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Good day, and welcome to the PAA and PAGP Second Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Roy Lamoreaux. Please go ahead, sir.
Thank you, Dan, good afternoon, and welcome to Plains All American second quarter earnings conference call. Today's slide presentation is posted on the Investor Relations News and Event section of our website at plainsallamerican.com, where an audio replay will also be available following our call today.
Later this evening, we plan to post our earnings package to the investor kit section of our IR website, which will include today's transcript and other reference materials. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2 of today's presentation. Condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix.
Today's call will be hosted by Willie Chiang, Chairman and Chief Executive Officer; and Al Swanson, Executive Vice President and Chief Financial Officer. Additionally, Harry Pefanis, President and Chief Commercial Officer; Chris Chandler, Executive Vice President and Chief Operating Officer; Jeremy Goebel, Executive Vice President, Commercial; and Chris Herbold, Senior Vice President and Chief Accounting Officer; along with other members of our senior management team are available for the Q&A session of today's call.
With that, I'll turn the call over to Willie.
Thanks Roy. Good afternoon to everyone, and thank you for joining us. I hope that you and your families are safe in what seems like a new normal environment for all of us.
At PAA, our organization has adapted to additional COVID protocols in the field, social distancing and working remotely for those that can. We continue to operate safely, reliably, and I'm very proud of our team, as we are having our best year-to-date safety metrics as measured as total recordable injury rate, and we are achieving levels that are better than half of where we were five years ago both in safety and key environmental metrics.
This afternoon we reported second quarter adjusted EBITDA of 524 million. These results reflect slightly favorable performance in our fee-based and Supply and Logistics segments, relative to the revised full year guidance we furnished in May. A summary of our performance and an overview of our call is reflected on Slide 3. Al will discuss our results in greater detail during his section.
I wanted to take a few moments to provide context for today's call and to discuss our updated guidance. I also want to highlight our progress on increasing profitability and free cash flow through reducing costs, executing key projects and further optimizing our capital program. We continue to believe that long term energy fundamentals are constructive. That being said, as illustrated on Slide 4 in the near term, this continues to be a dynamic and unprecedented environment for our industry.
As anticipated, in response to COVID induced demand destruction in the weeks following our first quarter earnings call in May, North American producers responded aggressively by shutting in significant levels of production, limiting the amount of storage builds and mitigating the risk of testing storage maximums, while refinery utilization gradually began to increase.
The previously steep contango market structured tempered and crude oil prices improved to levels that supported producers ability to bring previously shut-in production back online in June. However, the U.S. Lower 48 horizontal rig count continue to decline and currently sits approximately 20% of 2019 peak levels. Our current expectation is that production will continue to slowly recover from the trough in May through year end, as shut-in production comes back online and some completions continue.
We forecast the Permian to end the year approximately 4.1 million barrels a day, slightly better than our expectations earlier this year. I would highlight that we expect the market to continue to be dynamic in the near term influenced by multiple factors of uncertainty, including the pace of demand recovery due to potential COVID resurgence and geopolitical developments.
Our return to longer term sustainable production growth ultimately remains a function of the timing and the pace of demand recovery as illustrated by the - various third-party estimates of demand recovery reflected in Slide 5. Despite the near-term uncertainty, we remain constructive in our long-term view of global energy demand. We believe the world needs U.S. energy, the Permian Basin is critical, and our positioning supports a positive and a constructive outlook for our business.
As Al will discuss in further detail, this afternoon, we increased our 2020 adjusted EBITDA guidance by 75 million or 3% to plus or minus $2.5 billion with all three segments contributing to the increase.
We are squarely focused on increasing our free cash flow with the expectation of generating meaningful free cash flow after dividend and enhancing our financial and operating position. You will note a new free cash flow disclosure in this quarter's update, which Al will also comment on.
In addition to increasing guidance for our adjusted EBITDA, we have further reduced our 2020 and 2021 CapEx program by an additional $100 million. I would note that our capital investment is coming down meaningfully in the second half of the year, as we complete and put key projects in service. As reflected on Slide 6, we invested approximately 650 million in expansion capital in the first half of 2020, and we expect to invest approximately 350 million in the second half of the year.
In 2021, we currently estimate approximately 450 million of expansion capital investment, as we complete our investments in the Wink to Webster and Diamond/Capline projects. We expect to further lower levels of capital investment 22 plus, as we focus on smaller projects that connect production and improve returns across our system.
Project updates are outlined on Slide 18 in the appendix, and I highlight the following. We placed our Marten Hills terminal expansion in Canada into service during the quarter. Our Red River, Saddlehorn and St. James expansions are on track to be in service by year end. The Wink to Webster JV continues to progress. The JVs throughput agreements are expected to become effective. And the full JV systems entered service, which is now expected in the second half of 2021, with the potential for partial early service in the second quarter of 2021. The Diamond and Capline projects remain on budget with both projects expected to be in service late 2021.
As summarized on Slide 7, we continue to advance initiatives to optimize our asset portfolio and streamline our business. With respect to portfolio optimization, we have closed or contracted for approximately 440 million in asset sales year-to-date, which includes a 190 million expected to close before year end. We continue to advance a 160 million or more of additional divestiture opportunities, some of which could be more challenging to achieve in the current environment and will likely extend into 2021.
With respect to optimizing our business, we continue to streamline and drive efficiencies across all aspects of our business. In May, we estimated the benefit of this process to result in 50 million to 100 million of cost savings for 2020. Based on our progress to-date, we are on track to achieve the higher end of our range, which is reflected in our updated guidance. We also expect a significant portion of our savings to endure in future years, as we continue to reduce our cost structure. Additionally, our 2020 guidance for maintenance capital remains unchanged at 215 million.
With that, I'll turn the call over to Al.
Thanks Willie.
During my portion of the call, I'll recap our second quarter results, discuss our 2020 guidance and review our current capitalization liquidity and leverage metrics.
As shown on Slide 8, in the second quarter, we generated fee-based adjusted EBITDA of $520 million. Transportation segment results were generally in line with our expectations, but due to the impact of producer shut-in, tight regional basis differentials and the timing of shipper deficiency payments reflect quarterly sequential and year-over-year declines. We expect to collect the second quarter shipper deficiency payments in the second half of 2020.
Second quarter Facilities segment results exceeded expectations primarily due to operational cost savings and higher than expected throughput at certain of our Mid-Continent terminals. On a comparative basis, the segment was in line with second quarter 2019 despite the impact of asset sales and down sequentially, as a result of a multiyear deficiency payment received in the first quarter, as well as the impact of asset sales.
Supply and Logistics results of $3 million exceeded our expectations, as contango-based margin opportunities and more favorable NGL margins offset the impact of shut-in driven volume shortages, timing of inventory costing, and the typical NGL seasonal dip that occurs in the second and third quarters.
Now, I will shift to a discussion of our 2020 guidance, which is reflected on Slide 9. As Willie mentioned, our revised 2020 adjusted EBITDA guidance of plus or minus $2.5 billion, is $75 million or 3% above our guidance provided in May and reflects an increase in all three segments.
For the Transportation segment, we have revised down our expected average daily volumes by 4%, reflecting second quarter actual volumes, our current views of anticipated throughput on our system in the second half, as well as shipper MVC deficiencies.
Unit margins have improved reflecting higher expected average tariff rates and our continued focus on reducing operating costs. I'll note that our updated guidance incorporates a shift between quarters of earnings related to the timing impact of MVC deficiencies relative to billing cycles and the deficiency payments are also contributing to the higher average tariff rate for 2020.
With respect to the S&L segment, the guidance increase reflects our second quarter performance plus the benefit to the second half of the year from contango opportunities captured to-date, as well as a stronger than anticipated NGL and crude oil margins.
Moving to our capitalization and liquidity, a summary of key metrics is provided on Slide 10. Our reported long-term debt to adjusted EBITDA ratio of 3.2 times benefited from trailing 12-month Supply and Logistics results of almost $500 million.
As noted on the slide, the leverage ratio would be 3.7 times if normalized using our initial 2020 S&L adjusted EBITDA guidance reflecting the leverage slightly above the high end of our target level, thus underpinning our focus on reducing leverage.
In June, we completed a $750 million 10-year debt offering at 3.8%, which will be used to repay our $600 million February 2021 maturity via the par call option during the fourth quarter. We have no other near-term maturities. In our current - our total committed liquidity at quarter end was $2.9 billion.
As a result, we do not expect to access the capital markets for the foreseeable future. As Willie stated earlier in the call, improving our free cash flow is a key objective and to the extent it exceeds distributions will be reduced - will be used to reduce debt in the near term.
As shown on Slide 11, our free cash flow through the first six months of the year is a positive $122 million, and free cash flow after distributions was a negative $370 million. Absent short-term changes in working capital associated with hedged inventory storage, we expect our cash generation combined with lower capital investment to benefit free cash flow for the balance of the year and into 2021 and beyond.
With that, I'll turn the call back over to Willie.
Thanks Al.
As discussed throughout the call, I want to reinforce, we remain on track with our revised expectations that we articulated in May, and we are intensely focused on execution during what remains to be a very dynamic and challenging environment. We remain constructive on long term energy demand as population growth and the quest for better living conditions will drive global energy demand in the years to come.
Ultimately the world needs, North American energy and as the largest and one of the most economic producing regions, we expect that the Permian will ultimately lead in North American recovery.
Given the critical nature of our integrated crude infrastructure system in key North American basins and our large Permian position, which is underpinned by significant volume commitments in more than 2.5 million dedicated acreage and facility dedications, we believe we're very well positioned over time.
Additionally, we're taking the right steps to further streamline our business to lower our costs, improve free cash flow generation, reduce leverage and return cash to our unitholders after reaching our leverage targets. These actions make us a stronger company and positions us well for the future.
Before I open the call up for questions, I do want to acknowledge and thank all of our PAA team members for their hard work, their commitment and dedication, as our workforce continues to operate in a socially distant world. We remain laser focused on safe, reliable and responsible operations and managing our business for the long term. A summary of our takeaways from today's call is outlined on Slide 12. With that, we'll look forward to sharing additional updates on our third quarter earnings call in November.
I'll turn the call back over to Roy.
Thanks Willie.
As we enter the Q&A session, please limit yourself to one question and one follow-up question, and then return to the queue, if you have additional follow-up. This will allow us to address the top questions from as many participants as practical in our available time indeed. Additionally, our IR team plan to be available this evening and in the balance of the week to address additional questions. Dan, we're now ready to open the call for questions.
[Operator Instructions] We'll take our first question in queue. Caller please identify yourself and proceed with your question.
This is Shneur Gershuni, UBS. Interesting points and up-to-date. Hopefully all is well. Maybe to start off a little bit here, just I would like to start off, I guess a little bit bigger picture. When you last gave guidance on the last earnings call, you know when - rig counts were bottoming so forth, and you had a fairly ominous view as kind of - an exit rate for the Permian for this year. You've sort of moved the goalpost a little bit with this call today?
I was wondering if you can share with us what are the key signpost that you're watching to - are you looking at completion crews as a leading indicator, are you waiting for sustainable increase in rig counts, shutting reversals, crude differentials, just kind of wondering what are the things that you're looking at. Could it be something like efficiencies like we saw in the last call from an E&P breakeven perspective? Just I was wondering if you can sort of talk of the input or to come up with your view?
Shneur, let me start, and then Jeremy Goebel will give you his insights on this. Generally speaking, the guidance that we thought on the Permian specifically, where we are right now is pretty much, it's pretty close to expectations when you think about everything else. The difference is the slope of the curve and how quickly it happened and potential recovery curve, which I think Jeremy can cover, as well as some of his observations on the other things that we're looking at. Jeremy?
Shneur hi, it's Jeremy Goebel. So we basically came out of a frac holiday, but the shut-ins and curtailments happened very quickly. So end of May, we're rebalancing towards the second half of June. So you think about it, it was steeper, but it recovered quicker. And if you think about there's three components, those barrels either went into storage, those barrels didn't get produced because of curtailment or those barrels were just lost because of natural declines, lack of completions.
So across the system, we see producers now getting into starting to stabilize production. So I think our exit rate plus or minus 100,000 barrels a day. There was some movements in between. I'd say volumes now, recoveries, curtailments came back quicker than we thought, but you're going to experience declines. So I think people are getting back to work slowly, but you're going to have a significant inventory of DUC.
So we're going to manage complex completions. We're going to watch rigs. But I think in general, you see maintenance capital and articulated by all the upstream producers everyone is looking to stabilize production towards the end of the year and maintain production until we see higher prices. So, I think everyone's articulated what their plans is going to be, and we see that across our system, as volume stabilizing, as opposed to the volatility we saw in May and June.
Yes. So the other thing...
Go ahead, Harry.
Yes, the other thing is, all this is based on kind of plus or minus $40 crude oil price. It's really stabilized in here. It seems a bit want to stay in this range, but all those assumptions are based on the type of pricing.
Yes, I think a big difference, what we thought may happen is because of the proactive nature of the producer shutting in - we were able to avoid this filling up of storage, which would have created a knee-jerk reaction across the system, which would have been more severe than what's happened. So I think the crude oil prices where they are has helped that and the proactive - or the proactive nature of what the producers did helped the crude oil price and helped the - kind of avoid a containment problem.
Maybe as a follow-up question - CapEx again and just wanted to focus specifically on the $100 million reduction. Is this just you're finding ways to do the same things for less and that you've - and things are just causing less and nothing is really changing in terms of what you're putting in place in terms of assets or have you scaled back some projects a little bit as well?
So I'm just trying to understand if there is kind of an impact in terms of output for 2021 and 2022 and beyond or things are just costing $100 million less than what you previously thought?
Well Shneur, I'll start again. Clearly, we've said over and over again, we're focused on improving our cash flow. And CapEx spend, any spend we got is precious and we've got an intense focus and laser on, on how we avoid spending CapEx. We have an internal term that we use. It’s must do and no regrets CapEx, right. So to answer your question, it's really a little bit of all the above. But I'll ask Chris Chandler to comment.
Yes, thanks Willie. This is Chris Chandler. We're always looking for ways to optimize scope and improve execution, efficiency on our projects. We have seen some material and labor cost deflation. And of course, with the slowdown in upstream development, we're able to execute projects more efficiently without paying the expedite equipment or material or paying over time to complete work.
We've also been successful in optimizing the scope of our larger projects including Wink to Webster and Diamond/Capline. This might be things like number of tanks or size of tanks at origin or destination facilities. And finally, we have deferred several projects in Canada till beyond the 2021 timeframe. So it's really a combination of a number of efforts like Willie mentioned to continue to bring down our capital spend.
And maybe just a little bit about 2022 beyond Shneur, we guided to $450 million of CapEx in 2021. Just a little bit over a third of that is on Wink to Webster and our Capline and Diamond project. So when you think about that and you think about 2022, it really sets us up to be able to lower our expectations of what we're going to spend on capital in 2022 plus.
Perfect, that makes a ton of sense. Really appreciate the color, guys. I have some more questions, but I'll jump back in the queue. Have a great and safe day.
Thanks, Shneur.
And again caller, please identify yourself and proceed with your question. And we'll take our next questioner in queue. Please go ahead.
This is Jeremy Tonet from JPMorgan. Just want to start off if I could. There was significant contango opportunities in the quarter and just want to see how that translated into your results. How much of that did you secure kind of a long-term contracting and showed up in the facilities side versus maybe shorter term contracting, and you showed up in the S&L side, and just trying to get a feeling for how that dynamic played out?
Jeremy, I think Harry can cover that for you.
Yes so - from contango perspective, we captured all that - on the S&L side, not on the - in the facilities. And it probably looks muted and that's because of a couple of things. First of all one, we had under deliveries from producers, so we weren't fully able to utilize all the contango storage that we had available. Secondly, a lot of the positions were put on a term basis. So, we were looking at longer term positions, rather than just doing short one-month position.
So you'll see some of that come across in future months. And then the third component of it, that's sort of muted it was particularly in Canada the inventories are on a weighted average cost basis. So just the way that weighted average cost mechanism works not all the profits that were probably generated within the quarter actually occurred in the quarter. They will be spread out over the balance of the year.
So all that is reflected in the guidance for the balance, the offsetting that for the balance of the year, those - they are tied to differentials and spreads that we've only been able to capture historically won't be - we do not anticipating that those would be as robust as we thought they might have been earlier in the year.
And then just want to get into the guidance a little bit more, I guess. I think the Transportation volume guidance went down a little bit versus what you last said, but the EBITDA went up. So just wondering what kind of the moving pieces are now versus then to drive that if it's kind of different movements in different basins long haul for short haul. If you can just give us a flavor for how the different basins kind of change in this guide versus the last, that would be helpful?
Jeremy?
Thanks, Jeremy. This is Jeremy. Part of that was and the reduction is, you've got lower volumes, but you got the MVC. So EBITDA will go up more strongly with the lower volumes. We expect that to correct itself over the course of the year as - because if you think about it. We talked about the issues within May and June, pricing suggested the barrels should stay in the basin. So it made no sense for the marketers to ship a barrel from Midland to the Gulf Coast.
They left it in Midland to take care of shorts and went in other directions or went into storage or stayed in containment, as they were under produced. So that will reflect itself and EBITDA will show up, but the volumes won't show up. On the gathering side, that's more of a natural if it's produced it shows up. That's the way I would think about that it's lower guidance for Transportation on sheer volume movements, but EBITDA will reflect that we were paid for the movement.
Maybe just to complete it then, what type of MVC dollar value do you expect to show up in the next quarter to kind of make it all come together?
It's in the ballpark of 25 million - Q2 to Q3.
We'll take our next question in queue. Caller, please identify yourself and proceed with your question.
Keith Stanley at Wolfe Research. So first, I just wanted to confirm, Jeremy, I think you said $40 well you'd expect kind of flatter production year end '21 versus year end '20 in the Permian. is that your best sense right now? And does that require rigs to come back or more leaning on DUC inventory?
Keith, this is Jeremy. For a flattish case that would be largely rely on DUC inventory. For a case, where you see - the way we look at it is when rig show up at six months to eight months before the volume impact. So any improvement in activity is unlikely to happen in the first part of next year. We view it as more of a mid-next year. So a lot of the scenarios we're looking at is roughly flattish to slight growth.
The way to think about it as you had an inventory of uncompleted wells to - in the Permian, specifically to - to mass 400 plus rig, you immediately ramped down over two months to three months to the 125 to 135 rigs, but you had substantial uncompleted inventory plus those rigs that we're drilling the wells weren't completed. So there is - there is some surge capacity in there. We don't necessarily think that's going to drive growth. But that's going to create some noise in forecasting production.
But candidly for an impact of a rig because of pad drilling and the process as they go through now, it's close to six months before you see an anticipated impact of production. So we would think that in a very likely case, you can hold production flat with the rigs, you have today and you probably need to start bringing rigs down towards the end of next year or later early in the 2022 for growth.
And then second question, I'm just trying to square. So your volume guidance went down, but it sounds like your Permian Basin wide volume outlook is now a little better on the margin in the last call. Is that a function of kind of you guys being a little more exposed to the Delaware versus the Midland or just any color on your system versus basin wide for the year?
The way I'd look at it though is impacts to us can be that its revenue barrel right on our guidance. So that could be touched three times. So any movement, it's amplified. So it changes in forecasting. I'd say that we feel strongly about our assets and where they're positioned, where volumes will be. I think a lot of that is noise on the long-haul side from the MVCs.
I think that's predominantly where it is on the gathering. We have very healthy gathering system connections. We're seeing a lot of activity in the Northern Delaware and Western Delaware, and our Midland Basin assets are holding in well too. I think this is largely driven by long haul and MVCs.
Okay. Got it. That makes sense. Thank you.
So it's not the gathering piece of the business.
We'll take our next question. Caller please identify yourself and proceed with your question.
This is Ujjwal Pradhan, Bank of America. Firstly, just wanted to get an update on what you're seeing in your gathering accretion in the Permian, and maybe perhaps if you're in a position to update your outlook and some of the - the high double digit exit to exit decline bridge that you had referenced in the past. Some of your Permian crude gathering peers have noted some improvement in volumes in Midland since May and have made some positive revisions to their outlook. So anything you can provide, would appreciate that?
So Ujjwal, I think, Jeremy covered our - kind of our volume outlook and the shape of the curve. I don't know if there is anything else specific that you want to know. Jeremy, do you have anything to add or…
Ujjwal, this is Jeremy. We don't give specific gathering asset guidance. But I'd say like I tell know to the previous call, we - we feel good about the activity and things are holding in throughout the end of the year. I think we - I think our guidance reflects, where we see volume to be, and we're not disadvantaged - well as to any gathering assets, and we've put out the quality of the acreage underneath ours relative to anyone.
As Willie mentioned earlier between facility and acreage dedications, we've got over 2.5 million acres between Texas and New Mexico, and we feel strongly that we just don't give specific asset guidance.
And just to clarify some of your comments on the drivers of the Transportation segment EBITDA update here. Maybe if you - would you be able to provide color on sort of - the bulk of volume declines, where the bulk of the volume declines are below MVC. It sounds like, it's mostly on the long-haul side, but also how close the current volumes are the MVCs sort of trying to get a sense of if - what under recovery circumstance how - how close we are to those levels?
Ujjwal this is Jeremy. I would say that the changes in the basin reflect changes in our long-haul system for the most part. You saw - we saw in the last call that we're forecasting close to 2.5 million barrels a day of declines from March to May on onshore U.S. Yes. It has come out in support in that. The CSD percent decline there, you see volumes ramp up through this quarter and into next quarter. That's going to be the shape of what it looks like on a lot of our assets. I'd say we reflect the basin or some proxy for it.
And a quick one, if I may. Just on the cost savings initiatives and the number that you have quantified towards the higher end of range around 100 million this year. Are you able to provide some - some color on what are some of the specific savings that you had made, what type of initiatives they were and how much can we expect to be readable in 2021 and beyond?
Chris can give you a little more insight, but we do expect to have a good portion of that carryover into following years. Our efforts here are really how do we get lower our cost structure across the company through a number of different things, whether it be organization, systems, efficiencies and things. Chris, do you want - do you have some things you want to give some insight…
Ujjwal, this is Chris Chandler. The organization really stepped up and delivered cost savings really almost across all of our categories. I'll give you some examples. We've seen reductions in personnel costs. We've tempered hiring, and we're placing any vacancies with employees that we've redeployed internally. We've looked at our operations for the next two years and re-optimized all of our maintenance activities around those expected operation.
So for example, tanks that we're going to take out of service earlier in the year, we've been able to delay until next year to utilize and contango storage yet still within of course, integrity requirements and regulatory requirements.
We've seen a large reduction in travel and entertainment expenses, as you would expect. Our supply chain organization has been very busy competitively bidding both materials and services, and we've seen a significant savings there.
And then finally, our technical resources themselves focusing on expansion projects have really looked internally to optimize our systems and are finding ways through number of pumps, we run and which pump stations we operate and the trade-off between horsepower and drag reducing agents to lower the operating cost on our pipelines even at the same throughput of the same volume. So it's really - it's in every category, and we're seeing some very good success. And like Willie said, we think we're going to be able to carry that into 2021 and beyond even as volumes recover.
One of the things we really pressed forward on is not selling a dollar value. We really challenged our organization, how do we - how do we become as streamline as we possibly can. And our team hasn't let us down. And we've got a number of initiatives that Chris articulated number of them, but we're going to keep pushing on this because it's a continuous effort. Thanks.
We'll take our next question in queue. Caller, please go ahead.
This is Pearce Hammond with Simmons Energy. Thanks for taking my question. I appreciate your comments Willie on the divestitures in the prepared remarks and in light of the recent Berkshire Hathaway transaction with Dominion, I wanted to get your perspective on. Do you think valuations are attractive for divestitures in the current market? And do you see opportunities to further streamline and optimize Plains through additional divestitures?
So the answer is, we're always looking at our assets to see what makes sense for us and what doesn't, right. If it - if it's worth more to others than it is to us, we strive for that win-win-win for the buyer, the seller and the employees to - to get the asset over to a - to a business that can maximize the value. So I made a comment about a number of transactions that we're currently working on. I can't give you any more resolution on that because we're in the middle of some of those things.
But to answer your question, we're absolutely looking at opportunities to not only just asset sales, but we've been - one of our strategies have been with strategic joint ventures to try to optimize capital efficiency, where you can either share cost synergies, commercial synergies, capital synergies. So those are obviously in play.
And then the larger transactions, there is nothing that drives that, to do anything now. We've got a pretty, pretty identified path that we're on. And if we are able to do the things that we want to do, we think it's going to unlock value in - in our company, which will help us if there is ever an opportunity to do something broader. As far as the Berkshire deal, I really can't comment on that. But always open, but we're also very, very cognizant of what makes sense, what - what's transactionable, and we're focusing on things that we can do.
Okay. Thank you, Willie.
Pearce, this is Jeremy. I would just state that Berkshire transaction that's a unique set of asset and unique fit for a buyer. I still think there needs to be some health in the term loan B in the credit market to bring the specific buyers back to it. I think a lot of the strategics are on the shelf, right now. So that's not necessarily a proxy for all transactions.
As Willie mentioned, we're constantly evaluating our assets and making them generate specific returns and it's - keep it harvested or exit. And so anything in the exit box, we're constantly looking for opportunities to maximize value with third parties. And so we're trying to pair specific assets with specific buyers. And so the things that we think are candidates for sale, we're waiting to those specific buyers were healthy. We don't want to give anything away.
Thank you, Jeremy. And then a quick follow-up, if DAPL is shut down, would that be a net benefit for Plains because of your rail assets?
Pearce, this is. Jeremy. We had the Bakken North assets in West Canada that can connect from Trend to Regina. So we can benefit on the pipeline and the rail side and also from an S&L standpoint. So I think there are opportunities there. We're waiting to see how that plays out. But we would look to maximize value to Plains in this asset if something were to happen. But - but candidly, from a regulatory standpoint, everybody is watching it to see it as a precedent.
Thank you.
Yes. I'll just make a comment Pearce on - on DAPL. We're not close to it because we're not a partner, and we certainly don't operate it. But one thing that we're watching with - with a lot of care is what precedent does set. Again, I don't know the details, but to have a line that's been operating for a number of years safely being shut down for different reasons, it's - it's an environment of uncertainty, and it's certainly something that we don't - we don't see that the benefit of. So that's one.
And we always hate to see rules and regulations get - get confusing. And to Jeremy's point with the assets that we have it gives us a lot of optimization opportunities to handle not only the DAPL experience, but if there were interruptions elsewhere, if there's an interruption as far as hurricanes and the Houston Ship Channel, Corpus Christi, there is - having the asset base that we have gives us the flexibility to move barrels where they need to go.
We'll take our next question in queue. Caller, please go ahead.
Michael Lapides from Goldman Sachs. Somebody asked the question about asset M&A earlier, and I want to kind of take a step back and really ask the question of when you look around the portfolio, and obviously the Permian is core and obviously assets like Capline are core and Diamond, but you've a lot of assets in a lot of other basins. So where you don't necessarily have a lot of scale outside of the Permian and the storage at Cushing, in Capline, and that the Gulf Coast. How do you think about what potentially non-core or what the kind of the optimal portfolio longer term, not necessarily in the next 12 months or 24 months, but kind of three to five, five to seven years from now, what that would look like for the company?
Well, Michael, it's a tough question to answer because I'll give you our fundamental strategy maybe that will answer it - may help you understand how we think about it. I mean clearly with the - with the base we've got, we do want to build around existing assets we have, build optimization capabilities and flexibility.
Those are all projects that you've probably seen us do. In areas that we don't have an advantage or a significant presence, you've seen us obviously try to - try to find the right - the right home for the assets if they're available. We're not in a position, where we have to sell assets for the wrong values, but we're always talking with people again, trying to unlock what make sense for - for different folks.
So I think you'll continue to see us build around our base in the areas that you can look at on the map that we don't have as a core - a core - a core asset base. If there is an opportunity that makes sense for us to do something with someone else there, we obviously would consider it. We also factor risk. We factor a lot of things. Cash flow into it. So it's kind of a hard answer to give you our blueprint on. But hopefully that helps.
We take our next question in queue. Caller, please go ahead.
This is Jean Ann Salisbury from Bernstein. Do you expect U.S. crude exports to fall off in the second half? And would that reduce the share of Permian flows going to Corpus versus other versus Houston or Cushing?
Jean Ann, hi, this is Jeremy. Right now, we're seeing strong flows to the Gulf Coast. Obviously, differentials and demand will play into that. But absolute volume of production is down. So you would expect from a March standpoint exports to go down.
Relative share Corpus and Houston, Corpus has been increasing as Wink to Webster comes on and that contains balances. So I think there is a few things that we'll continue to move it. But demand and location of demand is going to have a big impact on that.
Okay. So you would necessarily say that because Corpus is so export heavy that it would be negative, I guess if the U.S. starts to export less?
Not necessarily because the demand is there simply from all the MVCs across the pipes in the dock. They are going to pull as many barrels, as they can that are physically available. I don't think from an export standpoint, we're not seeing - from a quality standpoint, we're seeing normalization between Houston and Corpus and when that happens, it's just going to be a matter of demand and who has access to barrels.
And then is there any appetite from customers today to blend and extend contracts or is now not really the time?
Jean Annualized and this is Jeremy again. I would say that there has been a bit of shock between March, April, May and June. As we get into this - those discussions what we had across all assets. We're extending contracts in the field and doing thing - doing a lot of different things - to our customers. But those discussions what we had is to optimize longer term relationships with customers, but it's a little bit too early.
There is a lot of bankruptcies going on. So those contract discussions are being had with individuals. I think the next wave of discussions on the long haul that will be part of it, for sure.
We'll take our next question in queue. Caller, please go ahead.
Tristan Richardson with Truist. Hey, really appreciate all the comments you guys gave on the second half. Just one quick question around seasonality in the second half, I think the 3Q directional estimate you share suggest something a bit higher and/or flat with 4Q versus the normal seasonality. Is part of that dynamic, the expected timing of MVC deficiency payments or the timing that contango capture. Curious, some of the factors making that second half a little more radical than what you'd normally see?
Yes Tristan, I think you covered the two of them, MVC timing impact and contango as Harry outlined. I don't know, if anyone else has anything to add to that?
This is Jeremy. The one thing and the seasonality in NGL, it's always in the third quarter versus the fourth quarter. So you definitely will see that.
Okay.
For some of the contangos is mitigating at this…
We've stronger contango margins in the third quarter and fourth quarter and actually got comfortable strong in the third quarter and fourth quarter too.
And then maybe just one on contango opportunities in general I think is there a way to frame up the total size opportunity of spread opportunities that were created by all this disruption or another way to think about spread opportunities that might be sort of non-recurring just with all the disruption we saw, March, April, May, June?
I'll make a comment and others can jump in. One of the things we consciously try to do is increase our fee-based - our fee-based earnings. So, if you went back a number of years, we might have more storage available to capture some of these. Our intention now is the assets that we've got. If we can get fee-based service out of it, it makes more sense for us to do that and try to keep tanks empty for contango or basis spread arbitrage. Harry or Jeremy, you want to add anything?
No, I think that covers it all.
So I didn't answer your question - but it's less than it's been in the past.
Fair enough. Thank you.
We'll take our next question in queue. Caller, please go ahead.
Gabe Moreen with Mizuho. Just two quick questions from me one Al, if you can just comment on sort of the working capital return, you're expecting in the back half of the year assuming no other, I guess contango or other S&L opportunities present themselves?
Can you ask that again I'm sorry, you broke up there, Gabe?
Sorry. Can you hear me better now?
Yes.
Just I was going to ask about whether the magnitude of working capital return in the back half of the year, assuming no other contango or S&L opportunities present themselves?
This is Al. As working capital and that is difficult to forecast. We clearly built a decent amount of contango storage and NGL into the second quarter, first quarter to second quarter with seasonal build, prices, margin all that come into play. So it's one that we'll not start forecasting working capital swings. We won't be doing a true forecast in our guidance for how we're defining free cash flow for that very reason because prices at the end of a period can impact margin and all that.
With that said, clearly, as it relates to the activity, we think over periods of time that four quarters a lot of that seasonality comes out and it's - then it's fairly priced and our focus is going to be on generating free cash flow.
And then maybe Willie if I can follow-up on your comment on one-third of the 2021 growth CapEx being in larger project. Does that imply - the $300 million, that's left is your base level of G&P growth capital you're spending kind of year in, year out, just curious if you would characterize it that way?
I would say in a right neighborhood, but I don't want - quote specific numbers because it's two years out, but it's a fair way to look at it.
We'll take our next question in queue. Caller, please go ahead.
Colton Bean, TPH. Just to follow-up on some of the questions around Transportation. Is it possible to speak a bit more explicitly to what type of volumes you all have seen over the course of July?
Colton, this is Jeremy Goebel. I would say that the vast majority of curtailments, where we've seen gone with - outside of the Williston Basin - by July. So the declines we've seen have been offset by some additional completions we started to see in June and now in July and in August, we expect more. So I see activity ramping and curtailments are behind us. I'm not going to talk about specific assets. But I would say that the production in July exceeded our forecasts or estimates.
Understood. I mean this is - as you look at capital needs expected to average $500 million or less, it sounds like potentially a decent bit less. It does seem like excess free cash flow should continue to grow. So if you think about allocating that capital is your - reaching your leverage target, a gaining event to allocating more cash to unitholders or does equity valuation also factor into that priority ranking?
Al.
In the near term, leverage will take priority, but clearly do we have to exactly hit our target, that will be a question. We're a bit of ways, as I've mentioned in our - in the prepared comments about with where we think our leverage is in a more challenged S&L environment, which is what we're expecting going forward. But we'll be focused on using - the excess in the near term for debt reduction, leverage reduction.
And then we'll be looking to allocate to equity holders, whether it's distribution increases and/or share repurchases. And those decisions are far enough out that it would be premature to talk about how we'll approach that.
The other thing, we'll look at carefully is, it's all also a fact of kind of what does the future look like, right. So if there is a better certainty of the future that may change the story a little bit. So it is a bit of a moving target. But clearly, the messages we want to get our - we don't want to get our leverage down to lower levels.
Got it. Appreciate the detail.
I think we have time for one more question. Can we go ahead and take that please?
We'll take our last question in queue. Caller, please go ahead.
This is Ganesh Jois from Goldman Sachs. Quick question how would you react to the decision that BP announced this morning to reduce its oil production for the long run and if this becomes a longer term trend, how do you view the capital intensity of your business, and some of the decisions that you have to make?
Well, Ganesh on volume - lower volumes, I think again, back to what we're focused on is, how do we reduce our capital intensity, right. And I think you've seen us take actions to do that. Portfolio optimization plays a piece in that. And it's just very difficult to lay out a strategy on what you might do with your portfolio without knowing timing, extent and duration of what people are doing.
But directionally, speaking to answer your question, we would obviously adapt and again, everything we're doing is to try to put the position - put the company in a position, where we flourished in the future. And so we would not be - we would take that input, and then just adjust our CapEx programs appropriately or look for more opportunities to do some strategic JVs.
In some cases maybe there is an opportunity for a line to go into a different service that may help a less carbon intensive world. So until we have better definition of that, it would be hard to kind of articulate a specific strategy.
This concludes the Q&A. I will now turn it over to Willie for any closing remarks.
Well great. Listen, thanks, again, for everyone dialing in. We hope you remain safe, and we look forward to talking to you all soon. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.