Day, ladies and gentlemen, and welcome to the Targa Resources First Quarter 2016 Earnings Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.
Chris McEwen, Vice President and Treasurer. Sir, you may begin.
Thank you, Crystal. I'd like to welcome everyone to our Q1 2016 investor call for Targa Resources Corp. Before we get started, I would like to mention that Targa Resources Corp, Targa, TRC or the company, has published its earnings release, which is available on our Web site, www.targetresources.com. We will also be posting an updated investor presentation to the Web site later today. I would also like to remind you that on February 17, Targa Resources Corp.
Closed its acquisition of all the outstanding public common units of Targa Resources Partners LP, TRP that it did not already own. So on this call, we will be discussing results as one entity, Targa Resources Corp. Please note that we will occasionally refer to the term TPL to refer to Targa Pipeline, the rename of former Atlas assets because our reported financials show comparisons back to Q1 of 2015 when we only owned TPL for 1 month. Any statements made during this call that might include the company's expectations or predictions should be considered forward looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 1934. Please note that actual results could differ materially from those projected in any forward looking statements.
For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the company's annual report on Form 10 ks for the year ended December 31, 2015, and quarterly reports on Form 10 Q. Joe Bob Perkins, Chief Executive Officer and Matt Molloy, Chief Financial Officer, will be our speakers today. Other members of the management team are available to assist in the Q and A session. With that, I'll turn the call over to Joe Bob Perkins.
Thanks, Chris. Good morning, and thanks to everyone for participating. It does not seem that long ago that we were reporting 4th quarter results, but a lot has changed in the short 2 months since the last call for Targa and for the entire energy industry. For Targa, we hosted our 4th quarter call shortly after closing the buy in of the MLP and also shortly after announcing a $500,000,000 preferred private placement. Since then, we announced that we upsized the private placement and had raised an attractive $1,000,000,000 of capital in total that we used to reduce indebtedness.
We also just completed a Q1 that we are proud of with continued strong commercial and operational performance and focus on savings that resulted in adjusted EBITDA of $265,000,000 and a 1.2x dividend coverage. More broadly, let's discuss the commodity, equity and debt market volatility that we have seen through the 1st 4 months of this year. Since early first quarter lows and based on yesterday's close, crude prices have rallied more than 75%. NGL prices have increased more than 55% and natural gas prices have increased about 10%. However, the uncertainties for our industry remain high.
Significant price uncertainty remains. And since our last earnings call just a couple of months ago, the domestic land rig count has continued to decrease from 489 to 405. And as audience on this call today undoubtedly knows, E and P companies are still figuring out what they will do for the rest of the year. We are trying to stay close to our E and P customers, but they do not really have much new information to share with us since this time 2 months ago when we told you they were still reeling from 3 instances where crude oil had dipped below $30 a barrel. Just as the commodity prices improved, so have the capital markets improved over the last 2 months since our last call.
Again, based on yesterday's close, the Alerian MLP Index went from 244 to almost 300, reflecting an improving outlook for the broad MLP sector and for the midstream industry, even though Targa is no longer an index. And Targa's common stock price went from $22.13 to yesterday's close of $38.71 At the same time, our senior notes went from trading in the 70s to trading at about par. Of course, these improved levels are a good thing from our perspective. And from our perspective, it's been a welcome change to see the commodity and capital markets recently rally versus the Q1 lows. But as I said, there continues to be uncertainty for our entire industry.
All of the significant next steps that we have taken since the commodity prices started to fall in November 2014 position Targa to be successful in almost any environment. Those steps, of course, include our reduced CapEx spending, our significant OpEx and G and A savings, commercial initiatives to improve our margins, the MLP buy in and its benefits and $1,000,000,000 of preferred equity issuance. In the face of continued uncertainties, we have positioned Targa to succeed in almost any environment, and we will continue to work to improve that position. Turning now to our Q1 results. We reported 1st quarter adjusted EBITDA of $265,000,000 modestly higher than last year's reported adjusted EBITDA, which included only 1 month of TPL volume and margins.
Year over year headwinds resulted from reduced commodity prices and challenging market conditions. Our Logistics and Marketing segment produced quarterly reported operating margin of $157,000,000 versus $191,000,000 for the previous year, lower as a result of the partial recognition last year, the renegotiated commercial arrangement related to our crude and condensate splitter project with Noble, lower fractionation margin and lower export margin. We reported approximately 5,500,000 barrels per month of LPGs for the Q1 of this year, which positions us well to meet or exceed our previous stated expectation of at least 5,000,000 barrels per month for 20 16. LPG exports have been a particularly topic over the last month or so. As more bullish domestic NGL price sentiment has begun to emerge and the potential impact on domestic propane supply and exports has been hotly discussed.
Obviously key drivers for export demand, a number of other important variables must also be considered, including global LPG demand, global LPG prices, particularly in the Middle East where LPG supply is declining, global shipping rates, local global shipping rates locational advantages of U. S. Gulf Coast supply, especially for the Americas markets and infrastructure growth throughout
the world.
Commercially, the pace of dialogue around long term contracts is picking up again, perhaps largely as a result of market perception that shipping rates are bottoming out. As evidenced by the large majority of ships leaving from Targa's facility and staying in the Western Hemisphere, Targa has advantages in exporting LPGs to Latin America, South America and the Caribbean, and those markets tend to be priced on U. S. LPG prices. Our facility has proven customer flexibility due to our multiple docks, which service a variety of vessel sizes and will simultaneously load propane and butane products.
These attributes are valued by existing and potential new customers. Another recent topic of interest is ethylene exports. Targa does not currently export ethylene, and we only provide ethylene loading or unloading services for 1 customer. We have an arrangement with CPChem whereby we operate assets owned by CPChem at our Galena Park facility and CPChem exports ethylene from 1 of our Targa receives a fee in exchange for operating the assets and providing access. While perhaps well positioned, we do not currently have any plans for expansion of our ethylene services.
Moving to field GMP. For field GMP, which is now subdivided as Permian, Central and Badlands, we expect average 2016 natural gas volumes to be about flat versus average 2015 natural gas volumes. For natural gas, we continue to expect Permian natural gas volumes to be up year over year offset by declines in the Central, with Badlands also about flat. We also expect that Badlands crude volumes will be about flat for 2016 versus 2015. Distributable cash flow for the quarter was $180,000,000 and quarterly dividend coverage was approximately 1.2 times.
Based on our Q1 declared dividend of $0.91 per common share or $3.64 on an annual basis. This was the 2nd consecutive quarter where we maintained Targa's quarterly dividend at $0.91 per common share. And our rationale for our recommendation to the Board this quarter was very similar to the last quarter. From our perspective, we have taken some very important steps to strengthen Targa, and those steps mean that we have the luxury to be able to continue to monitor commodity and financial markets, the actions of our customers and the actions of our competitors. Just as it didn't make sense last quarter, growing our quarterly dividend this quarter in the face of continued uncertainty also didn't make sense to management or to our Board.
Similarly, making a rash decision to meaningfully change our quarterly dividend didn't feel appropriate to us or the Board. Consistent with how we always approach quarterly dividend declarations, our ongoing analysis involves multiple commodity price and volume scenarios within a multiyear framework. We decided to stay flat. We have recently seen a number of midstream companies take steps to resize their payouts, and that trend may continue. For Targa, we will continue to assess the environment and opportunities in front of us and we'll continue to examine our place in the world as a midstream C Corp.
Remember that Targa is a mid stream C Corp that does not currently pay taxes and is not expected to pay taxes for the near and medium term. We have time to be patient and thoughtful with our first priority obviously being the health of our balance sheet. That wraps up my initial comments, and I'll hand it over to Matt.
Thanks, Joe Bob. I'd like to add my welcome and thank you for joining our call today. Before we turn to discussing our Q1 results in more detail, I would like to describe some changes that we made to our reporting, which you may have noticed in our press release this morning. We now report our results in 2 segments, gathering and processing and logistics and marketing. As Targa has increased its scale, geographic presence and diversification of operations, we have reevaluated our financial reporting segmentation and believe that this 2 segment convention is more appropriate.
Gathering and processing now includes both our field GMP business units and our coastal GMP business units. Our Logistics and Marketing segment, which we also refer to as downstream, includes both the former logistics asset and Marketing and Distribution segments. We will continue to provide some operational information at the business unit level or grouped business unit level. Within the Gathering and Processing segment, we are continuing to report the same individual system operating results, but you'll notice that we added some logical groupings. SOU, Westech, Sand Hills and Persado are collectively described Permian.
And collectively, I believe they represent the best positioned Permian gathering and processing business in the industry. We have completed initial interconnections of SAOU, WestTX and Sand Hills, improving our capabilities to operate efficiently and provide our producer customers with flexibility. Our operations personnel have also realigned responsibilities across these three business units to improve efficiencies and service for our customers. South Texas, North Texas, South Oak and West Oak are collectively described as central and Badlands and Coastal remain as standalone reporting systems and the aggregate of Permian, Central and Badlands will continue to be characterized as field gathering and processing. For downstream, we collapsed logistics assets and marketing and distribution into one reporting segment, which we believe should be helpful.
For example, in the previous state, we had export margin split across the 2 reporting segments. Now turning to quarterly results. As mentioned, reported adjusted EBITDA for the quarter was $265,000,000 compared to $258,000,000 for the same period last year. The modest increase was driven by the addition of TPL volumes and margin, offset by lower commodity prices, lower fractionation and export margin and by the partial recognition last year of our renegotiated commercial arrangements related to our crude and condensate splitter project with Noble. Overall reported operating margin was approximately flat for the Q1 compared to the Q1 last year.
Reported net maintenance capital expenditures were $13,000,000 in the Q1 of 2016 compared to $19,000,000 in the Q1 of 2015. Turning to the segment level, I'll summarize the Q1's performance on a year over year basis, starting with the Downstream segment. 1st quarter operating margin decreased 18% compared to the Q1 of 2015 as a result of the partial recognition in 2015 of the renegotiated commercial arrangements related to our splitter project with Noble, lower fractionation margin and lower export margin. As Joe Bob mentioned, we loaded an average of 5,500,000 barrels per month of LPG exports for the quarter compared to 5 point 8,000,000 barrels per month during the Q1 of 2015. Fractionation volumes decreased by 13 percent in the Q1 of 2016 versus the same time period last year as a result of lower supply volumes in Mont Belvieu and some contract roll offs in 2015, none of which has occurred thus far in the Q1 of 2016.
Related to future contract rollovers, we want to reiterate what we said last quarter, which is that over the next 3 years, less than 5% of Targa's fractionation contracts expire and less than 10% expire over the next 5 years. Logistics and Marketing segment reported operating expenses decreased by 3% in the Q1 of 2016 versus the same time period last year as a result of both continued cost saving efforts and lower fuel and power costs. Now turning to the Gathering and Processing segment. Reported operating margin increased by 33% compared to last year, primarily because last year's results include only 1 month of volumes and margin from TPL operations versus a full quarter contribution this year, plus a full quarter of operations of our Little Missouri III natural gas processing plant in the Badlands, which came online in the Q1 of 2015. 1st quarter reported 2016 natural gas inlet volumes for field gathering and processing were a little over 2,500,000,000 cubic feet per day.
For the Gathering and Processing segment, condensate prices were 37% lower, natural gas prices were 34% lower and NGL prices were 29% lower compared to the Q1 of 2015. Crude oil gathered increased to 105,000 barrels per day in the Q1, a 4% increase versus the same time period last year. Quarter over quarter, Badlands crude oil volumes were down about 3%, largely a result of producers shutting in existing production to frac new wells or for workovers. And as Joe Bob mentioned, we expect volumes to be flat versus for 2016 versus average 2015. Related to operating expenses, we continue to focus on cost reductions across all of our assets.
Excluding the additional operating expenses from the TPL acquisition and system expansion, most areas were significantly lower than last year due to a focused cost reduction effort. In the Q4 of 2015, we benefited from some one time reported reductions to OpEx, but through our continued cost reduction efforts, we were able to replicate a similar OpEx number for the Q1. Let's now move to capital structure and liquidity. On March 16, we announced that we closed on the sale of approximately 1,000,000,000 dollars of 9.5 Percent Series A preferred stock, issuing 965,100 newly authorized shares of Series A preferred stock and also issuing 13,550,000 warrants with a strike price of $18.88 per common share and $6,500,000 warrants with a strike price of $25.11 per common share. The proceeds were used to reduce overall indebtedness at Targa and importantly positions us in a time of opportunity to be able to execute on impactful projects.
As of March 31, we had no borrowings under TRP's $1,600,000,000 senior secured revolving credit facility due October 2017. With outstanding letters of credit of $12,000,000 availability at quarter end was approximately $1,600,000,000 At quarter end, we had borrowings of $150,000,000 under our accounts receivable securitization facility. On a debt compliance basis, TRP's leverage ratio at the end of the Q1 was approximately 3.5 times versus a compliance covenant of 5.5 times. As of March 31, TRC had $275,000,000 in borrowings outstanding under its $670,000,000 senior secured credit facility that matures in February 2020 and the balance on TRC's term loan facility that matures in February 2022 was $160,000,000 We mentioned this on our last earnings call and have provided detail on our leverage picture in our investor presentations, but I also want to reiterate that there is no maintenance covenant related to consolidated leverage in our credit facilities. Our fee based operating margin for the Q1 of 2016 was 77% and we continue to expect operating margin to be more than 70% fee based during 2016.
Turning to hedges for non fee based operating margin relative to the partnership's current estimate of equity volumes from field gathering and processing. We estimate we have hedged approximately 50% of remaining 2016 natural gas, 50% remaining 2016 condensate and approximately 20% of remaining 2016 NGL volumes. For 2017, we estimate we have hedged approximately 35% of natural gas, 35% of condensate and approximately 10% of NGL volumes. Moving on to capital spending, we estimate $525,000,000 or less for net growth capital expenditures in 2016 and $110,000,000 dollars of net maintenance capital expenditures for the year. As it relates to taxes, our expectation is that Targa will not be paying cash taxes for at least 5 years as we benefit from depreciation associated with the step up in basis from the Atlas mergers and the buy in of TRP.
And it is our expectation that Targa dividends for 2016 will likely be classified as a return of capital, possibly as much as 100 percent return of capital. That concludes my review, and I will now turn the call back over to Joe Bob.
Thank you, Matt. I will now provide some additional color related to growth capital projects, and then we'll wrap it up so that we can have some Q and A. First, our primary 2016 growth capital projects, the ones listed in our recent investor presentations, are proceeding well. Downstream, Train 5 is in start up mode at this time, consistent with our original time line, and we expect Train 5 to be fully operational by the end of the second quarter. As mentioned previously, Train 5 was underwritten by our own needs for additional fractionation capacity based on projected equity volume growth from our field GMP operations.
And we expect that Train 5 will fill up more slowly than initially expected. We recently executed an EPC contract for our crude and condensate splitter project at our Channelview terminal and now expect total growth CapEx for the project to be approximately $140,000,000 The splitter will likely be operational in the Q1 of 2018. In our Gathering and Processing segment, our 200,000,000 cubic feet a day Buffalo plant in West Texas is also in the final stages of startup, providing much needed processing capacity and increasing system reliability and operational flexibility. We expect it to be fully operational within the next couple of weeks. As part of our joint venture with Sanchez Energy in South Texas, we also completed the Carnero pipeline in March, which facilitated the Q1 volume growth that we saw in South Texas.
As volumes from Sanchez Energy flowed from the Carnero pipeline to Targa's existing Silver Oak facilities. Volumes in South Texas increased by about 25% in the Q1 versus the 4th quarter to more than 175,000,000 cubic feet per day as we received additional volumes from Sanchez earlier than we originally expected. We expect that volumes will continue to increase over 20 16. Construction on the joint venture's new 200,000,000 cubic feet per day Raptor plant in La Salle County is underway, and we expect it will be operational during the Q1 of 2017. When we announced our joint venture with Sanchez in October 2015, we announced that Sanchez was underwriting the joint venture projects with a minimum volume commitment of 125,000,000 cubic feet per day that begins in the Q1 of 2017 and lasts for 5 years.
This is the only material non investment grade minimum volume commitment across our gathering and processing footprint. Using that as a segue to another important topic on investors' minds, we continue to closely monitor our customer credit exposures on a customer by customer and contract by contract basis. Of course, we are operating on high alert related to customer credit exposure and continue to believe that we are well positioned to manage through the risks associated with potential counterparty default or bankruptcy. We will continue to stress our forecasts, stress our analysis with full consideration to credit risk and the lower commodity price environments just as we constantly try to assess the volume implications of those same price scenarios. Over the 1st 4 months of this year, there have been some announced bankruptcies, rating agency downgrades and other material E and P announcement.
But for Targa,
none of the announced situations has had or is expected to have a significant impact on us. Moving on to some closing remarks. I continue to be incredibly proud of our employees and our accomplishments through challenging times. Our finance team, with help from many other parts of the company, raised $1,000,000,000 of capital through a preferred plus warrant structure that they designed with the fundamental view that Targa was undervalued and that there were investors that would partner with Targa sharing that same fundamental view, which would allow us to raise attractive capital. It did, and we welcome those investors.
Our engineering and operations team have continued to identify and share best practices to reduce cost and manage dollars spent without sacrificing safety or the integrity of our assets. Our commercial teams have also continued to identify and share best practices related to contract renegotiations and additional opportunities across and between the businesses. And as expected, despite uncertainties, we are continuing to work on attractive potential projects across all of our business areas, leveraging our strengths and our positioning and demanding attractive returns. Every employee at Targa has had a hand in responding to the challenges of this energy cycle and trying to rise to the occasion in their own way, in their own role to position Targa for success. The collaboration that I've seen throughout the company has resulted in better bottom line results than expected and has better positioned Targa for the future.
In the face of uncertainty, those employees have demonstrated a focus and resiliency at all levels of the company, and it makes me proud. And I would like to take the opportunity to thank each and every one of our employees for their continued efforts. So with that, we'll open it up to questions. I'll turn it back to you, operator.
Thank And our first question comes from Brandon Blossman from Tudor, Pickering, Holt and Company. Your line is now open.
Good morning, Brandon.
Good morning, everyone. Good morning, Joe Bob. I'll kick it off with an LPG question. Probably it'd pop up everybody's mind as you pointed out. In a world that may have increasing demand globally and decreasing supply probably globally and in the U.
S, how do your terminals fare? And what does that look like kind of on the ground in terms of contracting, both contract roles and re contracting at those historic rates?
Yes. Thanks for the question, Brandon. Adding some color to our carefully prepared remarks, we feel good about our position. You're asking about our position in that global market. The supply demand variables that I talked about, Targa is well positioned for Gulf Coast propane and butane supply.
And we think that Targa and a very few others well positioned in that market are well positioned for the global economy. You'll see in our investor presentation that over the last 12 months, threefour of our LPGs are going to Latin America, South America and the Caribbean. That's driven by factors different than some of the variables that people spend a lot of time looking at. We feel good about that for the near term and the longer term. We feel good about our position of Mont Belvieu related LPGs and our natural share of that.
Okay. Fair enough. Any thoughts about where current spot rates are for LPG terminals?
It's a dynamic market. We said publicly in the last call that spot rates were certainly lower than the spot rates enjoyed a couple of years ago. I think other people on recent calls have made the same comment, but they are not unattractive. And the products, services, flexibility that we're providing our customers have continued interest for spot but also continued interest for term contracting.
Okay. All right. Switching topics. Matt, it looks like you timed the debt buybacks very nicely here. What's the expectation on a go forward basis?
Was this opportunistic? Or is there something structural going on here?
With the $1,000,000,000 proceeds we received, it just made sense for us to go out and repurchase our notes. It's more attractive than just paying down revolver, and we ran out of revolver capacity. So it made sense for us to do that. We also had the $1,100,000,000 maturity out there in January 2018. So we wanted to just begin repaying that to reduce that size some.
And so we've started doing that really late last year through the Q1 and we've actually continued doing some of that in April this year too. And we've repaid and you'll see it in the press release another repurchased another $96,000,000 post quarter end of those notes. And the balance on that $1,100,000,000 is now about 840,000,000 dollars So we feel good about where we are.
Okay. And we'll just see what happens going forward?
Yes, that's right.
All right. Thank you, guys.
Thanks, Brent. Thank you.
Thank you. Our next question comes from Darren Horowitz from Raymond James. Your line is now open.
Good morning. Job, my first question, within the comments you made around the field G and P volumes, and I recognize, as you said, that customers don't have any much more to tell you relative to what they told you a few months ago. But if we look across the forward curve and just for a second think that commodity prices materialize consistent with what that outlines. If you think about the different drivers within field G and P, where do you think there could be a bit more volume upside? Is it specifically within West Texas around the Permian, either around Versado or across the Midland system?
Or do you think maybe the magnitude of Central and Badlands volume declines isn't as steep?
It is a good question, Brent, and obviously feel better about the forward curve today than we did 2 months ago. It is a and it really was just 2 months ago we had our last earnings call. That always surprises me in the 1st part of the year. Customers are looking at those forward curves too. They know their economics very well.
It wouldn't surprise me if some of this is being locked in by for customers for future drilling. That happened about maybe 2 months later this time last year. And I shouldn't be speaking for those producers, but we try to stay in very close contact with them. You asked about where there may be more upside based on today's forward curve. And I would add or based on some positive movement of the forward curve in the near future, Yes, Permian Basin has some very sweet spots in it, and we are across some of those sweet spots.
Probably would see the most activity increase around the West Texas system as well as further west around Versado, that core Delaware. It is a sweet spot. Secondly, you pointed to the Badlands, makes a significant difference if you can get that forward curve a little bit better and how they'll feel about their activity. And then I guess I would go to the SCOOP. Across that spectrum, there are several places where there's some drilled and uncompleted wells, which we may benefit from.
And additionally, what I like is how producers right now are high grading their drilling dollars, drilling close to their own assets, which means close to Iris. The upside can come without a whole lot of capital expenditures if it follows the pattern we would expect it to.
Okay. And then I appreciate the color. My final question, if you could just I'd love your thoughts with regard to ethane recoveries, this theory that there's going to be composite in shale barrel price improvements, specifically the ethane market tightening opportunities for you guys from a recovery perspective, certainly on, if you will, the non fee based business or what could be the potential for uplift in the back half of this year in terms of POL and POP contract exposure?
I think it's a question of when, not if, you get ethane price recovery. I've been pretty bad on the wins in my career. All of the factors that are well discussed, we agree with, we try to model as well. You described towards the end of the year, I don't know the timing. It could be then.
It certainly has to occur sometime after then. It's just the dynamics of supply and demand and the help that we'll get from exports.
Thank you.
You're welcome. Thanks, Darren.
Thank you. Our next question comes from TJ Schultz from RBC Capital Markets. Your line is now open.
Good morning, TJ.
Good morning. Thanks. I guess just first is the move in the commodity and your improved cost of capital and balance sheet obviously, is any of the accelerated discussions on projects in your longer term backlog, both as we think about what could potentially be flexed higher in the 2016 bucket above that $525,000,000 and then as you think about moving to approval for projects a bit further down the road?
I hear you, T. J. It has been a pretty good movement in the last 2 months on commodity prices and our equity price and improved cost of capital, but we're taking a longer term view on our cost of capital, took that longer term view and we issued the preferred. Our project development continues and not just projects that we've talked about in the past. I did say and I said it intentionally because I'm proud of the efforts across our business areas, call them small projects and larger projects.
None announced or they'd be out there on that announced project page. Our businesses are working that pipeline. They're working it based on leveraging our asset position, leveraging the strong position we have relative to our financial ability to execute but also demanding attractive returns. It's just necessary because of the uncertainties. We want to make sure that we're getting large bang for our buck and that it has attractive spread over a longer term view of cost of capital that includes the fact that we put $1,000,000,000 on our balance sheet of that preferred.
The good news is those projects and opportunities exist. It's kind of a timing issue, customer uncertainties, etcetera, but we're working on the pipeline.
Okay, thanks. And then I guess in that vein, you touched on ethylene exports, no plans now. You self admittedly are well positioned. Is that something you may consider down
the road as a potential project?
Certainly. Actually, the reason for putting the comment out there is we've gotten the question so many times. And I wanted to sort of clarify the facts. We don't have it in investor presentations and certainly don't write much about it because it's not a big material portion of our business, but it is an important part of our relationship with CPC. That relationship is a one company relationship right now.
They have some assets and we have some assets that support that ethylene business. And we did want to clarify that we don't have a project currently planned. Your question is would we ever consider it? We consider everything.
Okay. Makes sense. Just lastly, to follow-up on some of the volume discussion, if you could expand a little bit on South Texas, what you're seeing there as you bring those Sanchez volumes into the system, sounds like they came a little sooner and then the pipeline in March. Just your expectations as we look at the run rate in the Q1 kind of what we should expect through 2016?
Sure. Well, first of all, coming a little sooner is sort of a specific shout out to the congratulations on giving all our employees for execution. We got it done sooner than we thought we were going to. And congratulations to that team, but there are many efforts like that going on. And getting it done sooner brought the volumes to us sooner.
Sanchez continues to be very, very good at drilling and completing those wells, and we expect additional volumes. I do understand that the Eagle Ford has rolled over for others, that it's not really a growth picture for others. But as we announced when we announced the project, that does kind of make the tide for Targa better in South Texas. It doesn't fix all of South Texas, but stand alone, it's very attractive. Stand alone, it makes the system better with a plant on the West and a plant on the East.
And we're already flowing all the way from the West to the East now with Sanchez volumes. That's all a good thing for the long term.
Okay. Thank
you. Thank you. Appreciate it, TJ.
Thank you. Our next question comes from Faisal Khan from Citigroup. Your line is now open.
Hey Faisal.
Hey thanks. Good morning. Hey good morning.
All right. Just want to ask a couple of questions. First off, with all the uncertainty that you talk about in the market, how are you looking at your dividend coverage ratio? I mean, is there a long term goal that you sort of envision in this sort of volatile commodity market that works for you guys?
Faisal, I don't have an announced long term goal for the dividend coverage ratio right now. Probably the best way to think about Targa is how we've behaved in the past and that we're working very hard to think about the future. I like our track record. I like the current coverage ratio, and we're going to try to be thoughtful and continue to analyze what other companies are doing, what the investment community is saying and reflecting and what's going on with our customers.
Okay, understood. And then in your prepared remarks, you discussed that there are long term contracts for LPG export capacity being discussed again. Could you go a little bit more in-depth on what you mean by that? Is this are customers coming back to the table to discuss sort of long term capacity? Or is this just sort of a one off?
I believe either in the script or in the Q and A on the last earnings call, I just reflected the color that while counterparties were interested and had needs for long term LPGs 2 months ago, it appeared that they were waiting to figure out what was going to happen with shipping rates. Shipping rates have been on a pretty significant trend. Depending on what shipping rates you're looking at, that trend may have bottomed out. And I don't want to pretend to be the expert on that, but it may have bottomed out. And with that, hey, if we're not at the bottom, we're close to the bottom or we've bottomed out sentiment coming from our contacts in the industry from existing and potential new customers, we've seen an increased interest to go ahead and do term deals again.
They didn't want to do that when they weren't prepared to do the term shipping deals. Don't mean to overstate that, but it is different today than it was 2 months ago in dialogue and interest and pace.
Okay. Makes sense. And then the other one of the other prepared comments that you said is that you evaluate your place in the world as a C Corp. I mean, could you go into a little more depth on what do you mean by that? I mean, clearly, you've collapsed the structure.
You're more simplified now. So is there something else that you're contemplating with regards to structure?
I think that kind of also came out of we're not in the Elerian Index anymore. I pointed to the Elerian Index even though we're not in it. We are a C Corp. We have tools to take care of our balance sheet and we want to take care of our balance sheet. However, we're a C corp that doesn't pay taxes, which makes a real difference for our investors.
And you heard Matt's comments about what that return of capital treatment would look like for 2017. All of that factors into what we're trying to deliver to our investors and how we're trying to deliver it. That's the color around my statement.
Okay, understood. I'm just trying to understand if you are you happy being a C Corp or do you want to be something else? That's all I
Oh, yes, we're going to switch again. I'm very, very happy with the moves we made and how that positions us for the current environment and the range of environments that could occur over the next several years. I may have misspoke on a year a little while ago, and I apologize, 16%
versus 17%.
I did. I said 17 for the return of capital. Matt only described it for 2016. But now I've been distracted. Did I answer your question?
You did. Yes. Thank you. I think I'm all set.
Thank you. And our next question comes from Jeff Bergman from Wunderlich. Your line is now
open. Good morning, everyone.
Hey, good morning.
Just a couple of questions from me. So one, just kind of bigger picture, as you said you would, it sounds like you've added some more hedges since the Q4 call. Just sort of big picture philosophically, I guess, within sort of the roller coaster we've been on the last couple of years. I was wondering if you are thinking about hedging policy sort of any differently going forward than perhaps you have in the past?
No. Our targets are give or take 75 ish percent or so year 1, 50% year 2 and then 25 ish percent year 3 and then there's ranges around those. We did add some hedges here ranges around those. We did add some hedges here recently. We're still well under those targets.
So as we're adding some hedges, we're not yet going out and adding to try and catch up to get to those target levels or exceed them. Adding those hedges is really more kind of keeping up with those targets, so we don't fall further behind. So that's really relates to the hedges that we put in place over really 4th Q1. In U. S.
For policy, I don't mind describing thinking because it's not a policy. Those are targets and goals we've had for a long time. The hedge committee of our Board and management are on the same page in that we do believe there's more upside than downside for most of the commodities that we hedge and do not see us trying to catch up while that's still the case. Keeping up is prudent. And that's our current thinking.
That thinking could change. But it's we don't think about it differently than we thought about it just to stay disciplined, watch it, track it, discuss it at least once a quarter.
And to add on to that, Joe, about 2, the hedges we've added have been primarily on the condensate and on the natural gas side of things. But NGL, as you can see, we're still well under our targets.
And that was part of the discussion, I
think. Right. Yes. No, all makes sense. Just one I'll come more from me quick.
The potential exercise of the warrants, just wanted to ask how you are approaching that? Obviously, the stock price has had a very nice run here. I was just sort of wondering, is that something that you see likely when the owners have sort of the right to do that? And are you thinking about your capital deployment leverage things like that?
Yes. All
with that timing in mind?
Sure. So it is our option to settle those warrants either in cash or net settle them in shares. So it is our option. They cannot be exercised for 6 months. So there's still some time before those could even be exercised.
And those are good question on when they'll be exercised. Those are 7 year warrants. So it'll just it'll be up to those individual holders whether they decide they want to go ahead and exercise or if they want to keep the time value. Good question, but we can always net settle in shares. So if we didn't want to pay cash, we didn't want to add leverage to the balance sheet, we could just net settle it.
Okay, perfect. Thanks, Matt. And then just sort of real last one for me. With liquidity pretty strong here, I was just kind of curious, Joe, Bob, you touched on sort of how you're thinking about pursuing new projects and things like that. Thought I'd ask just a question on M and A that doesn't get asked quite as much anymore.
But are you still out there interested in additional assets? And are you seeing any changes in the bid asks right here with this improvement in liquids prices or perhaps sellers digging in a bit more?
It's only been a couple of months since we commented. I don't think it's changed a lot today versus a couple of months ago on the M and A front. We will still look just as we're being very disciplined around the organic projects, one business area at a time, making sure we get attractive returns. And the way we do that is leveraging our assets, leveraging our position. An acquisition that would really get on our radar scope would need to look the same way, leveraging our assets, leveraging our position.
We're not going to be we're spending almost no time looking at the opportunity to increase footprint. It's just not that time for us right now.
Yes. Okay. Thanks a lot guys. Congrats on the quarter.
Okay. Thanks.
Thank you. Our next question comes from Jaron Holder from Goldman Sachs. Your line is now open.
Hi, good morning. Good morning. Just want to start off, how sensitive is Latin American or Caribbean demand for U. S. LPG exports in your view to higher U.
S. Prices?
It's been a short history, but it hasn't been very sensitive based on U. S. Pricing today. It's a demand that needs to be met. It's being met from obviously a very close source of supply.
And not that we are transacting with the customers in those markets, but it's our sense from our customers that that's based on U. S. LPG pricing. That removes some of that sensitivity. That's probably the best color I have to it.
And we certainly will see over the next year or 2 what that's going to be because we've had prices move all over the
place.
Over the
Pertex, we were still shipping. Our percentage share increased over the last 12 months in the price environment that you saw. So we feel good about it. We feel good about our position and our mix of existing customers and the opportunity with potential new customers.
Thanks. And how do you think about re contracting risks just given that there is increasing competition from other U. S. Gulf Coast LPG facilities?
The competition we feel the most are the ones who've been there for a while. And that competition should sort of become a natural market share around the butane and propanes that flow through the systems. A facility further away trying to get propanes or butanes from Mont Belvieu, the Mont Belvieu hub is not particularly advantaged for doing that. And so I probably don't worry about that competition as much.
And we
try to be very competitive and pretty discreet on how we're working with our customers and potential customers here in this market.
Great. Thank you.
Okay. Thanks.
Thank you. Our next question comes from Chris Sighinolfi from Jefferies. Your line is now open.
Good morning, Chris. Hey, Joe.
How are you guys doing?
Good. Good morning.
Thanks for taking my questions. Just wanted to, I guess, first circle up on the fracs, if I could. It seems like sizable decline in volume, both on a quarter over quarter and year on year basis. Matt realized what you said in regard to the contract positions on those. So I was just wondering if that decline in volume was was it tethered to an isolated area?
Was it due to something specific? Or was it just a function of reduced fuel volumes flowing that way?
Yes. It's a combination of all those things. It's a reduced volume that's flowing in from our volumes and others. But there were some contract roll offs late in 2015, which when you look at kind of a even sequential quarter to quarter, you'll see some difference from Q4 to Q1 that happened in the Q4. Okay.
And your earlier point was from here, there's very limited contract change over the next 3 years. Got it.
Okay.
Yes, that's right.
Okay. And then with regard to Train 5, really appreciate the color in the prepared remarks regarding the timeline for in service. I think you had mentioned or Joe Bob mentioned that you're expecting now a slightly slower ramp on that facility than original expectations. And so just could you remind us how much of that facility is contracted?
It's largely for our own needs. We haven't described how much it would be for 3rd parties. And to some extent, recognize that it's not one train at a time even though we can contract it that way. We had volumes in Louisiana that needed to be fracked at Mont Belvieu, not in Louisiana, that are will be back in Train 5, for example.
I think that's
all of the specifics we've provided on it. But we've got some space in Train 5. Anyone is interested in contracting for it at the right rate, the right term.
Okay. And then I guess a final question for me. Joe Bob, you had addressed the ethylene volumes through Galena with CPChem and I know you spoke to TJ about it in the Q and A. And I get that you're not actively pursuing any expansion in that line of business right now. And maybe this is just a question born from my own ignorance, but what would have to happen to get you to move forward with something?
And I guess where I'm going is that there is a view out there that there may we've long thought of Galena as an LPG facility because that's what you've been doing there. But to the extent that perhaps there become some underutilized capacity that you might be able to repurpose to an alternate use, How do I think about that decision tree?
Well, I would say that, first of all, look at our history over multiple years with that facility. When we acquired it, we thought of Galena Park as an import facility doing a little bit of exports of ethylene. We're economic animals and we will try to respond to the needs of the market. Ethylene is an interesting equation. Gotten a lot smarter over it recently trying to answer people's questions.
And that will be driven by the petchem customers linked in that ethylene market in this area and how long that's likely to continue. Our repurposing of facilities is really a way to describe it because we would not have to cannibalize any of our existing facilities. We've got ways of getting a little bit more out of this, that and the other piece of equipment. And if we wanted to increase ethylene, we would do so without repurposing. We could move more ethylene from that dock, for might add some refrigeration for ethylene so that it didn't get in the way of propane or butane loading before we would repurpose anything.
We'd want to make it additive.
Okay.
That's not saying
I'm doing a project. Didn't mean to imply that. But if CPC has a need, we're going to try to fill it. And if another counterparty believes that we can effectively service their ethylene needs, we may do that.
Okay. So all I was maybe misinterming. So all you were saying before is there is nothing active right now, but there's no active opposition to anything should be in market need.
Yes, please. Sometimes when I'm working on prepared remarks, I can be unclear. I was not trying to say opposition. I was just trying to get the facts out there for people.
Right, right. And the clarification is helpful because I didn't know if it was, okay, we're going to do this and that's going to make it less possible to do what has been the core function of that facility? It seems like from what you've just said, you can readily do both.
Yes. Okay. Got it.
Well, thanks a lot for
the clarity. Appreciate the time and good luck.
Okay. Thanks.
Thank you. Our next question comes from John Edwards from Credit Suisse. Your line is now open.
Hey, John.
Yes. Good morning, everybody. Just a couple housekeeping items. Maybe you said this or I missed it. Any change or what's the EBITDA guidance now?
And then what's the sensitivity now to commodity price changes?
The commodity price changes, we'll have that in our updated investor presentation, but actually don't think it's changed from our last. I think it's a $5,000,000 we have the $0.05 NGL move, I think it's about $25,000,000 of EBITDA. $20,000,000 Okay, sorry, dollars 20,000,000 but it will be in our investor presentation. We'll have it for crude, gas and NGLs. And then And we did update it.
Yes,
and we did update it. And then for EBITDA guidance, we have not provided or updated 2016 EBITDA guidance other than what was just the previous EBITDA numbers that are out there, forecast information that's out there. So we have not provided new EBITDA guidance on this call.
Okay. No new guidance on that. Okay. And then just, I was just curious, maybe it's just a timing issue, but your maintenance capital dropped quite a bit sequentially. And is that just a timing issue?
And I guess with the 110 you're guiding to, we should be thinking about significantly higher numbers. I mean, is it going to spread pretty much equally across the quarters? Or is there any seasonality embedded in that?
Yes. The maintenance CapEx, if you go back and look, it can be pretty lumpy. Q1 does seem be a bit lower than the other quarters and you look last year, it was relatively, I think, low 2. I think 110 the year is still a pretty good number. Could we come in a little bit lower?
Sure. But I think it's still probably a decent number.
Okay. Is that going to be relatively equally balanced then for the rest of the year you think?
We usually spend more in Q4, but it'll just kind of depend on activity as well.
Okay. That's it for me. Thanks.
Thanks, John.
Thank you. And our next question comes from Sunil Sabah from Seaport Global Securities. Your line is now open.
Yes, hi, good morning guys and congrats on a good solid quarter. A couple of questions for me. Going back to your prepared comments regarding repairing balance sheet remaining a top priority of management team. And clearly, you've made a lot of progress there. So I was just wondering with the $2,100,000,000 of liquidity that you have, how should we be kind of thinking about next kind of use of that liquidity?
Yes, I think I got that. I mean we want to have a lot of liquidity in this environment, in an uncertain environment. So whether or not the capital markets or the high yield markets are open and shut, they've in the last 6 months have gotten pretty much closed and now they're pretty open. So we want to operate with a lot of liquidity. We don't necessarily think of that liquidity as just usage to go out and buy things necessarily with it.
We're focused on keeping liquidity. We're also focused on our leverage ratio. So we want to keep our leverage ratio as strong as possible in this environment too. So I view having that liquidity as providing additional flexibility for CapEx and timing of when we raise additional capital, but also for refinancing and taking care of our other debt obligations.
Okay. That's helpful. And then just one housekeeping for me. It seems like your cash G and A has been understandably quite variable in the last couple of quarters. How should we be kind of thinking of that now that you've collapsed the structure and on a go forward basis?
Yes. The G and A has moved around a bit over the last couple of quarters. I mean, in the Q4 of last year, it was kind of a catch up for the remainder of the year. It was relatively low. This quarter's G and A is a better kind of indication of closer to a run rate number.
So I'd focus more on a Q1 kind of G and A number than I would look at necessarily look at a 4th quarter.
Okay, got it. That's all I had. Thanks guys.
Okay, thanks.
Thank you. Our next question comes from Bo McKenzie from Seaport Global. Your line is open.
Hi, guys. Thanks. Hey, one of your competitors reported kind of attractive levels of LPG export volumes going to Asia. I know that with your mix of Latin America, South America and Caribbean, there's a decent amount of seasonality. Are you seeing within that kind of 30% -ish kind of other part of the world enough incremental volumes given the shipping prices right now to offset some of that seasonality?
There is some
I use the term seasonality broadly. Not every month is the same based on our short history of exports. So I understand what you're saying. Our published LTM will show that it's 75% Latin America, Caribbean and South America for Targa now. We believe that there's sufficient business for that 75%.
That's why it kind of grew in share attractively. And the 25% is also attractive. I mean people are looking at this over the long term, not just over the short term. That 75% share, I'm reminded, has been a soon benefit from the Panama Canal, which the sooner and closer you get to their best estimate of when it's supposed to be complete, the less they will be wrong about it. And it will soon be open and it will make a difference or at least some of our customers believe it will make a difference.
We like our position to that market and we like the mix.
So if your nameplate capacity, I'm looking at the Q4 presentations on the website, there's 9,000,000 barrels a month, excuse me, and operating at 6.5 to 7. At what point, given that, given the rest of the world, given some of the long term contracting, do you have to evaluate potential expansion?
I know by saying this, I'm going to be asked more and more for details and numbers on it, but I'm not going to give a we have improved our ability to operate that facility since we last put numbers out. With creative and operationally experienced solutions to debottleneck. 2nd ago, we talked about the ability to continue to utilize our facilities without having to make choices about repurposing something. And we will keep doing that. If there's additional demand for our assets, we're going to figure out how to squeeze more out of our assets.
When I say we, I should take me out of the equation. It's a bunch of talented engineers and operations folks. But I'm proud of that and I know that we'll continue to get benefits from that kind of work.
So you're basically talking about squeezing instead of 75% of operating capacity on nameplate, something in the 80s or better from less turnarounds or more efficient turnarounds or whatever, getting closer
to that time? Those are examples of it.
We also said that
we could do an ethylene project without really cannibalizing what we're already doing or could see we could do in the future. We've got an ethane project that we could add to the facility without cannibalizing or reducing what we think we can do in the future on propane and butanes. So it's a very good facility and we've tried to think about the future for it. All
right. And then the fractionation volumes, I know again another competitor talked about part of that decline had been at least for them had been impacted by blending opportunities. I assume you guys are seeing the same thing. And at what point do you start to see in the commodity price spectrum that those opportunities return to the market?
Well, I think I know what you're referring to. That part of their margin was impacted by blending opportunities because you have less volume and different blending opportunities coming off the frac. So that the less blending opportunities hit us too, but it doesn't impact the front end volumes going through the frac, just
Thank you. Our next question comes from Danilo Juvane from BMO Capital. Your line is now open.
Good morning.
Good morning.
Most of my questions have been hit. I have one quick one. Joe, Bob, you've mentioned that you definitely see constructive ethane fundamentals and that you guys are modeling that internally. Can you quantify the potential impact positive impact that you see from ethane reinjection to the gas stream?
Our modeling has quantified that impact under multiple scenarios, and I'm not going to provide a public number of inputs. I just don't know what the right inputs are at this point.
Okay. Okay. That's it for me. Thanks.
Thank you. Thanks.
Thank you. And our final question comes from Helen Ryu from Barclays. Your line is now open.
Thank you. Good morning. Hey, Helen. Just follow-up on the ethane recovery in a scenario where we have to recover all the ethane given the cracker demand, trying to think about the upside to Targa, obviously, the NGL, the POP margin is going to do better. But on your frac plants, the surplus capacity that exists today, is that all economic upside if you were to fill all that capacity?
Or are you currently collecting some MVC volumes on capacity that's not being used?
That is what we think of that is pretty much upside. There might be some small where the MVC makeups, but I think it would pretty much be upside to our volumes if we were to start recovering more and having more ethane going through our fractionators.
And what about on the marketing side of the NGL downstream business? If ethane if NGL price shoots up driven solely by ethane, does the marketing segment also benefit? Or is that more driven by propane and butane price?
Yes. There will be some benefit there as well. There will be some there as well.
Okay. And then just lastly, your South Oak NGL production dropped steeply. I'm just wondering if there was some sort of one time effect or it reflects some changes in the wetness of gas there?
Pat McDonough.
We go in and out
of recovery at those facilities based on economic benefit and some of our contracts or requirements downstream of the facility. So you will see variation in those volumes throughout different quarters because of the contractual structure that we have at that facility those facilities.
Okay. So it's not something sort of a permanent level we're going
to see going forward? No. Nothing's changed as far as the gas quality coming into the plant. It will the way the contracts work, it will be intermittent, it won't be consistent throughout the quarters. We'll have periods where we will have higher recovery than during other periods.
Got it. All right. Thank you very much.
Okay. Thank you, Colin.
Operator.
Thank you.
If anyone has follow-up questions, please feel free to contact Chris, Jen, Matt or any of us. We appreciate your interest this Friday.
And ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect.