© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to the PAA and PAGP Third-Quarter 2018 Earnings Call. Today's call is being recorded.
At this time, I would like to turn the call over to Roy Lamoreaux. Please go ahead.
Thank you, Ann. Good afternoon, and welcome to Plains All American's third-quarter 2018 earnings conference call. Slide presentation for today's call can be found within the Investor Relations News and Events section of our website at plainsallamerican.com.
During our call, we'll provide forward-looking comments on PAA's outlook. Important factors that could cause actual results to differ materially are included in our latest filings with the SEC. Today's presentation will also include references to non-GAAP financial measures such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can be found within the Investor Relations Financial Information section of our website.
We do not intend to cover PAGP's results separately from PAA since PAGP's results directly correspond to PAA's performance. Instead, we've included schedules in the appendix of our slide presentation that contain PAGP's specific information. Please see PAGP's quarterly and annual filings with the SEC for PAGP's consolidated results. Also included in the appendix are some additional reference materials for today's call.
Our call will be hosted by Willie Chiang, Chief Executive Officer; and Al Swanson, Executive Vice President and Chief Financial Officer. Additionally, Harry Pefanis, President and Chief Commercial Officer; Jeremy Goebel, Senior Group Vice President, Commercial; and Chris Chandler, Senior Vice President, Strategic Planning and Acquisitions; and other members of our senior management team are present and available for the Q&A portion of today's call.
With that, I will now turn the call over to Willie.
Thanks, Roy. Good afternoon to everyone, and thank you for joining our call. Let me begin by hitting the high points of the information we released today.
As outlined on slide 3 and as Al will discuss in more detail, this afternoon we reported solid third quarter results that meaningfully exceeded our expectations. Our results for the quarter reflect continued growth from our fee-based segments and overperformance in our Supply and Logistics segments or S&L. We anticipate both of these trends to continue through the fourth quarter and into 2019 as reflected in our updated and increased 2018 guidance.
Al will provide an update to our preliminary guidance for 2019, which reflects continued momentum in S&L and remains in line with our prior expectations for fee-based growth after adjusting for our recent sale of a 30% interest in the BridgeTex Pipeline, which was executed after we provided our preliminary guidance for 2019.
We've characterized 2018 as a year of execution. So far, this year, we've delivered results ahead of our guidance and we remain on track to achieve our deleveraging objectives within the first half of 2019. We're excited about what the future holds and we believe that we're well-positioned to continue to execute to the benefit of our stakeholders.
The fundamentals for our industry are constructive. Global demand continues to grow, and the U.S. leads the world as the largest and most visible source of growing liquids supply. In this regard and as illustrated on slide 4, we anticipate crude oil production growth across multiple North American basins over the next several years, and our asset base and business model are positioned to benefit.
Specifically in the Permian, we continue to expect production growth to be in line with our year-end exit rate forecast of plus or minus 3.5 million barrels a day, and we expect similar annual volumetric gains in Permian production for the next several years. Additionally, we expect increased activity in other key producing regions including the Eagle Ford, Rockies, Williston and Mid-Continent, which should drive increased flows to key U.S. market centers including Cushing, Oklahoma. This is driving demand for new takeaway solutions that our existing system is well-positioned to serve through a combination of capacity optimization and capital-efficient expansion opportunities.
To that end and as illustrated on slide 5, we continue to progress options to increase capacity on our Red River and Diamond Pipeline systems. Additionally, the Capline owners are finalizing plans to purge the line and are advancing plans to reverse the pipeline. The potential expansion of our Diamond Pipeline capacity would be coupled with a project to extend the pipeline a relatively short distance to connect into Capline. These potential projects leverage existing systems to provide efficient solutions at attractive returns and would be incremental to our current guidance and capital programs.
Meanwhile, our Permian transportation assets remain the largest growth driver for our business. As shown on slide 6, we expect our full-year 2018 average Permian tariff volumes to increase more than 30% or approximately 1 million barrels a day. In total, we expect full-year Permian tariff volumes of slightly less than 3.8 million barrels a day. The impacts of the partial BridgeTex sale and timing of completion activity are partially offset by the earlier in-service timing of Sunrise.
For the fourth quarter, we expect a meaningful uplift in Permian tariff volumes, supported by the early placement into service of our Sunrise expansion project, as well as a continuation of Permian production growth and multiple bottlenecking expansion projects.
With respect to the early commissioning of our Sunrise expansion project, I'd like to publicly acknowledge the hard work, creativity and coordination of our team in making this happen. By bringing Sunrise into service early, we were able to add much needed capacity to the market. We also continue to make good progress on the balance of our capital program. Construction of our Cactus II pipeline is on track with partial in-service targeted for late third quarter 2019 and full service by April of 2020.
Additionally, our multiple gathering system expansions and intra-basin debottlenecking projects are advancing on schedule, along with complementary expansions of our terminalling and storage capacity footprint throughout the basin. We also continue to make meaningful progress on the ExxonMobil JV. The project will be anchored by ExxonMobil, and we continue to work with third-party shippers on additional commitments. We are also finalizing commercial agreements and working through joint venture documents.
As announced earlier, Lotus Midstream, which recently acquired the Centurion pipeline system and additional midstream assets from Occidental Petroleum, including a terminal in Midland, has signed a letter of intent to participate in the joint venture. We're pleased to have Lotus join the project and look forward to sharing additional updates on the JV project in the near future.
With that, I'll turn the call over to Al.
Thanks, Willie.
As Willie mentioned, our third-quarter results exceeded our expectations primarily due to strong performance in our S&L segment. The strong S&L performance is primarily the result of favorable regional basis differentials in Canada and in the Permian, as well as the one-time $20 million dollar audit recovery related to a profit sharing arrangement in our NGL business.
As shown on slide 7, we reported fee-based segment adjusted EBITDA of $561 million reflecting year-over-year growth of $16 million or 3%. Year-over-year Transportation segment adjusted EBITDA growth of $25 million was driven primarily by Permian volume growth, partially offset by Transportation segment asset sales, and a decrease in facility – Facilities segment adjusted EBITDA was primarily due to asset sales as well.
As shown on slide 8, we increased 2018 adjusted EBITDA guidance by $150 million to plus or minus $2.55 billion, driven by our strong third-quarter performance and our expectation for stronger than previously anticipated results in our S&L segment through the balance of the year.
I will also point out that our updated 2018 guidance incorporates the impact of our sale of a 30% interest in BridgeTex Pipeline, which closed on September 30, generating net proceeds to PAA of $862 million. We reported a gain on the sale of $210 million. The sale resulted in lowering our 2018 fee-based guidance by approximately 1%, or $25 million.
Our updated 2018 implied DCF guidance is approximately $1.84 billion, with approximately $1.68 billion available to common unitholders, resulting in implied DCF per common unit of $2.31. This represents a $0.49 per unit, or 27% increase over 2017. Retained cash flow for 2018 is expected to be approximately $810 million.
I will also note that we increased our 2018 maintenance CapEx by $15 million, or 7% percent, to $240 million due to our ability to complete more work during the year than previously anticipated and our decision to replace, instead of repair, certain segments of pipeline. These projects are part of our ongoing commitment to ensure safe and reliable operations.
In addition to 2018 guidance, I will provide an update to our preliminary 2019 adjusted EBITDA guidance. On our August earnings call, we discussed directional fee-based guidance for 2019 of 14% to 15% growth over 2018 guidance of $2.225 billion, which equated to approximately $2.55 billion. And we also indicated that our 2019 S&L performance would likely outperform 2018 S&L guidance, which was $175 million, result in total adjusted EBITDA of approximately $2.7 billion.
The BridgeTex sale represent a reduction to the directional guidance previously provided. Additionally, we intend to continue to gather and incorporate data from producers regarding their 2019 CapEx plans, as well as completion timing. And we'll provide more definitive guidance for 2019 on our February call; but based on our current assessment, we are updating our preliminary fee-based guidance for the BridgeTex sale and our current S&L outlook as follows.
We expect 2019 fee-based segment adjusted EBITDA to increase plus or minus 12% year-over-year, which equates to plus or minus $2.46 billion. This is essentially unchanged from our previous 14% to 15% fee-based growth guidance as adjusted for the BridgeTex sale.
We expect all of this fee-based growth to be driven by our Transportation segment, and our Facility segment is expected to be flat to slightly down as 2018 results thus far reflect a degree of outperformance relative to our initial 2018 guidance. We also expect 2019 S&L will likely outperform our 2018 guidance plus or minus $350 million. Directionally, that would place total adjusted EBITDA at plus or minus $2.8 billion.
Although we have the potential for some upside in our S&L segment in 2019, we anticipate this segment will return to a lower level of adjusted EBITDA in 2020 as we expect both Permian and Canadian differentials to narrow as new pipeline capacity comes into service. As a reminder, to the extent we are able to generate outsized S&L earnings, we intend to use such proceeds to either reduce debt or fund capital.
Before handing the call back over to Willie, let me provide a brief update on our deleveraging plan. As illustrated on slide 9, at September 30, PAA had a long-term debt to adjusted EBITDA ratio of 3.9 times and a total debt to adjusted EBITDA ratio of 4.0 times. These metrics are closer to our targets, and with the total debt to adjusted EBITDA ratio being down 1.5 turns from a year ago.
As Willie mentioned, we expect to complete our deleveraging plan in the first half of 2019. I will also note that our combined 2018-2019 capital program remains unchanged at $2.6 billion. However, we expect the 2019 capital program of $650 million to increase closer to the $1 billion level, primarily driven by expected progression of the ExxonMobil JV project in addition to sanctioning other new projects. We plan to provide an update on our capital plans in conjunction with updating our full-year 2019 guidance on our February call.
As we come closer to completing our deleveraging plan, we wanted to share some thoughts on how we plan to manage our distribution going forward. Multiple factors the board and management will consider are summarized on slide 10 and center on our commitment to maintain a significant level of financial and operational flexibility, support metrics that are consistent with mid-BBB credit ratings over time, and retain a level of cash flow that limits, if not eliminates, the need to issue common equity to fund routine growth capital programs. With these factors in mind, upon completing the deleveraging plan, we expect to be in a position to increase the distribution potentially as soon as the first quarter of 2019 distribution payable in May.
With that, I will turn the call back over to Willie.
Thanks Al.
As you can see, it continues to be a productive time for our organization, and as summarized on slide 11, we're real pleased to be making meaningful progress towards each of these 2018 goals. Before opening the call for questions, I wanted to acknowledge and thank Greg Armstrong, Co-Founder and 26-year CEO of Plains, retired as CEO effective October 1. Greg, Harry and the entire team have built an incredible business over the years, and I want to thank them for the trust that they placed in me and the efforts to make sure we had a smooth transition.
As we look forward, we acknowledge the recent industry cycle and the steps we've taken to position the company for the future. We continue to invest in our business through the cycle; while sharpening our focus on operations excellence, portfolio optimization, and continue to advance multiple initiatives to further improve our organization for the future. As a result, we believe that Plains is emerging as a stronger entity with an exceptional asset footprint in key North American growth areas.
We expect our deleveraging plan to be complete in the first half of 2019. This should provide us significant financial flexibility, enabling us to self-fund the equity portion of our routine growth capital programs, while delivering attractive DCF unit growth over time.
All that said, we remain intensely focused on the safe, reliable and responsible execution of our business plan, which we expect to drive strong results in 2019, and will continue to position the partnership well for 2020 and beyond.
I'll turn the call over to Roy.
Thanks, Willie.
Now, 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-ups. This will allow us to address the top questions from as many participants as practical in our available time this afternoon. Additionally, Brett Magill and I plan to be available this evening and tomorrow to address additional questions.
Ann, we're now ready to open the call for questions.
Thank you. We'll take our first question from Jeremy Tonet with JPMorgan.
Good afternoon.
Hi, Jeremy.
Hi. I just wanted to start off with Sunrise here and see – it seems like you've got 350,000 barrels a day capacity online in the quarter. And was just wondering if you could provide a bit more detail, I guess, on how that's flowing. And you said, I think, there was 220 of takeaway from there, 120 into Cushing, 100 to other Valero refineries. Is that what you're seeing moving now or is there a higher level? Anything you can expand upon this and how much the EBITDA ramp you'll still see in the fourth quarter versus the third quarter here.
Harry, you want to cover that?
Sure. So, started commissioning Sunrise in October, full operations with the generators in November. Initially, we thought sort of takeaway capacity would be in around 200,000 barrels a day or 250,000 barrels a day. It's probably around 300,000 barrels a day to 350,000 barrels a day. We developed a few more markets out at Wichita Falls area. So the pipeline can move about 500,000 barrels a day. But that's sort of the takeaway capacity that we see today. Of course, our goal is to try to maximize throughput and try and find additional takeaway options.
So, Jeremy, an obvious initiative for us is to continue to find those additional markets downstream Wichita Falls. So, using the map between 500 a capacity to where we are today is the opportunity set going forward.
That's very helpful. Thanks. And I want to just touch on S&L here real quick, and I know it's a smaller part of the business, but the number stepped up a bit there, and just trying to get our hands around what this looks like. And just wondering, is this kind of more front half of the year weighted as far as what you see for S&L and you kind of lift the guide (18:42) couple quarters higher? Is this more crude or Canadian NGL? There are some wide dips up there. What can you sketch as far as the composition? And when you get the super-sized earnings, you talked about reducing debt or funding capital or increasing the dividend, any thoughts to maybe putting it back into buybacks when it's kind of one-time in nature?
Four questions. So, were you talking about 2019, Jeremy, on your particular – Jeremy, maybe I'll – go ahead, I'm sorry.
Yeah. I mean, that was for 20 19 particular, just trying to get a feel for the guide that being front and halfway, but also just philosophically in S&L, could buybacks come into the picture there or anything else you can share on those thoughts?
So let me start off with the S&L numbers, and then Harry and Al can jump in here as they see fit. When we started the year, I think we all shared that we did not expect the margins to get or the differentials to really widen until the back half of the year. So we kind of went into the year with that thought that fourth quarter primarily we may be able to capture some. And I think what's actually come to fruition is obviously the differentials widened out for most of the year, and we were able to catch additional crude differentials primarily around the Permian fourth quarter. There's also some Canadian crude differentials that we've been able to capture. And if you think about the differentials in S&L, that happens when there are constraints in pipelines.
So our view of 2019 is there's a limited amount of capacity – takeaway capacity that comes online really until our Cactus pipeline starts up late third quarter. So there are opportunities there to be able to capture some arbitrage in the S&L segment, but once 2020 hits and there's a lot of pipelines, as Al pointed out during his prepared remarks, we don't expect certainly the crude differentials in the Permian to persist after that. So this is really an opportunistic period of time that allows us to capture some of that value.
On the flexibility of buybacks, I don't want to get into commitments on what we're going to do, but I think the message you should take from this is by having this financial flexibility it gives us a number of different options to be able to bolster the company for the future.
Great. And just to clarify the one point on S&L for 2019, it sounds like its normal ratability across the year with seasonality as we've seen in the past. It's not weighted towards the front first half versus the second half?
Well, no, not necessarily. I mean, if you just look at the curve on the Permian, its second quarter is probably the weakest quarter of the year. Fourth quarter, the market sort of pricing in and some of the pipes are going to be in service and it's compressed. So there's definitely going to be a curve to the Permian differentials. If you look at Canada, the differentials are wider in the first few months of the year than they are for the balance of the year. So there's obviously some contemplation that some of the turnarounds are – or other impacts the market might not weigh in the market as much as I do next year. So it's a mixed bag, but it's probably more heavily weighted to the first half of the year than the second half of the year.
Thanks.
And Jeremy, don't forget, we still do have a seasonality to the NGL portion of our business. But as Harry said, you've got that crude differential overlay on that, you'll still see some seasonality between first and fourth quarter based on the NGLs.
And Jeremy, I'd just add one follow-up on the point Willie answered, on using S&L to buy back. Clearly, maybe at some point in the future, but our first focus is balance sheet. I did mention that we expect our 2019 capital program to increase, and clearly those will be the first priorities with any excess S&L profits.
Understood. Appreciate the color. I'll get back in the queue. Thanks.
Thanks.
We'll go next to Tom Abrams with Morgan Stanley.
Thanks, guys. Was looking at your page 5 graph of all the – map of all the pipes, and just wondering if your comments on Permian to Houston line, looking for additional partners, if that implied that maybe some of the other projects out there that are also looking for additional partners may end up combining with your joint venture?
Jeremy, why don't you take that?
Yeah. I would say, first and foremost we're looking at – we have an attractive project with Exxon supply, Exxon demand. We have liquidity from Plains and Lotus. We have enough to make the project go on our own. We're looking for third-party shippers. We really can't comment on speculative concepts about merging projects, but honestly as you've seen with Plains historically, we'll always look at opportunities. But first and foremost, we're advancing the project as we've said on the call, and we're looking for third-party shippers at this time.
Got it. And I don't know if I get a follow-up or not, but I wanted to ask about a lot of crude coming into the kind of Corpus – I'm sorry, the Houston area. Your friends in Magellan talking about a connection to Corpus. Is there a need to get more crude from Houston over towards St. James?
Wait. Those are two different questions.
The differentials would tell you, yes.
I'm trying to think of your – the additional projects that are in your likely future.
Yeah. So, I mean, the differentials, LLS is about $8 and change over WTI and East Houston's $6 – or $2, $2.50 differential, so there's clearly demand in St. James.
And some of that is grade-dependent as well, like the Canadian barrels are looking for a home to get run in St. James, and so that would be the most efficient way to get there. So I think there's two components to the projects, and we're excited about both of them.
Great. I'll jump back in queue and come back on asset sales later. Thanks.
Thank you.
We'll go to next to Shneur Gershuni with UBS.
Good afternoon.
Hi, Shneur.
How is it going, guys? Just a couple of questions here, I'll try not to keep it to 11 parts, but in terms of the capital being invested for future growth, how much capital is being placed into service into 2019 that will only partially benefit 2019 and roll into 2020? And how much of your current CapEx impacts only 2020? I mean, said differently, can we see a material increase in 2020 fee-based EBITDA as well given the suite of projects that you've FID'd and are working on?
Shneur, this is Willie. I don't want to get into talking about 2020 because there's a lot of road between now and then. I think that the message you can take is we've teed up a number of projects here that aren't currently sanctioned, particularly around the Diamond and the Capline reversal. I think the takeaway should be we've got a number of projects that we've got in the queue to drive growth going forward in 2020-plus and we do have a number of projects that are kicking in for 2019 with the Cactus II project starting up late Q3, which we should get a full pop in 2020. So there's no shortage of projects or growth that we have.
Okay. Fair enough. And as kind of a follow-up there, in sort of the other projects that you were considering. I believe at your Analyst Day you talked about a Wichita Falls extension that could sort of take you all the way to St. James as well as a bullet pipe on the – or potentially, I guess, theoretically at Cactus III. Have those ideas – are they still in the hopper, are they developing? I was just wondering if you can give us some color around that.
Wichita Falls – we actually laid out two alternatives, one to extend to Cushing, alternatively to extend to the east and connect into the Red River system which could then tie into Longview, and Energy Transfer has got a pipeline system from Longview into Baton Rouge. So those projects are still actively being advanced. Cactus III is, I would say, backburnered given the fact that we're allocating our resources to the Exxon project.
All right.
Yeah. Shneur. I'm sorry, just another – this is Willie. Just one more thing to add. There's a lot of talk of new lines going from A to B. One of the things, our strategies is how do we take our existing system and come up with hopefully a shorter term solution and certainly a more cost-effective solution. So, for us, there may be more connecting the dots between existing pieces of our system to accomplish the same versus some of the other pipes that are just complete announcements of new projects, if that make sense.
No, that totally makes sense. And I'll jump back in the queue, thank you for the color, and maybe ask about the Exxon pipeline afterwards.
Thanks, Shneur.
We'll go next to Christine Cho with Barclays.
Hi, everyone. For the Capline reversal, is this going to be from Patoka down or just from that extension in Memphis? And how much time would you need to reverse it and do your connection? Like, if you were to do an agreement tomorrow with all the parties, how much time do you need to reverse and commercialize? Are we talking months or years?
Harry.
No, it's an 18- to 24-month process. If we started today, probably closer to 24 months. We have to purge the line and we need some equipment. We need a little bit of extension of the pipeline from Memphis to Collierville. So it's – maybe the south end of the system could be reversed in a 18-month timeframe. North end would be a little bit longer though. It's not something that can be accomplished in months. It will probably be in phases, with the south end of the system placed in service on a faster timeline.
And when you say south, are you talking from Memphis South or like what's south? Okay.
Yeah. It's Memphis South.
Okay. And then when you say – and then the north part is from Patoka all the way down.
Correct.
Okay.
Connecting carriers need some work too at Patoka so it's not all in our control.
Okay. And then with your – the Permian like long haul pipes that you guys have, how should – with them running full, how should we think about the risk to volumes in excess of the MVCs moving over to some of the NGL to crude pipeline conversions that have been announced for next year? Are there any protections or mechanisms in place to keep the volumes on your system in your view? And then to the extent that that happen, how should we think about the impact on Transportation and S&L, like how does that skew?
I think the best way to think about it is, our guidance reflects our view on how volumes move given all the relative projects that are forecasted to come in service next year.
Okay.
And Christine, don't forget there's different kinds of commitments, right? So you've got minimum volume commitments, which you addressed. There's also acreage dedication, which would be dedicated to our system. And a lot of the contracts we've got as we've chatted before are longer tenured or have longer tenures to them. So there's nothing that falls off a cliff in the next number of years.
Yeah. And in our legacy – we have some legacy systems that are just common carrier pipes. You can walk up and ship today or not ship today. So our guidance reflects our view on what happens with those volumes.
Fair enough. Thank you.
We'll go next to Michael Blum with Wells Fargo.
Hey, good evening, everybody. Just one question on Capline reversal. From Patoka, would you be sourcing heavy barrels from Canada so that part would just sort of have to sync up with Line 3, or could you also source barrels, I don't know, directly from the Bakken so those could be light sweet barrels that come sooner?
Well, it will be driven by a Canadian – by access to Canadian barrels. That's why I had mentioned earlier that it is dependent on connecting carriers. And the timeframe are probably longer than a reversal of the Memphis portion south. But it could conceivably receive volume from Bakken sources as well.
Okay. That's helpful. Thank you. And then second question on S&L, basically I just wanted to know, is there any change in your hedge position either for Q4 2018 or for 2019? In other words, what I'm trying to get at is, what gives you the confidence to put out the guidance you had for both years? Should we assume that that's effectively locked in?
I would say that our guidance reflects our hedge position and our view of the market for the unhedged portion, and we obviously are always active in the market, so it's not the same position that it was last call.
Okay. Thank you.
We'll go next to Jean Ann Salisbury with Bernstein.
Hi. Just a couple of quick ones for me. I think you said that $25 million came out of guidance for 2018 from BridgeTex, which I guess would just be for the fourth quarter. It seems a little high. Can you just kind of spell out, I guess, what the estimate that you had coming out of 2019 guidance from it was?
If you just walked through the math, principally the $25 million was BridgeTex. The pipe is obviously close to full, with logistical constraints. If you take the $2.55 billion to the $2.46 billion, that's principally BridgeTex coming out. The vast majority of it. So you had the numbers right.
Okay. A little higher than that. Thank you. And then it seems like once the pipelines to the Gulf are on from the Permian, that will be a bit more of a draw for Permian barrels then Cushing will be, which I think had a pretty long-term differential expectation in the forward curve. Can you kind of give us an estimate for how much of the flow on basin actually like doesn't go all the way to Cushing to get Cushing pricing and maybe won't be at risk once there is a more direct path to the goal?
Jean, this is Willie. That's Jeannie and this is Willie. That's a really tough question to answer because as barrels go down, depends on what happens to Cushing and what the arbitrage is, unless Harry has a better answer, I think it's really hard. These are definitely barrels at risk, but it's hard to put a number on it.
There are barrels at risk, but there's a certain pull from the Mid-Continent for Permian Basin volume. If you just look back historically, there have been times when the Permian has been – Midland has been a significant premium to Cushing, and volume still moved. So it's hard to pinpoint exactly, but there's definitely refiners in the Mid-Continent that rely on Permian Basin crude.
And we also have...
Okay.
...contracts for that movement, and we hedge some of that movement for ourselves as well.
Correct.
Great. Thanks a lot. That's all for me.
We'll go next to Colton Bean with Tudor, Pickering, Holt & Company.
Afternoon. So, with the Canadian volumes looking like they ticked up there quarter-over-quarter, is some portion of that tied to S&L barrels moving on Milk River and Aurora, and to capture that light spreader or just any clarity there?
The Canadian volumes are mainly tied to production in Canada, so it's not drip in volume that impacts our Canadian.
Got it. And then just can you give us an update on your thoughts around a potential extension of Saddlehorn to capture PRB growth? And I guess, pending Prop 12 – 112, does that impact the thought process around that extension?
We already have a pipeline that can source volumes out of Powder River into Saddlehorn.
Got it. And if the proposition were to go ahead, I mean, is there anything you would need to do to increase the capacity to maybe repurpose Saddlehorn to be primarily a Powder River pipeline?
Saddlehorn has committed shippers, so it couldn't totally be a Powder River pipeline. But there are – we do have the capability of expanding – extending capacity into Saddlehorn, and there's some enhancements that could be accomplished at Saddlehorn as well. So...
Got it.
...we think we're in pretty good position to capture some of the pinch volume increases in the Powder River.
Jeremy, do you have anything else you want to add that?
No. I think we have multiple options. So, today, barrels move from that area through Saddlehorn on a spot basis. But longer term, there's a possibility to expand with the existing footprint with pumps, and then if there's more demand, you could loop segments on the line to create additional capacities.
So I think depending on market demand, and we're watching capital budgets just as you are, and our customers demand on the system will optimize our capital spend relative to demand from the Powder River, but we're actively watching it. And we're honestly contracting some of the capacity in our pipelines in that area to enhance liquidity in our Guernsey terminal to make sure we have as many shots as possible to get those barrels.
That's helpful. Thank you.
We'll go next to (38:04) with Credit Suisse.
Hey. Good afternoon. I just want to start off with the potential distribution increase. Don't want to get too out of us here, but with the increase coming, and I realize you can't say much on specifics, but can you provide any sort of blueprint on how you decide what that first increase looks like and what the mechanism looks like going forward, just whether or not you increase it quarterly or annually from there?
Al, why don't you take that?
Yeah. And clearly, we can't provide specific numbers. The thoughts were all denoted on that slide. If you recall, back in August in 2017 when we made the reduction, we did make a comment that we would consider either starting with small – just normal kind of increases or a step change or a combination of both. We haven't made any decisions clearly as we get closer to that period of time. We'll look at the approach.
We are leaning towards going to a more annual basis versus a quarterly basis, which was denoted on the slide as well. But as far as specific numbers now, clearly, we want to focus on maintaining liquidity and commercial flexibility, operational flexibility, credit metrics supporting mid-BBB and to make sure we minimize the need for equity capital markets. And so those are all the tenets that we kind of dial through our thought process, assuming it is for the first quarter payable in May, but that's really all we could share.
Okay. No, that's fair. And we've heard a lot this quarter from your peers just around major crude export expansion projects, really tailored to VLCCs. Curious where you guys are on that. Seems like a natural extension to a lot of your pipelines. But just curious if you think there's maybe already a risk of overbuild here on the export side.
I'll make a comment, and then Chris Chandler, I'd like to – maybe you can follow up.
Sure.
Clearly there are a lot of deepwater VLCC projects announced. These are all big, big projects, significant expense. When we looked at our Cactus pipeline, we had been trying to look at not only the pipeline takeaway but combining that with a dock. And what we've found is that different shippers are interested in different docks.
So our view is that we can get the pipe – we can get the barrels to the coast and there is a number of different – there's plenty of docks that are being built and we can – we should have flexibility to get access to all those. And if it's a strong return and it's beneficial for us, we may participate. Otherwise, we're going to kind of watch and see what happens.
Yeah. The only thing I'd add is we do believe that one or more single point mooring projects do make sense going forward as crude oil exports continue to grow. It's, of course, the most efficient way to load a large volume of crude oil for export, and it's an area, like Willie said, that we're closely monitoring.
Great. Appreciate that color. Thanks, everyone.
Hey, before we go on to the next caller, I want to circle back just to clarify. We are seeing a little more volume come across the border through our cross-border pipelines like Milk River. It's not a huge volume, but there is more volume that comes down in through Milk River into our Western Corridor system. Next question.
We'll go next to Dennis Coleman with Bank of America.
Yes. Good evening to everyone. Thanks for taking my questions. I guess, if I can just start with the S&L and push a little bit more. Al, you talked about sort of normalizing that volume, I guess, for lack of a better description, into 2020. Anything you can say in terms of how we should size that? Obviously, there are some impacts that you talked about in terms of the debottlenecking projects, and I guess Canada plays a big role there as well. What have you assumed in terms of the projects coming on there from competitors that you've talked about?
Yeah. We wouldn't try to put a specific number for 2020 S&L out yet. What we're trying to do is just make sure – obviously, we started this year at $100 million for S&L, slowly took it up to $175 million, now $350 million. We think the $350 million is going to be there and likely exceed it in 2019. We're just trying to make sure that anybody that's modeling that segment recognizes that as all these Permian pipes get built, it gets sized down. There may be some of the Canadian opportunities go a little longer, but they are probably a little less material for us. So we would think you'd want to make sure you model a meaningful reduction from the $350 million when you're looking at 2020.
Okay.
That's how we're going to run the company. As far as how we're thinking of leverage, distribution coverages, we're going to assume we've got a nice opportunity to capture it. It's helping us fund projects, reduce debt, but we're going to run the company in mind with a fairly modest amount of S&L contribution for 2020, and how we're thinking about things.
Great. That's very helpful. Maybe just switching. There was a comment that St. James volumes were up in the quarter, and it seemed perhaps that it was – that's more crude by rail. But any expectation that that would continue to ramp up and any comments that you can give there?
I mean, we think we'll continue to see strong rail demand in 2019 at St. James. I think it's largely driven by the pipeline constraints. And as pipeline constraints ease, rail lines will likely subside some, but we've had steady business for a long time at St. James, it's just been accelerated due to the pipeline constraints.
So, do you have excess capacity there? Is it something that could continue to ramp?
Oh, yes, we have additional capacity.
The limit has been rail car access to rails. That's been what's been the limiting point through 2018 and, of course, prices – fixed prices and additional rail cars have been directed to the markets that need it.
Okay. Okay. Thank you.
We'll go next to Jerren Holder with Goldman Sachs.
Thanks. What is the latest on your potential to increase takeaway capacity of the Bakken and Canada?
Out of the Canadian Bakken or out of the Bakken and Canada?
Bakken and Western Canada.
Okay. So our footprint is not significant in the Bakken. It's mainly consists of some smaller pipes and rail takeaway. So, obviously, we try and take advantage of the limited infrastructure we have, but we're not going to be one of the parties that develops a significant takeaway project out of the Bakken.
We do have two cross-border connections, Rangeland and Wascana that we are working on how do we get more capacity on those two systems, but the volumes are fairly limited.
Yeah. And ideally that would be a pipeline system would be bidirectional where you could move items into the Canadian infrastructure if you had higher demand there or into the Bakken infrastructure if there was higher demand in the Bakken.
And that's in the Wascana piece, on the Rangeland piece, being bidirectional.
Yeah. And then follow-up on the asset sales. Where are we following BridgeTex? Are you guys looking to do more? Are there any outstanding that are just waiting to close at this point?
Chris Chandler, why don't you take that one?
Sure. Jerren, this is Chris. Our goal for 2018 was to achieve $700 million in asset sales, and we have exceeded that goal. We will continue to evaluate our portfolio going forward based on valuation and strategic fit. But we don't feel any pressure to sell additional assets. If something changes there, we'll provide updates as warranted.
And no pending deals that haven't closed yet or anything like that?
That's correct.
Okay. Thank you.
We'll go next to Tristan Richardson with SunTrust.
Afternoon, guys. Just on the intrabasin side and debottlenecking. Can you give an update on your Wink to McCamey project as you sort of set the table for Cactus II?
Yeah. That's one of multiple projects. We have capacity in the Wink and then out of Wink. That will be on sometime within the last month of this year or first month of next year. But more importantly, we need capacity in the Wink as well, because there's a lot of production that's coming online in the Western Delaware Basin. And what that does is it frees up capacity in the Midland on our historical basin system. So it will give us a lot of capacity, just having the first leg on, to help keep that part of the basin and debottlenecked. So it creates additional tariff barrels from us even if we don't have the rest of Cactus on at that time, Cactus II.
Tristan, this is Willie. You should think of the Wink to McCamey piece, never mind – I was thinking of something else. Jeremy had it on.
Okay. Thank you.
Journey go from Wink over to Midland and then down to McCamey. And so by basically taking the hypotenuse of the triangle, you just – it makes it easier from the flow perspective.
It's helpful. Thank you. And then just quickly, with respect to the preliminary 2019 guide on the fee-based side and the feasibility you have on tariff volumes as some of these long hauls come online, could you talk about generally where you see tariff volumes in 2019 as it's presumed in your preliminary guide?
We don't intend to provide a volume to go with the EBITDA until February. So, look forward, we'll provide that detail then.
Okay. Thanks, Al.
We'll go next to Keith Stanley with Wolfe Research.
Hi. Good evening. Just wanted to clarify on the Transportation segment guidance, implies a pretty strong acceleration in Q4, quite a bit more than what you've seen the past few quarters. So it's up $40 million, and then you're losing BridgeTex, so it looks like it's up really more like $65 million versus the third quarter. Is that just Sunrise causing a big debottlenecking in the system, or any other color or drivers to think about for Q4 and the nice uptick there in Transportation?
Yeah. This is Willie. Clearly, Sunrise is a piece of it. But as we stated in the prepared comments, there clearly is an expectation for volumes – production volumes to increase. We saw a slight lull in completions in pushing barrels back. We expect a lot of that to come in the fourth quarter, so that's definitely a component of the growth piece.
Okay. And then it looks like about a $500 million reduction in short-term debt. I'm assuming that's just hedge collateral coming back to you. And is that a sustainable level to model going forward?
What I would say is a little bit of the flips between long-term and short-term had to do with the BridgeTex cash closing at the end of the quarter. So short-term was understated relative to probably what we could have borrowed under the same metric, i.e., hedged inventory and margin. But we have seen our margin numbers come back to what I would say is a pretty normal level, which is what we expected. Clearly, we had done a lot more hedging in – for the first eight to nine months of the year versus the fourth quarter, as we have mentioned. So what I would tell you is that probably below what you would expect if you look out six months or nine months from now due to the BridgeTex timing and the cash that came in from that.
That cash was received in early October though, right? Or was it Q3?
It was in Q3. Yeah.
Okay. Thank you.
We'll go next to Patrick Wang with Baird.
Hi. Good afternoon. Thanks for taking my question. As you look toward resuming distribution growth in 2019, how does or doesn't preferred equity stay into the picture as a source of funding?
Well, today, clearly our view is that we're – when you look at next year, the equity portion of what our CapEx requirements will be would be funded principally with retained cash flow. We have room left on the growth basket as far as the rating agencies for hybrid or preferred type of securities, but our thought in 2019 would be that we would not raise any preferred to fund the capital program. Clearly, if our capital program grows or we see acquisitions in today's valuation for our common units, we would look to use preferred.
Got it. That's helpful. And then a bigger picture in the Permian. It looks like crude takeaway relief will come before new gas takeaway, so that when you think about flaring levels between now and 2020, how do you think about the risk of a gas-induced activity constraints on the oil side?
This is Jeremy. That is a risk. There's also fractionation risk on the NGL side. We feel like gas is probably a little bit ahead of fractionation risk, but we're monitoring all the above. I think our view and I think, as Harry pointed out, volumes is predicated on a presumption that producers are not going to – they're going to continue to run rigs at a much faster rate than completions until they see a line of sight to debottlenecking of infrastructure. So we feel that a ramp towards the second half of next year and completions as there's a line of sight into oil, gas and NGL takeaway. But there is interim solutions just like there are with oil with some of the others, flaring being one. There's other ways to move NGL. So we're paying attention all of them, but I think our guidance reflects our view of the completion cadence we see for next year.
All right. Great. Thanks for that detail.
We'll go next to Sunil Sibal with Seaport Global Securities.
Yes. Hi. Good afternoon, guys, and thanks for all the clarity. I just wanted to go back to the credit metrics that you laid out on slide 14. So when I look at that target numbers on the extreme right, the leverage metrics that you lay out there, that's consistent with a BBB rating that you're looking for – or mid-BBB rating that you're looking from rating agencies correct?
You mean our targets? Yeah. They are. But rating agencies have adjusted kind of how they look at things over the recent past. But our intent is to, over time, make sure we get our leverage and our performance to where we will be mid-BBB again. That won't be instantaneous, we view, but they are consistent. But clearly, the bar has changed over the last few years.
And then within that EBITDA calculation, how do you kind of think about S&L contribution? Is that pretty much nailed out or it's like a minimum level kind of number?
In how we think of leverage metrics?
Yes.
Yeah. No. I mean, we'll include S&L in the metrics because clearly some of the debt that is in the numerator side of the calculation is there to generate S&L profitability, so you really can't eliminate the EBITDA without taking the debt out, right? That won't make any sense. But the reality of it is, is that in part of what the comment would think -trying to advise, and look, we recognize S&L is going to drop in 2020, so we can't sit and assume that we've got to dial that into our thinking of our leverage, that it's going to revert back to a more normal or lower level. And so we're not going to exclude it, but we're going to have our eyes open and the headlights on with regard to the fact it's going decrease in 2020. I hope that makes sense.
Yeah, it does. Thanks for that. And then, one – kind of a follow-up from previous question. When we think about close to your 4 million barrels of tariff volumes in Permian and then you look at your MVCs over the next, say, two to three years, could you give us a sense of a cascading – or impact of this MVCs rolling off over the next two to four years in Permian?
Yeah. No. I mean, clearly a substantial amount of our long haul is supported by MVCs. Clearly when – on the gathering side you got more acreage dedications probably supporting that. We do not have any material roll-off on large contracts on our MVCs over the next few years.
Okay. Got it. Thanks guys.
Yeah.
We'll go next to Ross Payne with Wells Fargo.
Hi, Ross.
Mr. Payne, were unable to hear you. You might try checking your mute button or picking up your handset.
He must have left...
Due to no response, we'll move on to the next caller. We'll go next to Elvira Scotto with RBC Capital Markets.
Hey, good afternoon. A couple of quick clarification questions for me on the Exxon JV project. So just wanted to clarify, are you looking for additional third-party shippers or additional JV partners? And what would Plains ownership interest ultimately be?
So we haven't disclosed the ownership, but ultimately – and then you can imagine that upstream companies and downstream companies, both shippers on pipelines, all and often cases whichever pipelines commit to take equity. So, in many cases, it's both. So we're really looking for long-term partners in the project and we're judicious in who we talk to and want it to be a long-term partner that preserves quality, has a good balance sheet. And so we're practically talking to parties that – the shortlist of parties that we think would make sense, but candidly they'll be shippers and equity owners in many cases.
Elvira, this is Willie. You should consider – you should think about our position as meaningfully less than 50%. We've made that comment before.
Great. Thanks. And then just a bigger picture question around Cushing. Can you maybe provide a little more color on your view of Cushing and its relevance longer term? Especially in the context of pipelines moving more Permian crude to the Gulf Coast and Canadian barrels potentially bypassing Cushing, especially with the Capline reversal.
Over 2 million barrels a day that moves through Cushing, I don't see that materially changing. When you look at, I think you're going to see we have fewer Permian volumes coming in. You're going to have more local production in the Mid-Continent. You're going to have more of the Rockies production coming into Cushing, so Cushing is going to continue to be a very viable hub. And when you look at what could potentially move down the Capline system through a connection, it's pretty small in relation to total Canadian production. Much more of that production is going to move through Cushing and down the reversed Capline system.
Okay. Thank you for that.
That answer your question?
Yeah, yeah, that's very helpful. Thank you very much.
Hey, it looks like we're at the top of the hour. I think we're going to – and we're going to go ahead and cut off questions at this point. Those of you that are remaining in the queue, Brett and I can circle back with you individually and address those questions. But thank you, everybody, for your time today, and we appreciate you being on the call.
This does conclude today's conference. We thank you for your participation. You may now disconnect.