Targa Resources Corp

NYSE:TRGP

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Targa Resources Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Sanjay Lad, Vice President, Finance and Investor Relations. Please go ahead, sir.

[Sanjay Lad, Vice President, Finance and Investor Relations]

Thanks, Cole. Good morning, and welcome to the second quarter 2022 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 be available for Q&A. Pat McDonie, President, Gathering and Processing; Scott Pryor, President, Logistics and Transportation; and Bobby Muraro, Chief Commercial Officer.

I will now turn the call over to Matt.

[Matt Meloy, Chief Executive Officer]

Thanks, Sanjay, and good morning. This is an exciting time for our company. And given the recent close of our Delaware Basin acquisition, I want to take this opportunity to publicly welcome our new colleagues to the Targa team. I would also like to thank all of our employees for their collective efforts as it has been a very busy first seven months of 2022, and the team has already accomplished a lot.

And our strong execution continued across the second quarter, including record-high quarterly EBITDA, record volumes in the Permian, record NGL transportation and fractionation volumes, redemption of Series A preferred stock, completing the successful sale of our interest in Gulf Coast Express Pipeline, integration of our acquired South Texas assets, successful negotiation of our Delaware Basin acquisition and subsequent financing and $74 million of common share repurchases.

Looking ahead, continuing to execute on our strategic priorities will drive increasing EBITDA, reduced common share count, a higher common dividend while maintaining leverage within our target range. Our performance this year has been strong, and we expect that to continue.

We are updating our financial guidance for the year to account for the completion of the Delaware Basin acquisition effective August 1. We now estimate full year 2022 adjusted EBITDA to be between $2.85 billion and $2.95 billion. We continue to expect volumes to grow across both our Permian Midland and Delaware positions for the remainder of the year and well beyond.

We have several gas plants under construction, Legacy I and Legacy II in the Permian Midland and Midway and Red Hill IV in the Permian Delaware. And given our line of sight to increasing G&P volume growth, we are continuing to invest across our NGL business.

We are announcing two new projects, a new 275 million cubic feet per day processing plant in the Permian Midland, which we are calling the Greenwood plant; and a new 120,000 barrel per day Train 9 fractionator in Mont Belvieu. Investing in organic growth projects across our integrated footprint provides Targa with attractive returns and puts us in a strong position to continue to return capital to our shareholders.

Turning to our Delaware Basin acquisition and our combined Permian Basin footprint. On a combined basis, we now have about 2.8 billion cubic feet per day of processing capacity in the Permian Delaware, complementing our 3.6 Bcf per day processing position in the Permian Midland for a combined total of 6.4 Bcf per day of processing capacity.

Our assets in the Delaware Basin overlay some of the most economic acreage in North America with the acquisition, increasing our size and scale by extending our reach into the highly active and productive Eddy and Lea counties of New Mexico. We now have several million acres dedicated to us across the Permian Basin, providing decades of future activity that will result in increasing volumes moving across our integrated assets.

We acquired the Delaware Basin assets at an attractive 7.5x multiple of estimated 2023 EBITDA and expect volume growth as well as near- and long-term synergies to reduce the acquisition multiple. We expect to capture downstream synergies over time as existing contracts come up for renewal and from new Targa processing expansions. We funded the acquisition with cash on hand and debt and expect to end the year with leverage around 3.5x, comfortably around the midpoint of our 3x to 4x long-term leverage target ratio.

Let's now discuss our operations in more detail. Starting in the Permian, our systems across the Midland and Delaware Basins continue to perform well, averaging a record 3.1 Bcf per day reported inlet volume during the second quarter. In Permian Midland, our systems continue to run full, and we expect to bring online our next 275 Mmcf per day Legacy I plant later this month, which is expected to come online highly utilized. A special thanks to our engineering and operations teams for working diligently and safely to bring Legacy online ahead of schedule.

Our Legacy II plant in Permian Midland remains on track to begin operations during the second quarter of 2023, and we similarly expect it to be highly utilized when it comes online. In Permian Delaware, volumes across our system are also continuing to ramp. Our new 230 million a day Red Hills VI plant is expected online in September. And our new 275 million a day Midway plant is expected to begin operations during the third quarter of 2023.

We expect Red Hills VI to essentially be full when it comes online, and we have flexibility across our Permian Delaware system to handle additional near-term production growth from Eddy and Lea counties with connections to Targa plants.

Shifting to the Badlands. Late winter storms impacted our natural gas and crude gathering volumes for the second quarter, but volumes have since rebounded. In our Central region, the acquired assets in South Texas and an uptick in activity levels in Oklahoma and North Texas drove a sequential increase in volumes during the second quarter.

Shifting to our Logistics and Transportation segment. NGL transportation volumes were a record 492,000 barrels per day to Mont Belvieu during the second quarter. Throughput volumes sequentially increased 7% driven by increasing NGL production from Targa's Permian plants and third parties. Fractionation volumes at our Mont Belvieu complex during the second quarter were a record 737,000 barrels per day, and the fractionation market in Mont Belvieu continues to tighten.

We are moving forward with Train 9 given our outlook for continued supply growth from our Permian G&P systems and third parties. Train 9 is fully permitted and is expected to begin operations during the second quarter of 2024 with an estimated cost of around $450 million.

In our LPG export services business at Galena Park, we loaded an average of 10.4 million barrels per month during the second quarter, providing a consistent outlook for our customers despite continued volatility in global commodity markets. We continue to expect to complete our previously announced low-cost expansion project to increase our propane loading capabilities with an incremental 1 million barrels per month of capacity by mid-2023.

Lastly, year-to-date, we have purchased almost 2.4 million common shares at a cost of around $154 million. Our balance sheet is strong. We are continuing to invest in our business, both organically and through acquisitions. We are returning an increasing amount of capital to our shareholders, and we are excited about Targa's outlook.

Before I turn the call over to Jen, I would like to extend a final thank you to our employees for their continued focus on safety while executing on our strategic priorities and continuing to provide best-in-class services to our customers. Jen?

[Jen Kneale, Chief Financial Officer]

Thanks, Matt. Targa's reported quarterly adjusted EBITDA for the second quarter was $666.4 million, increasing 6% sequentially as we benefited from higher commodity prices and higher volumes across our gathering and processing and logistics and transportation systems, partially offset by lower marketing margin and higher operating expenses.

Higher operating expenses were primarily attributable to increasing activity levels across our G&P systems, our recently acquired assets in South Texas and inflation.

While costs are higher, inflation continues to be a net tailwind for us across our businesses as we benefit from inflation-linked fee escalators across our commercial contracts. Targa generated adjusted free cash flow of $334 million in the second quarter. During the second quarter, we completed the redemption of all of our outstanding Series A preferred stock for approximately $973 million and also received the proceeds associated with the sale of our interest in Gulf Coast Express pipeline of $857 million.

Our consolidated net leverage ratio was 3.1x at the end of the second quarter, and we had about $2.3 billion of available liquidity. We repurchased about $74 million of common shares in the second quarter and repurchased an additional $30 million during July. We have approximately $215 million remaining under our $500 million repurchase program.

Since the inception of our common share repurchase program in the fourth quarter of 2020, we have opportunistically repurchased $285 million of common shares or about 8.6 million shares at an average price of $33.12. We continue to expect to pay a common dividend per share of $1.40 for 2022 with our next dividend increase likely to be announced in early 2023, concurrent with when we expect to provide 2023 operational and financial guidance.

Throughout the year, we have added hedges and we are significantly hedged for the balance of 2022. We have also continued to add 2023 hedges at higher weighted average hedge prices than 2022.

It has been a very active couple of months for the finance team as we were able to attractively finance our Delaware Basin acquisition through a combination of five-year and 30-year senior notes issued in the investment-grade market, a three-year term loan and availability under our revolver. Pro forma for the acquisition, we have about $1.1 billion of liquidity available on our revolver.

Benefiting from now being an investment-grade issuer, we also recently entered into a commercial paper program. As Matt mentioned, we are updating our financial estimates to account for a partial year contribution from the Delaware Basin acquisition and now estimate full year 2022 adjusted EBITDA to be between $2.85 billion and $2.95 billion and continue to estimate a year-end leverage ratio of around 3.5x.

With the addition of spending in 2022 for the Greenwood plant and Train 9 announced today, plus spending to support the newly acquired Delaware Basin assets, we now estimate 2022 net growth CapEx to be between $1 billion and $1.1 billion. Our estimate for 2022 net maintenance CapEx remains unchanged at approximately $150 million.

Our continued investment in growing Targa's underlying businesses, supported by solid business fundamentals and the strength of our balance sheet means we are in excellent position looking forward to continue to return an increasing amount of capital to our shareholders.

Lastly, I'd like to echo Matt and thank our employees for their dedication and for continuing to prioritize safety.

And with that, I will turn the call back over to Sanjay.

[Sanjay Lad, Vice President, Finance and Investor Relations]

Thanks, Jen. [Operator Instructions] Cole, would you please open the line for Q&A?

[Operator]

[Operator Instructions] And our first question today will come from Jeremy Tonet with JPMorgan.

[Jeremy Tonet, JPMorgan]

Just wanted to dive into capital allocation thoughts a bit more. Big spend this year with the acquisition and all. But as you start to look into '23, it seems like there's a lot of available cash flow. And I just wanted to kind of get your thoughts with where you see that landing. It seems like the opportunity for buybacks would only increase. And when you think about buybacks, is it more price sensitive to the stock? Or is it more balance sheet capacity that drives time and buybacks?

[Matt Meloy, Chief Executive Officer]

Yes. Jeremy, we really are in a good position where we're going to have a lot of flexibility as we move through this year with strong EBITDA growth and then as we get into 2023, expecting continued growth in our business. I think we'll continue to focus on investing organically, which is driving some of the really good returns for Targa and then really increasing our ability to return more capital to shareholders over time. But we'll have a lot of flexibility in 2023 to increase that return of capital to shareholders.

So this fall, we'll discuss with our Board what the right dividend level is. We'll kind of look at our peers. We'll look at broader industry peers, S&P 400, 500 and then come up with a recommendation for a dividend. That will be one piece of the equation.

And then we'll also look at continuing our share buybacks. You've seen us actually ramp that up here even in light of the Lucid acquisition. We've been increasing our share buybacks. I would still like to say that it is an opportunistic program. I don't see us just setting a level and say it's going to be this. We're going to look at the macro environment. We'll look at our organic growth projects, where we set our dividend and then come up with a plan that makes sense but have flexibility in that such that if we see some good opportunities to increase that, then we can do so.

[Jeremy Tonet, JPMorgan]

Got it. That's helpful. And just wanted to kind of clarify two points there as my follow-up. When you think about the dividend, is it relative to midstream peers or more kind of like S&P 500? And I guess there's concern in the marketplace with regards to this much free cash flow coming out next year and whether that be returned to shareholders or put to M&A. I'm just wondering any thoughts you could provide on that.

[Matt Meloy, Chief Executive Officer]

Yes. I think as we look to the dividend, we will look towards broader industry peers. We will be informed by what our midstream peers do. We'll take a look at that. But I think we talked about when we moved our dividend to $1.40, having modest growth. We certainly have the ability to do that and a lot of flexibility and the ability to do more if we so desire to do more than modest growth. That will be a discussion with our Board.

Either way, we're going to prioritize financial flexibility as we go forward to continue to invest in our business organically. And then I view M&A kind of similar to how we've talked about it. I think we continue to have a high bar for M&A. We need something that's going to put us in a really strong position coming out of the other side of the M&A with both the Southcross and the Lucid acquisitions.

Our balance sheet is strong. We reported 3.1x leverage ratio. We're estimating 3.5x by year-end. So we want to make sure we have a strong balance sheet if we do any M&A. I'd say right now with as active as we've been this year, our focus is going to be on integrating those acquisitions and making sure we do those well and extract the synergies that we think we can get from those acquisitions.

So I think our focus is going to be on integration here for a little while, even while we have significant cash flow to invest in our business organically and then increase return of capital to shareholders.

[Operator]

Our next question will come from Brian Reynolds with UBS.

[Brian Reynolds, UBS]

I was curious if you could just a little bit on commodity exposure post the recent Lucid acquisition and how we should think about the evolving kind of 60-40 G&P logistics and transportation earnings mix over time. Is it kind of fair to assume that we should see growth in fee-based in the L&T business going forward relative to G&P and POP exposure?

[Matt Meloy, Chief Executive Officer]

Yes, sure. Our commodity exposure with Lucid really being, I'd say, entirely fee-based contract. There still is some embedded commodity exposure in there with just the way those contracts are settled, but it's primarily fee-based.

So all things equal, that's going to marginally increase our fee-based margin over time. As we look at that mix, what's G&P and what's downstream, we kind of think of it more as we're going to continue to invest in both of those businesses.

It's an integrated business. We're going to invest in G&P. And we're going to invest like we are with Train 9 and the export dock as needed to handle those volumes. And then -- so the mix is just going to kind of be a result of investing in our integrated platform. To the extent we get higher commodity prices and we move above our fee floors, then it ends up shifting a little bit more margin into our G&P business. That's really a result of just excess earnings and having a higher commodity price environment.

So we don't have a target we're going for. We're just going to continue to invest in both businesses. That said, we see increasing fee-based margin just on an absolute basis continuing to grow. We're going to continue to have growth in our G&P business from fees. We're going to continue to have fee-based margin increase in our downstream business from fees.

[Jen Kneale, Chief Financial Officer]

And we'll also continue to look to add fee-based elements or floors to any existing contracts where we don't already have those particularly as contracts come up for expiration or there's some catalyst to be able to renegotiate those contracts. So that will also help provide additional cash flow stability on the downside going forward.

[Brian Reynolds, UBS]

Great. I appreciate all that incremental color. Maybe as my one follow-up, the Lucid acquisition appeared to include some carbon and GC waste capabilities. Just given the recent 45Q credit increase included in Inflation Reduction Act proposal, how should we think about the potential opportunity set for Targa as the largest processor in Permian?

[Matt Meloy, Chief Executive Officer]

Yes. Thank you. We have been working prior to Lucid, just on working on carbon capture to see if there's something we can commercialize across our Permian footprint. Lucid has made really good progress on that as well. And so I'd say I'm excited about the opportunity to be able to develop that, both in the Delaware and on the Midland side. They have some really good people over there who are really smart and knowledgeable about how to do this.

And yes, you're right, with the 45Q, if that gets passed, increasing it makes those projects easier to get over the finish line. So I think with their expertise plus the work that we have done, it kind of increases our ability to commercialize that opportunity.

[Operator]

And our next question will come from Keith Stanley with Wolfe Research.

[Keith Stanley, Wolfe Research]

I guess to start just on Lucid synergies. Can you talk a little more about near-term, long-term opportunities and how impactful it might be? I guess near term, you referenced potentially shifting some Lucid volumes if it's above your capacity onto other Targa assets. Just any color along those lines and how you're thinking about that over time.

[Matt Meloy, Chief Executive Officer]

Yes, sure. We think near term, there will be some synergies on the NGL side but just moving some volumes over to excess capacity we have out in our Far West Delaware processing plants. We have excess capacity. Lucid is running overcapacity. And so when we -- they're already tied together. We're actually working on putting in some more pipes to expand the capability to move more gas to and from.

So some near term, just from what we call offloads on to our existing Targa system that then pushes those liquids down Grand Prix. And we expect over time as we add processing plants, those processing plants will be undedicated. We'll be able to capture some of those volumes and move those into our downstream business. That's another opportunity. And then as existing NGL dedications roll off over time, we'll be able to move those on to it as well.

So I'd say there are some short term, some medium term and then some longer term where it's contracted or tied up. So I think it will be similar to how we think about that from our previous acquisitions we have done, it's going to be kind of a gradual increase in the ability for us to capture those liquids versus probably a cliff or just a really large amount coming all at one day. It's going to be a gradual move of NGLs onto our system over time.

[Keith Stanley, Wolfe Research]

Great. And second question, just with the Inflation Reduction Act. Jen, can you just give an update on when you expect the Company to be a material cash taxpayer and how that bill is currently written could impact the Company?

[Jen Kneale, Chief Financial Officer]

So currently, Keith, it depends on ultimately what our earnings and profits are and the amount of growth capital spending that we undertake. But our current assumption is that we wouldn't really pay any cash taxes of any material amount until 2024, and then it would ramp from there. So it's probably, call it, 2027 before we've worked our way through our existing NOL. And then again, that could be shifting depending on growth capital spending, et cetera.

With the Inflation Reduction Act, we could potentially be paying a minimum tax in 2024. But that would really be available -- those taxes would then be available to reduce regular income taxes in the future. So it would really create more of a timing shift of when we pay cash taxes versus anything else.

[Operator]

Our next question will come from Colton Bean with Tudor, Pickering & Holt.

[Colton Bean, Tudor, Pickering & Holt]

So I apologize in advance for a few bundled questions here. But it looks like Grand Prix reached nearly 500,000 barrels a day during Q2. So one, can you frame the mix between Permian and Mid-Con?

And then two, to the extent that Permian utilization continues to climb as new plants come online, is there any ability to push beyond that 550,000 barrel a day upside capacity? And if not, what sort of lead time would you need to loop the line to the 30-inch interconnect in North Texas?

[Scott Pryor, President, Logistics & Transportation]

Colton, this is Scott. I'll start it off and see if Matt has some other comments that he would want to add. But I would just say that we've not described exactly what the mix is from the West leg of our Grand Prix pipeline versus the Northern leg coming from Conway and in through the Kingfisher connection that we've got with the Williams pipeline with Bluestem. But it is a contributor to that, and that is one contributor that will grow over time as existing contracts with some of our customers roll off with competitors and those volumes roll on to us.

We're certainly aware of the need of the west leg that we have today. And we are continuing to add pumps where it's necessary to pump up that pipeline. We are always evaluating what the needs are relative to increasing over and above maybe the 550,000 barrel limit that we have kind of stated publicly. And then we are obviously evaluating what the needs are to add additional transportation needs out of the Permian.

It is our goal as we add gas processing plants in the Permian, both -- whether it's with the Delaware acquisition that we recently did or new plants on the Midland side, our goal is to make sure that those volumes run along our transportation legs, whether it's current Grand Prix pipeline or future expansions that we may do.

[Colton Bean, Tudor, Pickering & Holt]

Great. Maybe just on that last piece, any early expectations around what sort of lead time you would need to be able to loop the line to that larger interconnect?

[Matt Meloy, Chief Executive Officer]

Yes. So we are working through that. We've got a number of processing plants underway now that are going to add significant liquids to us. We still have a fair amount of capacity that gives us a lot of lead time to be able to capture those.

So I'd say right now, we're kind of working through looking at the timing of our transportation volume in the build and kind of evaluating when the right time to add additional transportation capacity is. So that's kind of something we're actively working on. And so just kind of -- we'll have to just kind of look at that as we go forward.

[Colton Bean, Tudor, Pickering & Holt]

Got it. And then just switching over to the G&P segment. A fairly material step-up in OpEx Q-on-Q. Any detail on the trajectory you're expecting here through the balance of the year?

[Jen Kneale, Chief Financial Officer]

Colton, this is Jen. I think you should expect an increased Q3 relative to Q2 just as a result of the Lucid acquisition. We are seeing inflation across our businesses on the cost side in terms of chemical costs and things like that. I think our teams are doing a really good job of trying to manage through that, but costs are higher.

And then just as activity levels increase, that also results in higher costs as well. And we certainly have an expectation of activity levels on the G&P side continuing to increase rest of this year, both Delaware Basin plus standalone Targa.

[Operator]

And our next question will come from Neal Dingmann with Truist Securities.

[Danny Peak, Truist Securities]

This is Danny Peak on filling in for Neal today. My first question is really about on expansion. You guys have some attractive plants and attracting areas coming online. Do you guys see any material demand for additional products? And if so, which region would you say is the strongest?

[Matt Meloy, Chief Executive Officer]

Sorry, just to clarify, you say regional demand for products? Or are you kind of just referring to fractionation demand, is that...

[Danny Peak, Truist Securities]

Yes. That's correct, yes.

[Matt Meloy, Chief Executive Officer]

Okay. As I kind of said in the scripted comments, we do see a tight frac market. Our volumes have ramped. A lot of the competitors' volumes, third parties volumes have ramped. So we're seeing a lot of wide-grade hit Belvieu. And so that market is tightening up. A lot of that is coming from the Permian from growth. A lot of it is also coming with some operational upsets we've had in the industry coming from other areas as well.

So that's causing to kind of tighten up a bit. We still have some flexibility with our fractionation complex with Train 7 and 8 coming on and giving us some excess capacity. We have flexibility in Lake Charles. And we also are looking at what the right timing for a GCF potential restart is.

So we're kind of sorting through that. So I think we'll be able to provide some outlets for that increased Y grade. But it is tightening up, and we do expect it to be tight for a while.

[Danny Peak, Truist Securities]

Okay. Great. And my last question is on capital allocation. Specifically, is there a leverage level where you would become more aggressive with stock buybacks? I know you guys are at your midpoint or expecting to be at your midpoint by year-end. But can you give any color on that? That will be it for me.

[Jen Kneale, Chief Financial Officer]

This is Jen. I think it's easier to be more aggressive if your leverage ratio is trending towards the lower end of your long-term leverage target range. But that may not be when the best opportunity presents itself in the market. So if you rewind it back to October of 2020, when we put the repurchase program in place, I wouldn't say that we had our leverage where we wanted it to be. But we saw a unique opportunity in the market to go and repurchase shares. And so we stepped into that.

I'd expect that it's an important part of how we'll return capital going forward. The most important element of how we want to manage the profile of the Company is with maintaining a very strong balance sheet. So if our balance sheet is strong, which we really believe is within that long-term leverage target range of 3x to 4x, with a preference for that leverage ratio to be the bottom end of that range, I think you'll see us continue to have the flexibility to be active. And then it will just be a matter of what opportunity do we see presented in the market.

[Operator]

And our next question will come from Chase Mulvehill with Bank of America.

[Chase Mulvehill, Bank of America]

I guess the first question is really just coming back to Permian processing capacity. Obviously, we've seen a lot of announcements recently for a lot of your peers adding processing capacity in the Permian. So if we kind of think about that and relative to yours, I think you got about 1.2 b a day of incremental capacity that you to bring online by the end of next year. Could you talk about the confidence you have of filling that? Would you bring those plants online?

[Matt Meloy, Chief Executive Officer]

Sure. Chase, yes. No, we've got a lot -- I mean we run five plants right now across the Permian. I'd say we feel just kind of starting with the nearest term ones, we feel really good about those being full. I think Legacy I and Red Hills are both going to be highly utilized really the day they turn on. We are running absolutely full in the Midland. And it was actually over full in the Delaware on the Lucid asset. So I think those are going to be full kind of day 1.

And when you go to the Midway plant, that is a partial -- that's a replacement. We're going to be idling the Sand Hills plant. So we'll move those volumes over and then have available for growth there. So most of that is going to be utilized just from the Sand Hills volumes day 1.

And so then that leaves two more processing plants in the Midland Basin. We've added a number of plants in the Permian Midland. And it's really been the same story for us as soon as we bring it on with the flush production coming from kind of lowering overall field pressures plus the growth. We feel very optimistic we're going to be able to have those highly utilized when they come on and then fill up very quickly.

So I think really, the next question becomes when do we need more -- what's the cadence beyond that. We feel like hopefully, with -- on the Midland side with adding Legacy II and adding Greenwood, maybe that gives us a little bit of time. But I think we'll be quickly looking at the Delaware for when we're going to need another plant out there. So I think we're more thinking about when we're going to need another one as opposed to are we going to be able to fill the ones we've announced.

[Chase Mulvehill, Bank of America]

Well, good to hear. And then can I ask on Waha basis real quick. Obviously, there's some risk of widening out kind of 2Q, 3Q or maybe even before next year. I'm just kind of curious on kind of your thoughts on the risk -- more just the basis risk than the volume risk. But the basis risk that you have out there and maybe how much you kind of hedged of that risk?

[Matt Meloy, Chief Executive Officer]

Sure. Yes, I'd say our risk out there is we want to make sure that we can flow the volume. So when Waha tightens out, if it gets difficult moving it out, we want to make sure that we can move it. So we've been active at taking out transportation and making sure we can get the volumes away from our plant and to market.

As far as the overall Waha basis risk, our length in natural gas, when we hedge, we hedge it at Waha. So really, what we want is kind of an absolute higher Waha price versus a whole lot of exposure to the spread. So we want absolute Waha prices to be high. We want to make sure we can get volumes out.

[Chase Mulvehill, Bank of America]

Okay. Makes sense. I'll respect the two questions. And hopefully, somebody will ask about Medford.

[Matt Meloy, Chief Executive Officer]

Thanks.

[Operator]

And our next question will come from Sunil Sibal with Seaport Global Securities.

[Sunil Sibal, Seaport Global Securities]

So I wanted to start off on the capital side of things. So obviously, you've raised 2022 budget. I was kind of curious how should we be thinking about puts and takes for the 2023 capital spend. You obviously have outlined a few expansion projects. So from that perspective, what kind of cost inflation you're seeing? And then how should we be thinking about the '23 budget?

[Jen Kneale, Chief Financial Officer]

Sunil, this is Jen. For 2022, we've really accelerated projects that were in our five-year plan, but just we need them sooner given the visibility that we have to volume growth when you think about Train 9 spending shifting into 2022. Think about Greenwood spending shifting into 2022. And then the adder would be the Delaware Basin acquisition and the continued build-out of those assets.

As we look into 2023, I think that part of what will impact our growth capital budget for next year will be potential spending on next plants, whether that be on the Delaware side or the next plant needed on the Greenwood side. But I'd expect that we will be spending capital at levels very much commiserate with the size of the Company.

And so as we've gotten bigger, we just have more flexibility capacity to spend more. But we also don't have a lot of visibility to what I call additional large projects beyond those that we've already announced other than incremental processing expansions, a looping or other project associated with Grand Prix and NGL transportation down the road. That would be the one that just depending on what we're seeing on volume growth. The next large project that we have on the radar screen and the timing of that, again, will be dependent on the continued growth of NGL transport volumes.

[Sunil Sibal, Seaport Global Securities]

Just to clarify. So what you're saying is that unless you announce more projects, you should see a bit of a step-down in '23 CapEx based on all that you announced?

[Jen Kneale, Chief Financial Officer]

I don't know if I'd say that we'll see a step down. We'll provide formal guidance in February, typical with our time frame of when we provide CapEx guidance for the following year. We do have some spending that's shifting into this year and that spending on frac Train 9 that otherwise may have occurred next year. We've got spending on Greenwood shifting into this year that otherwise may have occurred next year. But I think we're very comfortable with spending around these levels.

And then ultimately, it's our visibility to increasing volume growth and where the next pinch point is within our asset footprint that will result in us needing to move forward with the next project. I'd say that there isn't something large looming out there that would have a material impact on growth capital spending at this point in time.

[Sunil Sibal, Seaport Global Securities]

Got it. And then my second question was related to the IRA. I understand that there are some provisions in that with regard to limiting methane emissions from processing facilities. So I was curious if you had a chance to look through that. And how do you think that impacts your footprint? You've obviously highlighted plans to reduce methane emissions. But does your plans kind of tie in with new requirements in IRA. Or how should we think about that?

[Matt Meloy, Chief Executive Officer]

Yes, sure. So our -- yes, our ES&H group has been really active at kind of evaluating what that methane tax or what the regulations could entail. We actually were looking at it quite a bit in the last round this came about. We took a look at it. We are focused on reducing our emissions, improving our intensity. We have a lot of projects that we're moving forward with to try and reduce that.

So we'll -- we're very good at compliance, very good at meeting rules and regulations. And I think our ES&H Group is up to the task on that. And we'll see what the ultimate -- what the fee or what all the operating parameters are for setting those limits and everything else. So it's early. We'll have to see what ultimately gets passed. But I'd say we are actively focused on it, working on it and we'll perform very well.

[Operator]

And our next question will come from John Mackay with Goldman Sachs.

[John Mackay, Goldman Sachs]

I wanted to start on L&T. You guys touched a little bit on marketing being weak. But just given how strong volumes were, could you just talk a little bit about what's going on this quarter? Was it a kind of one-off on margin dipping? Or is this kind of the run rate unit margins that we should think about going forward?

[Scott Pryor, President, Logistics & Transportation]

I would -- first off, I would say, John, that we had a very strong first quarter as it relates to some of our marketing and optimization around that, not quite as active in the second quarter. And that's -- that would be somewhat seasonal and typical for us when we roll into the second quarter.

With that said, when we look at the growth that we've had on the fractionation volume side, obviously, record volumes there. We've had increased volumes flowing down our transportation assets in and through Mont Belvieu. So we've seen some nice increases on that.

And then our export business continues to be very consistent, quarter in and quarter out. Obviously, with pricing the way that it is today, with the backwardation that we're seeing across really the U.S. pricing as well as international pricing, that presents itself some challenges.

But all in all, with the volume growth that we're seeing on our G&P side of the ledger, those volumes are going to be steered toward our transportation assets to our fractionation footprint. We're going to continue to see volumes increase over time.

So we feel very comfortable where we sit. Obviously, we've got a lot of work to do as it relates to our announcement around Trade 9 and bringing those -- bringing that fractionation train back on. And we see opportunities there just to continue to grow with the volumes.

[John Mackay, Goldman Sachs]

All right. Maybe just unpacking a little bit of what you said there, just in terms of the export business. We've seen some softness in petchem demand overall. Maybe you can just share kind of where you see that sitting right now and how that should trend for the rest of the year.

[Scott Pryor, President, Logistics & Transportation]

From an international perspective, is that what you're referring to?

[John Mackay, Goldman Sachs]

Yes, for the export business.

[Scott Pryor, President, Logistics & Transportation]

Well, again, from our volumes, we've seen consistency quarter in and quarter out. There has probably been more of a challenge on the butane export side of the business. Some of that's related for backwardation, again, that we're seeing on propane as well as butane. But internationally, yes, it's been a little bit more -- a little tougher on the butane side.

Spreads have been compressed. We have also seen that internationally, butane prices are actually trailing behind propane prices. And so when you look at the risk of waterborne traders, when you look at the consumption overseas, obviously, dealing with potential issues just with the economies, we'll be facing some challenges.

We feel very comfortable, though, with our term contracts. We've not had any cancellations across our dock. So we, again, believe that we'll see consistency with that. We feel very comfortable also with our expansion that will come online mid next year, adding some additional flexibility.

So all in all, I think the cadence of our export business looks very smooth relative to overall expansions that we're doing across our entire downstream business that complements our upstream side.

[Operator]

And our next question will come from Michael Cusimano with Pickering Energy Partners.

[Michael Cusimano, Pickering Energy Partners]

On my numbers for '22, you have realized almost $300 million of hedge losses year-to-date on the G&P system. And disclosures are kind of stale, but my math shows a couple of hundred remaining for the rest of the year. So I was hoping you could talk about '23 hedges.

We're not sure where they're priced necessarily. But given the recent commodity weakness, are those looking like potentially even a net benefit next year even if spot prices stay high? It just seems like there's almost a $500 million tailwind going into next year just from hedge realizations rolling off. I was hoping you can give some more clarity there.

[Jen Kneale, Chief Financial Officer]

We have hedged at higher prices in 2023 relative to 2022. So that will provide a nice tailwind for us. If you look across all commodities, I'd say that our hedge prices right now are, call it, 25% plus higher than where they are for 2022.

So I think you're right in saying that, that will be a nice tailwind for us as well as just continued volume growth as well. So if we have continued higher prices like we're seeing more prompt given the backwardation in the market, then as we realize those higher prices on additional volumes, that will be a nice tailwind as well.

[Michael Cusimano, Pickering Energy Partners]

Got it. That's very helpful. And then I'll kind of take the bait and asking about just Medford impact which I've seen on your system. And part of the strength in the frac volumes are a direct result of that.

[Matt Meloy, Chief Executive Officer]

Yes. So I really kind of answer the overall frac market question previously. The frac market is tied. It's a combination of increased volumes from Y-grade. And you have some operational upsets from the industry that is moving more volumes to Belvieu. So yes, that is tightening up the Belvieu to some extent.

[Operator]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sanjay Lad for any closing remarks.

[Sanjay Lad, Vice President, Finance and Investor Relations]

Great. Thanks to 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.

Have a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.