Q1 2026 Earnings Call Transcript

Thank you for standing by, and welcome to Targa Resources Corporation's First Quarter 2026 Earnings Webcast and Presentation. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Tristan Richardson, Vice President, Investor Relations and Fundamentals. Please go ahead, sir.

Thanks, Jonathan. Good morning, and welcome to the First Quarter 2026 Earnings Call for Targa Resources Corp. The first quarter earnings release, a supplement presentation and our latest investor presentation are available in the Investors section of our website at targaresources.com. Statements made during this call that might include Targa's 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; Jen Kneale, President; and Will Byers, Chief Financial Officer. Additionally, members of Targa's senior management will be available for Q&A, including Pat McDonie, President, Gathering and Processing; Ben Branstetter, President, Logistics and Transportation; Bobby Muraro, Chief Commercial Officer. I'll now turn the call over to Matt.

Thanks, Tristan, and good morning. This year is off to a pretty remarkable start here at Targa. We had record first quarter adjusted EBITDA, Permian volumes and NGL fractionation volumes despite the impacts of severe winter weather and periodic producer shut-ins from weak Waha gas prices. We are continuing to see strong production activity in the Permian and are on track for our volume forecast this year despite being impacted by more shut-ins than we previously estimated.

A huge thank you to our field operations and engineering employees who worked tirelessly to support our producer customers through very cold weather across much of late January and early February and to also quickly resolved an unplanned outage towards the end of the quarter at a portion of our LPG export facility. The efforts by the Targa team supported another record quarter and strong start to the second quarter. The short, medium and long-term outlook for Targa growth has continued to improve. Higher prices and supply disruptions in the Middle East create tailwinds for our business and underscore the importance of secure and reliable energy supply for the United States.

With growing cost-advantaged natural gas and NGL supply from the Permian Basin and significant expansions underway across our integrated value chain, Targa is well positioned to meet the growing demand for natural gas and NGLs across domestic and global markets. We believe that there are significant advantages to being on the Targa platform, a track record of constructing Permian gas processing plants on time or early. We have the largest system with best-in-class redundancy and fungibility across the Permian Basin, and we continue to invest and grow our system as further evidenced by 2 additional gas processing plants in the Permian Delaware announced today.

We have a large and growing portfolio of transportation assets in both NGLs and intra-basin residue gas, a leading fractionation footprint in Mont Belvieu with Train 11 now online, 5 trains added over the last 6 years and Trains 12 and 13 currently under construction. And our LPG export facilities, which we are expanding our capacity to more than 19 million barrels per month time very well for the increase in demand for long-term LPG export contracts. Looking back over the last 6 years, we have brought into service 27 major projects, including 16 Permian processing plants, 5 fractionators and 3 NGL transportation pipelines with every one of these major projects over this period coming online on time or ahead of schedule.

We have also successfully and seamlessly integrated several Permian acquisitions. This track record of execution is a credit to our best-in-class engineering and operations teams and to our commercial team for continuing to identify attractive opportunities to grow our footprint. Today, we increased our adjusted EBITDA outlook for 2026, which is bolstered by continued and disciplined production growth from our customers and a strong opportunity set in our downstream business across LPG export and marketing and optimization opportunities. This increase highlights Targa's strength and the durability of our business across environments.

At Targa, we continue to focus on execution and believe the strength of our large integrated asset footprint positions us to be successful across commodity environments as we continue to invest in attractive integrated opportunities and return increasing amounts of capital to our shareholders. Targa now has more than 3,600 employees. And before I turn the call over to Jen, I want to express my thanks to all my colleagues. We have a lot of positive momentum and a lot going on.

And as we discuss internally all the time, safety is our first priority. So a huge thank you to our employees for their continued focus on safety.

Thanks, Matt. Good morning, everyone. Operationally, it was a solid quarter as our Permian natural gas inlet volumes were a new record, primarily driven by the successful integration of and volume contributions from our acquisition that closed at the beginning of the year as well as continued strong producer activity, partially offset by the impacts of Winter Storm Fern and other severely cold weather plus some gas price-related shut-ins. Currently, our Permian volumes are more than 250 million cubic feet per day higher than the first quarter average, even with more shut-ins to start the second quarter from some of our producers given weaker Waha natural gas prices.

Average volumes through the first 4 months of the year are consistent with what we forecasted coming into this year, which is remarkable given we currently have between 200 million and 400 million cubic feet per day of Permian gas temporarily shut in by producers on any given day, depending on what is happening with gas prices. And while it is difficult to predict with precision how producers are managing egress constraints in the short term, we continue to feel good about our low double-digit Permian volume growth estimate for 2026. Importantly, we have demonstrated the strength of our strategy and resiliency over the last several years by ensuring that we have sufficient takeaway capacity from the Permian for our producers and by continuing to identify marketing optimization opportunities through our growing portfolio of natural gas transportation assets.

We expect that marketing opportunities will continue likely until later this year when incremental Permian egress capacity is added. We are also continuing to execute on our major projects along our Permian footprint to accommodate the growth from our customers. In Permian Midland, our East Pembrook plant, which was scheduled for the second quarter, began service early starting at the end of the first quarter. Our East Driver plant remains on track to begin operations in the third quarter of 2026. In Permian Delaware, our Falcon II plant successfully came online in the first quarter, and our Copperhead, Yeti 1 and Yeti II plants remain on track to begin operations as previously announced.

Our new Permian Delaware plants announced today, Roadrunner III and Copperhead II are both expected to begin service in the first quarter of 2028, which will be much needed to accommodate the expected growth from our customers in the very active Delaware Basin. We have multiple Permian intra-basin residue projects on track as scheduled that will add connectivity and fungibility across our system for our customers and offer access to multiple premium markets. Additionally, we expect Blackcomb, a natural gas pipeline in which we have an equity interest, will provide much needed egress relief for the Permian when in service in the fourth quarter of this year.

Traverse will further enhance market connectivity when it comes online in mid-2027. The Permian natural gas egress environment is set to improve as we exit 2026 and the prospects for sustained higher Waha gas prices with improved egress will be a positive for Targa and our Permian producers. Shifting to our Logistics and Transportation segment, Targa's NGL pipeline transportation volumes averaged 1.02 million barrels per day and fractionation volumes averaged a record 1.145 million barrels per day during the first quarter. Both transportation volumes and fractionation volumes were impacted by the winter weather and shut-ins that impacted our G&P volumes, but consistent with what we are seeing in G&P have rebounded nicely as the underlying fundamentals of our business remain very strong.

We are also making great progress on some of our key downstream projects as our Delaware Express NGL pipeline is currently in startup and our Train 11 fractionator began operations early in the second quarter. Speedway, our large expansion of our NGL pipeline transportation system remains on track for the third quarter of 2027 and Trains 12 and 13 remain on track for the first quarter of '27 and the first quarter of '28. With 4 Permian plants now in service since we announced Speedway and 6 Permian plants now under construction, we continue to expect a meaningful and growing supply of available NGLs behind our system to baseload Speedway's initial capacity of 500,000 barrels per day and supply our Mont Belvieu fractionation and LPG export footprints.

Turning to our LPG export business at Galena Park. Our loadings averaged 13.1 million barrels per month during the first quarter despite the unplanned outage at a portion of our facility that reduced our loadings towards the end of the first quarter and early in the second quarter. Our LPG exports are highly contracted, and our team is doing a great job of trying to figure out how to support the high global demand by getting incremental volumes across the dock. We have some flexibility at our facility to move more butanes during periods of high demand and have been able to secure some additional contracts across this year that we expect will drive record Targa loadings in the second quarter.

Longer term, we are in a really good position to continue to secure incremental multiyear contracts given the increasing supply that will be in our system through all of our G&P, transportation and fractionation expansions underway and increased global demand for U.S. Gulf Coast LPGs. We expect our large LPG export expansion will be much needed when it comes online in the third quarter of 2027. We are exceptionally well positioned operationally and believe that our wellhead-to-water strategy driven by activity in the Permian Basin will continue to put us in excellent position to execute for our customers and shareholders.

I will echo Matt's appreciation for all of our employees that are focused on delivering for our customers and are doing it safely and with great pride. Your efforts are greatly appreciated. I will now turn the call over to Will to discuss our financial results and outlook in more detail. Will?

Thanks, Jen. Targa's reported adjusted EBITDA for the first quarter was $1.4 billion, which is 5% higher sequentially. The increase was primarily a result of contributions from our Permian Basin acquisition, which closed in early January and from optimization opportunities in our marketing businesses. The increase was partially offset by winter weather that impacted both G&P and L&T volumes.

We are increasing our estimate for full year 2026 adjusted EBITDA to be in a range of $5.7 billion to $5.9 billion. The new midpoint is $300 million higher than what we provided in February, supported by higher first quarter adjusted EBITDA than we were estimating, meaningful natural gas marketing and LPG export opportunities for the full year and continued strong performance of our underlying businesses. We continue to estimate net growth capital for 2026 of approximately $4.5 billion, with no change despite announcing 2 new Permian gas plants today. We also continue to estimate 2026 net maintenance capital spending of $250 million.

In March, we successfully completed a $1.5 billion debt offering comprised of 4.35% notes due 2031 and 6.05% notes due 2056. As a result, we are in an excellent liquidity position as we execute on our capital program. At the end of the first quarter, we had $3.1 billion of available liquidity and our pro forma consolidated leverage ratio was approximately 3.6x, well within our long-term leverage ratio target range of 3 to 4x. Shifting to capital allocation, our focus is more of the same from Targa, maintain our strong investment-grade balance sheet, continue to invest in high-returning integrated projects and return an increasing amount of capital to our shareholders.

We declared a first quarter common dividend of $1.25 per share, which is a 25% increase relative to the first quarter common dividend for 2025. We also opportunistically repurchased $55 million in common shares at an average price of $241.43 per share during the first quarter. We expect another record year at Targa across multiple dimensions and remain well positioned to create value for shareholders over the long term. And with that, I will turn the call back over to Tristan.

Thanks, Will. For the Q&A session, we ask that you limit to 1 question and 1 follow-up and reenter the queue if you have additional questions. Jonathan?

And our first question for today comes from the line of Jeremy Tonet from JPMorgan Securities.

Just want to start off with the Waha basis, if we could, and I guess, the impacts on the basin and Targa going forward here. There's a lot of production that seems being curtailed with the low prices. And just wondering how you see the interplay between GCX and other pipes coming online over the balance of this year, how the basis trends and when these curtailed volumes could return? And then at the same time, the interplay with the uplift that you have gained on the marketing.

Just wondering if you could provide some color on how you think that mixes together over the balance of the year.

Jeremy, this is Jen. I'd say that Waha is largely playing out as we expected this year, which is that as we go through the year ahead of the incremental pipes coming online as well as the GCX expansion, it's going to continue to be really tight. And I think you are seeing that manifest really all throughout this year. And it's arguably going to continue to get worse before it gets better as we think about the cadence of volume growth that we're seeing on our system and that we're seeing more broadly in the Permian and how that interplays with not enough takeaway capacity.

I think importantly, from Targa's perspective, we have available capacity to ensure that our producers' volumes flow, which is, of course, of paramount importance to us in making sure that we are delivering for our customers. So for us, it's not physical constraints. It's really the interplay of prices that are resulting in some producers making decisions, frankly, day by day, week by week to shut in volumes in certain areas within our footprint. And I think that's largely based on a view of when there's planned maintenance on pipes coming, that creates more visibility to the fact that it could get a little bit tighter and that could create more weakness in pricing.

And of course, if there's unplanned maintenance, then that impacts the basin as well. As we look forward, the GCX expansion and then Blackcomb and [indiscernible] will bring much needed relief, and we believe that we will see that collapse in basis, and we'll have significant capacity of Permian egress, call it, towards the end of this year and heading into 2027. [Technical Difficulty] and prices relative to what we see today for Waha.

That's helpful. And is it fair to say, I guess, the guidance bakes in optimization kind of only what's visible right now? Or just trying to get a sense for how that fits in.

I'd say that we tend to be very conservative about how we forecast optimization opportunities. So we've got 4 months of visibility that's realized so far this year. And then, of course, we've got some visibility into what our expectations are for May. And then beyond that, we try to be modest about how we forecast marketing benefits across a range of scenarios.

So really, the guidance uplift for 2026 is driven by strong fundamentals, as we've talked about on the volume side, what we've seen year-to-date on the marketing side, plus some modest expectations for go forward and then just increasing demand for global LPGs where we've been successful operationally in managing to plan to get an incremental cargo or cargoes across our dock across this year as well. So it's a confluence of factors, but the fundamentals are just really strong at Targa, and it sets us up exceptionally well exiting this year.

Got it. That's very helpful. And if I could just follow up on that last point real quick, the LPG export dynamics. Just wondering how much upside that could bring here and particularly as it relates to, I guess, the butane side, as you said, and just wondering what that looks like and what you see.

Jeremy, this is Ben. I think you hit on a key point. As you know, we did have an outage in the first quarter. And I just want to, first of all, say thanks to our operations and engineering team again for bringing it back so quickly.

But also thanks to our commercial team and our customers. It was really a hand-in-hand exercise to get as much as we could across the dock during it and then afterwards. And then part of us getting back on track and having line of sight to additional spot volumes across the dock is, of course, the product mix. And so what we've seen as a result of the Iran conflict is an additional call on butane.

So we're working with our core portfolio of customers to move more butane across the dock as they need it and the world needs it. And then that does have the additional benefit of freeing up space on the dock for additional cargoes as we co-load that product. So of course, we came into the year, as we always do, very well contracted across the dock, but that does -- ultimately, that product mix does shift a little dock space in our favor.

And our next question comes from the line of Michael Blum from Wells Fargo.

I wanted to ask -- notwithstanding the recent curtailments and the Waha weakness, I'm curious if you're seeing any change in producer conversations or planned activity in light of the higher price deck and just the Middle East volatility.

Yes, sure, Michael. I think what we're seeing is just really continued strong activity across our footprint. We haven't seen any dramatic changes in response to prices moving up. I think we would suspect as the prices stay elevated for longer and the back end of the curve moves up, I would anticipate there to be some tailwinds for us as we kind of look out into '27, '28 and beyond.

But I think what we're seeing this year is just really strong activity, continued, I'd say, outperformance on the gas side. As Jen mentioned, with 200 million to 400 million shut-in, we're on track with our volumes. I would say kind of coming into this year, thinking there could be some downside to volumes for the year for us, given all the expected shut-ins that we're going to have, it was just kind of a big unknown. I think we're -- now that we're in the midst of really weak Waha prices and that our volumes are on track.

I think it sets us up well for kind of back half of this year when that egress comes on for a volume picture and then going into '27. So I'd expect producers to continue to drill. We've even had some tell us that they're kind of pushing and delaying some of their completions and activity into the back half of this year. And so even with some of that happening, us being on track for our volumes in the first part of the year with these shut-ins, I think it just paints a really good picture for us as that activity ramps when there's sufficient egress on the gas side.

Got it. And then just on the LPG exports, I wanted to ask a little bit of a longer-dated question. I'm just -- clearly, you're seeing an uptick in demand, as you would expect. I'm wondering if you think you'll see higher rates or perhaps longer contracts going forward in light of just the global volatility in that market?

And quarter beyond what you've already committed to, what's in flight in terms of expansions, do you think you could see even further expansions of your LPG capacity? And do you have the room to do that if demand was there?

Michael, this is Ben. In terms of expansions, I'd just step back and point to our export program is really part of our integrated system. So that's something that we're looking back to the wellhead across our millions of dedicated acres and seeing what kind of supply we have coming out of the Permian and really across the U.S. And so as we look at expansions, we're really looking at our integrated supply footprint.

And clearly, we're very bullish about that, and we see it growing '26 and into '27. And so we'll keep monitoring that and to the extent we see the need for additional chilling to move product through the system. That will, of course, be a nice expansion that we have room for at our Galena Park facility and would be a really relatively inexpensive next step for another chiller. So that always remains on the horizon. And then in terms of -- you asked about rates and contracts, I'd just say, as I mentioned earlier, on butane, we have seen just additional long-term -- near-term and long-term interest in firm butane volumes.

So over time, if that's sustained, we could move a little more than we had initially thought out of our export facility. And then I'd say just generally on the contracting side, we are, of course, working with our current portfolio of customers. And then we have more inbounds than I've certainly ever seen just from others across the world, thinking about getting into the U.S. LPG export market, the surety of supply that comes with working with us here.

And I'd say those are multiyear contracts that we are in discussions on and have been actively closing. So I think it's a very constructive environment for us to continue to be highly contracted across our export facilities.

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Just on the processing side, it seems like you've seemingly been announcing new capacity every quarter here recently. Just curious how you're thinking about the cadence of new plants from here and if you see potential upside to the 3 plant per year run rate that you've outlined in the past?

This is Jen. I think ultimately, it will be the pace of producer activity of our, what I'll call sort of foundational existing contracts already in place and then the cadence of new contract adds that our best-in-class commercial team are working on securing day in and day out that will ultimately dictate how much incremental capacity we need on the processing side and of course, what that will mean for incremental assets that we'll need all along the value chain. I think that we've got a great set of customers. We continue to add contracts.

We feel very, very good about the short, medium and long term. You see the cadence of plant adds that we've got going now with the addition of Roadrunner III and Copperhead II. So we'll have 3 plants online in '27, now 2 plants online in the first quarter of 2028. And I think whether it's 3 plants more or less, that's ultimately going to be dictated by producer activity. But I think we're feeling very bullish about really the short, medium and frankly, long term for continued activity and growth from our Permian Basin contracts that are already in place.

And I think that puts us in great stead to just continue to have a portfolio of growth looking forward. But it's a little bit hard to predict 2, 3, 4 years out what exactly the cadence of plant adds will be. I think the fact that we've got 50 plants built and in progress is recognition that we've got the largest footprint across the basin, which puts us in a great position to compete for incremental contracts as well with the most reliable, most fungible, most redundant system already in place where we've just continued to have a cadence of plant adds year in and year out and bringing those online on time or early, as Matt described in his remarks, is just a testament to our outstanding team.

And I think, again, just puts us in a really good position to continue to capture growth going forward.

That's helpful. And maybe just to follow up on your comment there about that process and kind of feeding down the value chain. Can you just remind us your latest expectations here just in terms of how quickly you expect Speedway to ramp once online? And then realize you have 2 more fracs in the works already, but I guess how soon might you need to start thinking about another frac as well?

I think we tried to provide pretty good visibility on the ramp of Speedway by both talking about fairly early that we were going to be overcapacity on our existing Grand Prix line, which meant that we were going to need to utilize third-party offloads, which you can expect we are currently doing and that when Speedway comes online, those volumes will be available to baseload over to Speedway. And then as I described in my scripted remarks, all of the plants that have come online since we announced Speedway as well as all the incremental plants that we've added since then, mean that we are in a really good position to generate a very attractive rate of return on our Speedway investment similar to what we did for Grand Prix and have, I think, good visibility to continued plant adds beyond the 2 that we announced this morning, which will, again, bring a lot of incremental NGLs in our system, and those will move down our pipeline to our fractionation footprint, and then we'll have incremental propanes and butanes available for export.

And our next question comes from the line of Keith Stanley from Wolfe Research.

How much of the '26 guidance raise would you attribute to marketing with the wide Permian gas spreads and spot LPG exports versus more core volume and margin outperformance in the business? And I'm trying to get at how much of the pretty meaningful guidance raise is repeatable beyond 2026?

Keith, this is Jen. I'd say it's a combination of factors. But certainly, when we forecasted our guidance for 2026 in February, we probably sounded a little bit conservative even on that call in saying that given the visibility we were seeing and the fact that we had only included modest marketing gains, there was definitely the potential for upside there, and we're definitely seeing that play out for this year. But I think what you also heard me say in some of my earlier comments was that what we are including in the revised guidance range is still a relatively modest set of outcomes for the balance of the year.

Good visibility to the first 4 months of the year that are realized, good visibility to May. But beyond that, I think that we've been, again, pretty modest in what we have forecasted into our new guidance range. So we'll have to see how that plays out. I'd say importantly, what is definitely repeatable is what we are seeing on the volume side going all the way through our integrated system.

And as Matt described, when we get those Permian lines online, we're going to see pretty good ramp in volumes here across the rest of this year. And that ramp, we believe, is going to continue into 2027 and well beyond that. So I think it's a mix. But of course, a lot of the fact that we're raising guidance by as much as we are a couple of months after we gave our initial guidance range is definitely because we are seeing significant marketing opportunities on the gas side.

And then as Ben described, also some good incremental opportunities on the LPG export side, too, which we didn't factor in.

That's helpful. And then I want to kind of revisit growth in a little bit of a different way. You now have 6 plants under construction and 5 in the Delaware. So that's over 1.5 Bcf a day of new plant capacity that you're adding by early '28. Historically, Targa has filled up plants very quickly, almost immediately.

Do you expect that to still be the case with these 6 plants under construction? And I ask because -- I mean, it's a 25% increase in your plant capacity relative to your inlet volumes all by early 2028.

This is Jen again. I mean I'd say that we generally try to be incredibly capital efficient, but we also want to make sure that we are creating white space for our producers. So if a producer wants to accelerate and/or if a producer has better results than they're forecasting that we, of course, can handle all of that incremental volume. So a lot of what you're seeing us do, particularly in the Delaware now, which is similar to what we had in place in the Midland Basin already was create a lot of that system reliability and fungibility.

We're also adding a lot of sour gas infrastructure to, again, make sure that we're positioned if producers are forecasting less sour gas than materializes, we're going to be able to handle it. And if we've got peers that aren't able to handle it, then hopefully, we can handle incremental volumes even above and beyond what is even contracted at Targa today. So I'd say that based on our forecasting, we believe that these plants are going to be very much needed and well utilized when they come online. So there's nothing that's different about how we are forecasting when plants are added or how much volume growth we expect when the plants come online.

I'd say that part of what we do is we get to a final investment decision on a new plant when we've got visibility with contracts in hand to fill up that next plant. And then what invariably happens is our commercial guys do a great job of going out and adding incremental contracts. So by the time that plant comes online, we've actually added more volumes than we were forecasting when we got to the investment decision. And I think that's part of why our plants continue to be very well utilized.

And I can assure you that our commercial teams are working very hard to continue to identify incremental opportunities to add to our already several million acre base of contracts today.

Yes. And -- well said, Jen. And just to add to that, we've talked about over the last couple of years of having kind of outsized commercial wins, some on the sour side, some on the sweet, and it's been disproportionately on the Delaware side. So you see the kind of shift of us putting in more Delaware plants compared to the Midland.

We still think Midland is going to have strong growth going forward, but a lot of the success we've had over and above the dedicated acres and the activity on existing contracts, existing acreage that we have, we just had a tremendous amount of success over the last several years. And us building these additional plants is in response to the volume curves we have from producers and what their anticipated drilling activity is going to be.

And our next question comes from the line of Elvira Scotto from RBC Capital Markets.

Just a couple of follow-up questions. Are you embedding any scenario of sustained higher commodity prices in your Q2 plus volume expectations? Or are you assuming prices normalize back to kind of previous levels? Also, can you talk a little bit about what you're seeing on the GOR trends in the Permian?

This is Jen. I'd say related to forecast, we tend to get longer-term forecasts from most of our producers that aren't moving sort of month by month as the price curve shifts. You are seeing some smaller and private producers that may accelerate activity into a higher commodity price environment. But for the most part, we're putting infrastructure in place based on a longer-term forecast.

And so I'd say that, that longer-term forecasts are largely consistent with what they were even back in February in a lower commodity price environment. So I wouldn't say that we've got a material increase in activity based on where commodity prices have moved over the last couple of months. It's really more based on a disciplined set of producers that have multiyear programs in place, and they are executing on those multiyear programs. As it relates to GOR trends, I'd say that we continue to expect that we will have a higher gas-to-oil ratio as we think about where producers are drilling and just the results that we are continuing to see in our system.

So that will provide a continued tailwind for us going forward.

Okay. And then just on capital allocation, what's your latest thinking here on opportunistic M&A? You talked about acquisitions. Are you seeing attractive acquisition opportunities in the Permian?

And then just kind of thinking about some of your other assets that are not in the Permian, what's the kind of strategic importance of some of those assets? And could they be monetized over the kind of medium to longer term?

This is Jen. I'd say that we're always looking at opportunities to add to our footprint. We have a lot going on organically and very high focus organizationally on making sure that we continue that strong track record of project execution. But we continue to look at opportunities.

I think we're really pleased with the acquisition that we made that closed at the beginning of this year and really grateful for the new employees that have joined the Targa team and how successful that integration has been. So I think we have a good track record of executing acquisitions and integrating them well. But again, for us, primary focus right now is executing on what we have under foot in terms of the projects underway. And then I think related to non-Permian assets, I think related to all of our assets, part of our job is to always evaluate if somebody has a view that something is worth more to them then that's something that we would certainly consider in terms of monetizing assets.

But we're in such a strong balance sheet position. And I think we've got a lot of option value in many of our assets that I call non-Permian that we're really excited about the outlook for our entire footprint. And ultimately, our base case is that we will continue to execute with the assets that we have under foot, but of course, are always open to any discussions on any assets that others might value more highly.

And our next question comes from the line of Jackie Koletas from Goldman Sachs.

I just wanted to go back to your comments on guidance. You noted the new guide continues to be somewhat modest on optimization. Where could you expect the most outperformance or upside from here that could kind of drive you to the near or above the top end? And then specifically, what could that come from? Is that all incremental Waha or something else?

Yes, sure. This is Matt. I think Jen kind of articulated where we are in our guidance and how really good we feel about our guide, even albeit $300 million higher. I think from here, we have a relatively conservative forecast for the back half of the year in terms of marketing and optimization.

We'll see how that plays out. That could be some further upside. But we'll just kind of see how Waha plays out in the back half of the year with the incremental pipeline capacity coming on. Then I think just in terms of production activity and volumes through our system, we're still seeing on any given day, it is pretty volatile, the amount of shut-ins we have on our system.

When exactly that's coming back, is there, frankly, more gas there than we really think. It's a bit of an unknown of kind of how much comes back and where volumes settle out once we're in an environment where we have sufficient takeaway capacity. So I'd say there's some -- probably some volume up -- potential volume upside and both gas marketing and LPG export upside as well.

Got it. And then just to go back a little bit to capital returns. With '26 capital -- CapEx being maintained for the year and increasing EBITDA guidance, what is your appetite to increase shareholder returns from here?

This is Will. I'll take that one. Thank you for the question. When we look at our return of capital strategy, it's one that we've been pretty consistent adhere to, and that is to have a strong balance sheet to invest along our value chain at attractive returns and return increasing capital to our shareholders.

If you just look at the first quarter, we did all of those things. We had a strong balance sheet at 3.6x leverage. We invested in our business and significant capital investments. We also closed an acquisition.

We bumped our dividend 25%, and we bought back $55 million worth of stock. So I think you'll see us continue to execute on that plan and try and grow our shareholder value.

And our next question comes from the line of Manav Gupta from UBS.

Congrats on the strong result. Your press release says your inlet volumes in 2Q are trending significantly above your 1Q. I was hoping you could quantify that significant a little bit for us. And also what's driving the quarter-over-quarter volume growth, if you could talk a little bit about that?

Manav, as I said in my scripted remarks, right now, our current volumes are about 250 million cubic feet a day higher than the Q1 average. And then I also described that on any given day, we've got about 200 million to 400 million cubic feet a day of shut-ins on our system that are really driven by the low Waha gas prices that we are seeing. So I think that makes it difficult to forecast the quarter in terms of volumes with precision. But what we are seeing is material growth over the first quarter.

The first quarter, again, impacted by severe weather as well as some shut-ins, say, second quarter, seeing really good strong underlying fundamental activity, but also seeing increasing shut-ins because of lower gas prices, and we've got a number of -- we've had some planned maintenance on the egress side and some unplanned maintenance that has impacted that as well. So those are all the data points that we tried to give this morning and color around our volumes. And really, the underlying premise is just there's a lot of volume growth. And when we get these incremental pipes online later this year, I think you're going to see a material step-up in our volumes just because of the shut-ins that we're experiencing.

Perfect. My quick follow-up here is one of your peers who was somewhat of a late entrant in sour gas is finally acknowledging that they're seeing a big activity in that region. And I was wondering if you're also seeing higher rig count in that part of Delaware and Lea County? And do you expect your sour gas volumes to also ramp up in the second half of this year?

As we've discussed before, we have, for a long time, invested in sour gas infrastructure in the Delaware Basin. And one of the things as the larger producers develop their acreage positions, they really develop sweet gas for a long period of time because they didn't have confidence in sour gas takeaway treating, et cetera. But over the last 3, 4 years, we have seen a significant increase in sour gas activity, certainly because we put the infrastructure in place. We've been able to tie up and dedicate acreage under our sour gas infrastructure.

We continue to see volumes ramp. We do have discussions with producers where some of the Bone Spring, Avalon development that they had put off for a period of time, they are now stepping into. So quick answer is yes, we expect to continue to see sour gas growth. And we have the infrastructure in place, really comparable -- nobody is comparable to us in that footprint.

So we feel really good about that incremental opportunity and the margins associated with it.

And our final question for today comes from the line of Brandon Bingham from Scotiabank.

Just wanted to maybe go back to the setup into next year, especially as more producers are coming out with, at least in the Permian, incrementally positive commentary or updates. I think Diamondback, in particular, mentioned pulling forward some Barnett development. Just curious, given all of this plus the forthcoming egress capacity and forward curve pricing, at least on the crude side that sits comfortably above what people would consider mid-cycle. Is there potential for something more than just a modest pulling forward of incremental pads thinking '27, '28 and beyond?

Brandon, this is Jen. I mean I'd say that just the overall environment as we look at short, medium and long term, just feels really constructive for continued producer activity. And given the system that we're sitting on, the contracts that we already have in place, the millions of dedicated acres, I think there's going to be material volume growth here for years to come. I think part of what makes us really well positioned as well is the infrastructure adds that we have underway.

So we'll add the East Driver plant on the Midland side here in the third quarter of '26. And then as we get into 2027, we'll add Copperhead on the Delaware side in the first quarter, then Yeti in the third quarter and Yeti II in the fourth quarter. And all of those incremental adds combined with the largest system just puts us in a really good position to be able to handle any incremental growth above and beyond what we were already expecting to be a very robust growth year in 2027. So I think we're just feeling really good about the outlook, and there's nothing that we're seeing so far this year that doesn't support that continued view that 2027 is going to be a really, really strong year for Targa.

Okay. Great. And then just quickly, it looks like East Pembrook came online ahead of schedule. I think Falcon II was previously pulled forward as well. Just curious how much opportunity is there to continue that trend of plants in service early? Or is it maybe constrained by customer volume expectations or anything out of your control?

I think that our engineers and operations teams do a fantastic job, along with our supply chain team of making sure that we've got the infrastructure to construct of working really well together to try to get assets online as quickly as possible. I think that we try to be very conservative in the initial dates that we come out with relative to our projects, just to make sure that we can deliver both internally and, of course, for our customers. And then as we move through a project cycle of getting it fully complete, we do sometimes have the opportunity to pull it forward. And I think we're constantly probably quite annoyingly challenging our engineering team with questions of can we move something forward even if it's a week or a month or in some cases, you've seen us successfully move projects forward as much as a quarter or so.

So that's something that I think we just pride ourselves a lot on is making sure that we bring our projects on time or early and are consistently challenging ourselves to do that while also maintaining the high quality of service that I think really sets us apart for our customers.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Tristan Richardson for any further remarks.

Thanks to everyone joining the call this morning, and we appreciate your interest in Targa Resources.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.