more fee based components. So I just expect that to continue to move more and more fee based as we move forward.

Operator, Operator

Thank you. And I'm now showing no further questions at this time. I would now like to turn the conference back to Sanjay Lad, Vice President of Finance and Investor Relations, for closing remarks.

Sanjay Lad, Vice President of Finance and Investor Relations

Thanks, everyone that was on the call this morning, and we appreciate your interest in Targa Resources. The IR team will be available for any follow-up questions you may have. Thanks, and have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.