Good day, everyone, and welcome to the PAA and PAGP Third Quarter 2020 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Roy Lamoreaux. Please go ahead, sir.
Thank you, Christy. Good afternoon, and welcome to Plains All America's 3rd quarter earnings conference call. Today's slide presentation is posted on the Investor Relations News and Events section of our website at plainsallamerican.com, where audio replay will also be available following our call today. Later this evening, we plan to post our earnings package to the Investor Kits section of our 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.
A condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today's call will be hosted by Willie Chang, 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 Goble, Executive Vice President, Commercial and Chris Herbold, Senior Vice President and Chief Accounting Officer, along with other members of our senior management team, available for the Q and A portion of today's call. With that, I will now turn the call over to Willie.
Thanks, Roy. Hello, everyone, and thank you for joining us. This afternoon, we reported solid Q3 results in all three of our operating segments, which Al will discuss more in detail during his portion of the call. A summary of highlights from today's call are provided on Slide 3, which reflects our progress in a number of areas including raising our 2020 guidance, executing non core asset sales, providing 2021 preliminary guidance, targeting an additional $600,000,000 or more of sales and progressing our shift to positive free cash flow, which leads to today's buyback announcement. A few of these are replicated in our key messages for today's call summarized on Slide 4, which highlight positive momentum as we enter 2021.
First, we're well on our way in our transition to positive free cash flow after distributions. 2nd, our year to date performance continues to highlight the value of our integrated business model. 3rd, we continue to successfully execute across each of our key initiatives. And as a result of our progress and our outlook, we've announced a $500,000,000 equity buyback program that we plan to execute in a balanced manner, allowing us to continue to reduce leverage while maximizing value to shareholders. Let me elaborate on each of these points a bit further.
Starting with free cash flow, we've reached an inflection point where going forward, we expect to generate meaningful free cash flow after distributions on an annual basis. As illustrated on Slide 5, we expect 2021 free cash flow after distributions to total roughly 300,000,000 or over $900,000,000 when including our $600,000,000 plus of additional asset sales we're targeting in 2021. Our preliminary guidance for 2021 adjusted EBITDA is plus or minus $2,200,000,000 This includes the estimated impact of our targeted asset sales and assumes a $50,000,000 contribution from our Supply and Logistics segment. We intend to provide formal guidance for 2021 on our February earnings call. Regarding our 2020 year to date results and as shown on Slide 6, our business has performed well despite a very challenging year.
This afternoon, we increased full year 2020 adjusted EBITDA guidance to $2,585,000,000 which is now in line with the initial full year 2020 guidance that we furnished in February pre COVID and is $85,000,000 above our most recent August 2020 guidance. These results highlight the value of our integrated business model and while challenging the forecast, we have demonstrated our ability to capture margin based opportunities during periods of volatility through our extensive asset base. Our integrated model, meaningful term supply and committed acreage position also enhances our ability to move additional volumes on our system over a long time horizon. As a case in point and as acreage position, which we believe is highly strategic in the current environment and brings additional value to the table as we work with customers, partners and peers to optimize and rationalize infrastructure capacity. Additionally, as summarized on Slide 8, we have a strong portfolio of long haul pipelines representing a combination of supply push and demand pull pipelines.
These systems are underpinned by long term third party MVCs and are further complemented by long term dedications of lease supply to our lease gathering business and strong integration with our hub terminals. Included on the slide is a summary of 3rd party contractual support underpinning our key long haul systems and the average remaining term of these contracts. In addition to our MVCs, our termed up lease supply provides us an additional level of insurance that our pipelines will continue to be utilized in a variety of market conditions. Throughout the year, we've continued to execute across a number of key initiatives, which are recapped on Slide 9. We continue to operate safely and reliably, embracing COVID protocols in both the field and in offices, social distancing and working remotely as conditions warrant.
I want to acknowledge and thank all of our PAA team members for their hard work and dedication to driving continuous improvement, which is evident through our year to date safety and environmental performance metrics. As discussed previously and as Al will discuss further, we are squarely focused on maximizing free cash flow, reducing leverage, minimizing investment capital and increasing shareholder returns. Regarding portfolio optimization, on October 15, we closed on the sale of our Los Angeles terminals, generating proceeds of approximately $200,000,000 which brings our year to date proceeds from asset sales to approximately $450,000,000 Additionally, we announced a strategic asset swap with IPL inter pipeline that reinforces our NGL asset position at our Empress complex in Canada. We continue to advance additional asset sale opportunities and have established an additional $600,000,000 as our 2021 asset sales target with the potential for upside to this target. We've also made solid progress in our efforts to streamline and drive efficiencies across all aspects of our business and we've realized meaningful cost savings.
We currently expect to realize $125,000,000 a year or more of fixed cost savings that should endure in future years. This exceeds the high end of our previously estimated cost savings range of $50,000,000 to 100,000,000 dollars At the same time, we've continued to advance our sustainability initiatives. Highlights of our progress are summarized on Slides 18 through 23 of today's slide presentation. Before I turn the call over to Al, I'd like to touch on a couple of other matters that are currently topical. 1st, regardless of the outcome of tomorrow's election, our long term outlook is constructive.
We recognize that a potential change in the administration could create headwinds for the industry and for planes. However, it could also bring benefits, particularly for those with pipe in the ground. Slide 34 of the appendix outlines some of our thoughts regarding a potential change in the administration. Additionally, with respect to an energy transition, we believe alternative sources of energy will continue to grow and will be an important addition to meeting global energy needs. But we also firmly believe that hydrocarbons will be needed for decades and will remain an integral part of the global energy supply.
As illustrated on Slide 10, we believe global demand recovery is a question of when and not if, which over time should drive a return of constructive oil prices, sustainable North American production and higher production levels in key onshore shale basins. The location, scope and flexibility of our integrated system match with the capabilities of our teams position planes favorably in such an environment. In short, we believe we are well positioned to manage through the current environment and benefit as demand recovers over time. In regards to energy markets, current negative investor sentiment has impacted the entire sector, including our equity securities, which continue to trade at levels that ascribe minimal value to the long term durability of our business. We believe this provides a significant value investment opportunity.
For that reason, and considering our progress across multiple key initiatives and our constructive longer term outlook, today we announced the $500,000,000 common equity repurchase program. As Al will discuss further, we plan to take a very balanced approach and allocate up to $75,000,000 to buybacks in 2020 and up to a 25% of free cash flow after distributions to buybacks in 2021 with the balance being used to reduce leverage. With that, I'll turn the
call over to Al. Thanks Willie. During my portion of the call, I'll recap our Q3 results, review our current capitalization, liquidity and leverage metrics and provide additional color with respect to our outlook for 2020 2021. As shown on Slide 11, 3rd quarter fee based adjusted EBITDA of $620,000,000 exceeded expectations in both the Transportation and Facilities segment. On a comparative basis, Transportation segment results increased over Q2 2020 results, driven by a $25,000,000 timing benefit related to MVC deficiencies that occurred during the Q2 in addition to a modest increase in tariff volumes and continuation of cost optimization initiatives.
Relative to Q3 2019, the slightly lower segment results reflect the COVID related impacts on producer activity level. Additionally, one accounting related item I will note is that in the 3rd quarter, we recorded a $91,000,000 non cash impairment within our investments in unconsolidated entities attributed to a joint venture in the Mid Continent area. With respect to the Facilities segment, our 3rd quarter results exceeded expectations, primarily due to operational cost savings and higher than expected revenues at our Cushing facility. On a comparative basis, the segment was in line with Q2 2020 and Q3 2019, effectively absorbing the impact of asset sales. 3rd quarter 2020 S and L results of $61,000,000 benefited from contango margins as a result of transactions entered into earlier in the year.
Moving on to our capitalization and liquidity, a summary of key metrics is provided on Slide 12. Our long term debt to adjusted EBITDA ratio of 3.3x benefited from trailing 12 months S and L results of $437,000,000 The leverage ratio would be 3.8 times if normalized using our initial 2020 S and L adjusted EBITDA guidance of $75,000,000 reflecting leverage slightly above the high end target level, thus underpinning our focus on reducing leverage. This week, we will repay our $600,000,000 February 21 senior notes via the par call option. We have no other near term maturities and our total committed liquidity at quarter end was $2,800,000,000 or approximately $2,200,000,000 pro form a for retiring the note. We do not expect to access the capital markets for the foreseeable future.
Now I will shift to our outlook for 2020 and 2021, which is summarized on Slide 13. As Willie mentioned, we have increased our 2020 adjusted EBITDA guidance by $85,000,000 to plus or minus $2,585,000,000 which is primarily attributed to the Transportation segment and is driven by our Q3 results and our expectations through the balance of the year. With respect to our preliminary guidance for 2021, which is net of the assumed impact of targeted asset sales, underpinning our outlook is an assumption for the crude oil environment and producer activity levels to remain relatively unchanged throughout the majority of the year. Therefore, an acceleration of demand recovery and corresponding improvement in commodity prices relative to the current levels would be a net positive to our outlook and potentially favorable to our 2021 preliminary guidance. As we have communicated previously, we expect challenging market conditions for our S and L segment in 2021.
Moving on to Slide 14, our expectations for 20202021 investment capital remain unchanged on a combined basis, but reflects a $50,000,000 shift from 2020 into 2021 due to project timing. I'll note that roughly 50% of the 2021 amount is comprised of Wink to Webster and Diamond Capline projects and roughly 20% to 25% is related to high return wellhead and CDP connections that we expect to be paced with producer activity levels. The balance is associated with smaller high return projects. A status update and high level overview for the Wink to Webster and Diamond Capline projects is provided on Slides 3132 of the appendix of today's slide presentation. Beyond 2021, assuming an approximate $50 per barrel oil price environment, we estimate our run rate investment capital to be within a range of $200,000,000 to $300,000,000 annually.
Based on this range, high return wellhead and CDP connections would represent approximately 50%. However, if we remain at current price levels, we would anticipate total investment capital to be at an even lower level. I would also note that we do not have any material capital commitments beyond 2021. Additionally, we estimate annual maintenance capital to be $200,000,000 or less on a run rate basis. We are very focused on disciplined management of our balance sheet, minimizing capital investment and maximizing free cash flow.
I'll note that a detailed breakdown of our free cash flow is provided on Slide 25 within the appendix. As shown, our free cash flow for the last 12 months is a positive $521,000,000 while free cash flow after distributions was a negative $464,000,000 With regard to the unit repurchase program, as Willie noted and as summarized on Slide 15 and illustrated on Slide 16, we will be disciplined in how we allocate capital. We plan to allocate capital to buybacks in a balanced manner consistent with our priority of reducing leverage over time. As we generate additional free cash flow and lower our leverage, we expect to be able to increase the allocation to buybacks over time. For the balance of 2020, we currently intend to allocate up to $75,000,000 for repurchases, which effectively equates to the increased 2020 guidance.
For 2021, we currently intend to allocate up to 25% of free cash flow after distributions for equity repurchases. The allocation within this range may scale up or down depending on asset sales, financial performance and other factors. For example, in the absence of asset sales, we may allocate up to 25% towards equity repurchases. In event of meaningful asset sales, we may allocate a higher relative percentage towards debt reduction in recognition of the loss of EBITDA associated with the assets sold. To be clear, and this is important, we will not utilize debt to fund equity With that, I'll turn the call back over to Willie.
Thanks, Hal. Before opening into Q and A, I want to reinforce 3 critical points which are summarized on Slide 17. First, we believe we are well positioned to manage through the current environment and emerge stronger. We have strong conviction in the durability of our business and we have a long term positive outlook for the future. Our asset base is well positioned to move North American product to market production to market and we have a prominent integrated franchise in the Permian with significant termed up supply, committed acreage, integrated systems, long haul MVCs and access to multiple markets.
We believe the Permian will lead the recovery and North America will continue to be the short cycle solution to meeting the world supply needs. We certainly understand the longer term transition to lower carbon energy and we believe that ultimate global population growth and improvement of quality of life standards will drive the need for all energy sources, including conservation and efficiency. Any energy transition will be underpinned by significant allocation to hydrocarbons including oil for multiple decades. 2nd, we're making meaningful progress on enhancing our financial flexibility and lowering leverage and we remain very focused on further progress as we manage through these near term challenges. And 3rd, we continue to drive for strong alignment with our investors and external stakeholders.
We've had conversations with many of you over the past several months and we thank you for your feedback, which has been extremely valuable to help us shape enhancements that we've made and those that we're continuing to advance. We're very focused on managing our business to generate sustainable free cash flow after distribution and improving shareholder returns, which has been a significant focus of today's call. I would also highlight that we've made considerable enhancements to our governance and sustainability frameworks in addition to the safety and environmental commitment that I previously mentioned. In addition to the sustainability presentation and additional disclosures available on our website, we've included a summary overview additional detail within the appendix of today's presentation that I would encourage you to review. So thank you again for your feedback.
We look forward to continuing these discussions and we appreciate your continued support. With that, I'll turn the call back over to Roy to lead us into Q and A.
Thanks Willie. As we enter the Q and
A session, please limit yourself to one question and one follow-up question and 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, our Investor Relations team plans
to be available this evening and
into the balance of the week to address additional questions. Christie, we're now ready to open the call for questions.
Thank We'll take our first caller, Shneur Gershuni from UBS. Your line is open.
Hi, good afternoon, everyone. Maybe to start off today, if we could start with the preliminary guidance for 2021. Lilly, you coined a phrase something about going from sport mode to efficiency mode with respect to costs. I was just wondering if you can talk us through how much of the cost optimizations you've achieved? How much is baked into your 2021 guide?
Is there any incremental opportunity that's not there? And maybe as part of the guidance question, if you can share about the EBITDA associated with the planned $600,000,000 of sales that you outlined in your presentation?
Thanks, Shneur, for the question. One of the things we've really focused on is not setting a target for cost reductions. I think as I've shared before, I've been burned too many times where you set a target and that's exactly the number you get, whether it's a good answer or a bad answer. So we've really pushed the organization to be as efficient as we can. So the answer to your question of how much of it is baked into 2021 guidance is yet to be determined because we continue to make progress as we go forward.
And that's why we'll give you a formal guidance on that in 2021 in February. But I do want Chris Chandler to chat a little bit about the cost savings that we've got and what the configuration of some of those savings are. And then maybe Al, you want to take the EBITDA question. I think it's $40,000,000 that's associated with 2021 guidance? I just saw your thunder.
I'm sorry about that.
This is Chris Chandler. So I'll provide some additional color on the cost savings without trying to tie it to our actual 20 21 plan as Willie mentioned. But we're working very hard to ensure these savings are sustainable. We believe we've reduced our fixed cost by $125,000,000 to $150,000,000 compared to 2019 and that would exclude any benefit from asset sales or reductions in variable costs. We would expect to achieve these savings if we're in an environment similar to the one that we're currently in.
They're really from a number of categories. So it can be things like personnel costs, it's efficiency related improvements, it's organizational streamlining, It's consolidation and closure of field offices. It's supply chain improvements. It's a reduction in the number of generators that we use to operate our assets. It's moving volumes from trucks onto pipelines.
It's consolidating information systems and so on. So we expect to sustain cost reductions in all of those categories going forward and we'll provide additional color on that when we released our formal 2021 guidance.
Al, do you want to add anything more to the Yes.
No, Shneur, we assumed clearly not all of the asset sales happening early in the year. So therefore, it's not as big of an impact that Willie mentioned, the $40,000,000 that's an approximate based off of more of a midyear type of a convention.
Okay, great. And then maybe as a follow-up, just a clarification. With respect to the buybacks, thank you for taking a formulaic approach to the buybacks. I think the transparency will be much appreciated. I was just wondering if you can clarify, if you do asset sales, does that count as part of the free cash flow and therefore some of that would be available for buybacks as well too as part of your 25% formula or is that excluded from that?
This is Al. No, it would be included. Clearly, we will use judgment as to the quantity of EBITDA that we're selling. And in my prepared comments, I talked about maybe changing the allocation a little bit based on that consideration. But now our definition of free cash flow and we lay out the calculation on the slide include all investing activities, asset sales as well as maintenance capital and investment capital.
Perfect. Thank you very much guys. Really appreciate the color today and stay safe.
Hey, Shneur, I'll just make another comment. This is Willie. When we think about consensus of roughly 2,300,000,000 dollars I think I don't know if you were getting after this, but as far as kind of normalizing that, we have $50,000,000 assumed in our S and L segment. I don't know what others have, but I've seen $100,000,000 in some of the consensus numbers, as well as when you take that $50,000,000 plus the EBITDA, it kind of gets you to that same zip code if you normalize the 2.
Yes. That's something we are after. Thank you for that.
And next we'll go to Jeremy Tonet from JPMorgan. Your line is open.
Hi, good afternoon. Hi, Jeremy. Good afternoon.
Just want to follow on with the asset sales there and want to see the $600,000,000 I think you've talked about a few different ways before. How much of that is kind of incremental to what you guys have said before with asset sales? It seems like some has slid from 2020 into 2021. So just wanted to see what was incremental there? How far advanced are you in these?
How much certainty do you have to these closing? And when you talk about debt reduction here, I don't know if I heard explicitly perhaps how they fit into that versus the other buybacks and outright debt reduction. So just wondering if you could help us on those points?
Hey, Jeremy, let me start with this. I'm going to ask Jeremy Global to kind of fill in the blanks here. So we've said $600,000,000 as far as potential upside, it could be several 100 for 2021. We on the $440,000,000 that we announced or $450,000,000 for 2020 against the $600,000,000 all we're doing is we're kind of resetting the slate now and going forward our target is $600,000,000 plus. So Jeremy, you want to chat a little
bit more? Jeremy, this is Jeremy Goebel. We have a continuous process of streamlining our asset base. And as we look at cost reductions, we look at the whole organization. This is Chris' team, it's the rest of the group around identifying which assets could potentially be sold, what is worth more to someone else than us.
And that's involved looking at external markets, what do people want. We've got substantial inbounds on certain assets and those will be the ones that we look to sell. They're good assets, but they're better off than someone else's hands based on our use of available capital for potential deleveraging and buybacks. So the $450,000,000 as Willie said that closed against the $600,000,000 this year. The way you were looking at it potentially $150,000,000 is moving into next year and that $600,000,000 target we'd look to exceed if we can be successful in all the opportunities we're looking for.
Al mentioned the mid year convention, which gives you a sense you guys understand the timing of investment banking processes and how they roll. So I think you'd see early as second quarter and then stuff could go into the second half of next year, if that helps from a timing perspective.
And Jeremy, I think you threw in a question on the repurchase. You probably get your follow-up embedded in there, but we would look at only common equity repurchases and not either of the 2 preferred securities at this time.
Got it. Thanks.
If I'm I'll
have one more, I just want to go to Jeremy as far as the you gave a great picture as far as what the demand recovery could look like. But just wondering how you think that could translate into supply side, different basins next year? Just wondering if you could give us a flavor for any thoughts you have for volume increases or decreases by basin across your footprint?
Hi, Jeremy. Good question. I think as we look at it based on just how we talk to producers and our customers, say 20% to 30% of capital cash flow is going to go back to shareholders, roughly 70% to 75% or 80% recycle ratio probably on the lower end for next year at less than $50 we assume that that's going to be the market. Our forecast as mentioned in here is based on $40 to $45 oil for next year. What that looks like in the Permian Basin is largely flat to Q4 throughout the year exit of 4.1 maybe there's some growth and that's lumpy across the system based on timing of completions, but largely managing cash flow in that.
The recent wave of M and A could yield some disproportionate allocation to the Permian away from other basins. We're seeing that with some of our customers, which could yield incremental cash flow. But right now, we're sticking with roughly flat to the Q4. And for other basins, you could see continued declines. But largely what you're seeing most producers do is the declines that started in the Q2, they're stabilizing now using drilled and uncompleted wells and we'll try to do that throughout next year and look to see and reevaluate as demand returns and you get back to a more favorable pricing environment for them to get this drill bit back to work.
Got it. Thank you.
And next we'll go to Keith Stanley from Wolfe Research. Your line is
open. Hi, thanks. Just following up on the asset sales, Can you give a sense of confidence or visibility in being able to execute at prices you think are adequate? I guess we haven't really seen a lot of new asset sales since the pandemic. So any sort of early reads you have or visibility on getting good prices?
I'll make a comment, Keith. We have been successful in transacting on number of asset sales as you know. I think this will take us above $3,500,000,000 worth of asset sales and
we've been able to do
them at good values. I don't think we're prepared to give you any more detail at this point. And as we go forward into 2021 on our guidance, if we have some additional information, we can give you some. But we wouldn't have announced our intent if we didn't have some confidence that we could move forward with these.
Okay, great. And second question is just on the updated guidance for transportation for the year, it's up 80,000,000 dollars The volume outlook is pretty similar. So can you just talk a little more to some of the big changes that are causing Q3 and Q4 EBITDA to be higher in transportation than your expectations last call?
Al, why don't you
take that? Sure. I'll take a shot at it. Yes, no, EBITDA up 80% volume is kind of flattish. If you recall back in May, shortly following the pandemic, we lowered our transportation segment quite meaningfully about $300,000,000 And the only reason I'm mentioning that is that as the business performed a little bit better in the Q2, we had a little bit of cushion in our model.
But following the big change in the uncertainties, we chose to retain some cushion in our guidance when we put it out in August. And then lower costs being a big part of it, some of which aren't volume related, it's just cost management. And then a little bit of it is with some of our Canadian pipes with average higher margin just kind of the business mix are really the 3 key things. But we did have a little bit of cushion in our model when we updated guidance last time.
Great. Thank you.
And next we'll go to Michael Lapides from Goldman Sachs. Your line is open.
Hey, guys. Congrats on a
good quarter and appreciate the announcement and the detail on capital allocation. Really, just when you think about the asset portfolio mix outside of the Permian and maybe inbound into the Cushing and into the Gulf Coast, How do you think about what in the Plains portfolio over time may prove to be non core? Like obviously you've got $600,000,000 you haven't disclosed what that specifically is. But when you think about kind of the other parts of the business that may not be core to kind of your long term 5 year plus strategy, how do you think about what might fit into that bucket?
Well, Michael, I know what you're after. You're after the list, which we're not going to share right now. But I'll tell you the way we think about this is everything that we do is really part of the integrated approach. So what you've seen us on the asset sales that we've transacted, probably the best example I can give you is some of the transactions we did out in California. If you think about the ability of integrated pull through on some of those systems, The less integrated pull through that it has probably gives us more opportunity for some gives it have more opportunity of value with somebody else than ourselves.
So I would tell you the integrated model is very, very key. And you've seen us sell some other assets that as we think about where future outlook of capacity may go. Again, if it fits better in someone else's portfolio, we've been willing to do that. So unfortunately, I'm not going to be able to give you much specifics, other than as you think about assets, things that aren't tied to integration. But the other point I would tell you is we've done quite a bit on strategic joint ventures in working with other companies, in efforts of rationalization and creating more
If I look at the 9 months of the year to date income statement, G and A is down $24,000,000 year to date, field OpEx is down $172,000,000 so call it almost $200,000,000 year to date. Is what you're implying is that some of that will actually come back next year? Because if you're running it almost 200,000,000 year to date down and you're talking about kind of 125, 150,000,000 it almost implies some of that comes back.
Yes. I'm going to let Chris Chandler address this, but what I'll tell you is, we're very deliberate about how we think about this. Sometimes you can think about cost and it's variable and fixed. And what we've shared with you is what we think are enduring fixed expense cost reduction. So it's truly what you'll see at a minimum versus volume related.
But Chris, why don't you share a bit more?
Sure. Yes, this is Chris. You've got the right numbers. Our combined operating and G and A costs are down almost $200,000,000 versus the same period in 2019. And while we can't directly compare that to the $125,000,000 to $150,000,000 reduction in fixed costs that I mentioned earlier, It is reasonable to think as some of that difference being related to variable costs and our expectations for what we expect to spend in 2021 and future years.
The other thing to think about there is part of our cost reductions in 2020 are deferrals into 2021. These can be things like not wanting to undertake large maintenance or overhaul activities and bring outsiders into our assets in a COVID environment. If we have the flexibility within our inspection programs and the regulatory requirements, we've deferred some of those activities into 2021 primarily due to COVID. So those are just a few examples of why the numbers are different.
Got it. Thank you. Thanks. Much appreciated.
Michael, this is Willie. You've talked about operating costs and G and A and Chris touched on it, but it's more than that, right. So if you look at our maintenance capital expenses, not only we've talked about the investment capital having high returns, but the maintenance capital we've been successful in being able to bring those numbers down a little bit that will endure over a period of time. So it's really cost across every bit of the organization and how we spend money.
Got it. Appreciate it really. I'll follow-up with the team offline. Thank you guys. Thanks.
And we'll go next to Tristan Richardson from Truist Securities. Your line is open.
Hi, good evening. Thanks for all the commentary on 2021 and the detailed commentary on repurchase. It's more insight than we're used to. Just one quick question on the leverage target as a trigger for that sliding scale of the repurchase allocation. Is the desire to get to a certain point within the 3.0 to 3.5 before ramping that relative percentage or if we're in that band that it really just opens it up for you?
Al, you want to take that?
No, we won't have a specific trigger nor will we necessarily assume you got hit the exact low end. There's a number of variables. I think we summarized it on one of the slides that we would consider as we think about it. Clearly, the up to 25% of free cash flow after dividends is where we feel like is the right allocation until we see progress on leverage being 1, but then the other variables as well with regard to just industry conditions, market conditions, etcetera. So, no, we're not going to provide an exact formula for how we do it.
Thanks, Al. And then just to follow-up, curious on the fee based 2021 versus 2020. Can you talk a little about how much we should think of as the delta there being asset sales versus new project contributions like Limp to Webster and just the strong Q1 2020 making for a difficult comp?
This is Jeremy. The way to think about Q1 2020 is you still didn't have all the long haul pipes in the Permian in service. So Epic and Gray Oak were ramping. So there was on the legacy pipes, there was more there. That makes the tougher comp.
I'd say with regard to project contribution, as some of our partners, I think, have said earlier today, Wink to Webster ramps up this year. That's reflected in our guidance next year. Essentially think of it as the Midland to Echo portion will be available. We still have some origination work and some destination work that we've kind of slowed down some of the capital spend to ensure we had the maximum efficiency of capital with our partners. And so it will be later in the year, second half to early fourth quarter when that starts up full.
So there's a slight ramp from probably the beginning of Q2 through to Q4. And at that point, the TSA is triggered. So the real contribution from Winklevster doesn't start till the Q4. And then Diamond Capline is really a Q1 of very beginning of 2022 start up is the way to think about it. So this year is more of a transition year for those two projects.
So you think of the comp year over year to the Q1 is largely driven by the new pipes weren't on Wink to Webster and Gray Oak. And then Q4 of this year that will be somewhat steady state until the Q4 of next year and then you'll have the start of the ramps of the new projects.
Great. Thank you guys very much.
Thank you, Tristan.
And next we'll go to Ujjwal Pradhan from Bank of America. Your line is open.
Thanks for taking my question and thanks for all the detailed color on the capital allocation plan so far. Firstly, just one more clarification on the asset sales. Willie, you said it earlier, the expected contribution is around $40,000,000 next year assuming a midyear sale. I believe that would imply around 7.5x EBITDA multiple. My question is, is that right?
And could the total asset sale proceed be larger next year if the EBITDA multiple could be better than that?
Hey, Yuval. This is Jeremy Goebel. We certainly think it could be substantially better than that. And we're specifically not providing detail because we're in the process of discussing with buyers. But I find it difficult to say due for substantial assets, which will have significant interest and we're going to absolutely do our best to get the highest number and we'd look to significantly exceed that number that you referenced.
I'd say that we'll give you more color as we have it, but at this point we don't. I'd echo Willie's comments. The way to think about non core for us is something that doesn't meet the integration of our pipeline facilities and marketing type businesses where we can't get the full integrated high efficiency network that we have. And so we're going to continue to look for those opportunities. And don't look at this as a 12 month cycle.
There's a continuous pruning and simplification for us to just become very efficient. And so this is a continuous process and we'll update you guys as we have the opportunity to. But right now, we're kind of in the middle of the sausage making and it wouldn't be prudent for us to advise you on specifics such as valuation.
And this is Al. My comment earlier about midyear convention was trying to illustrate that we didn't assume January 1, that was an approximate. So don't take a linear exactly linear
this is Willie. Well, another key point to make as we think about cost reductions and simplifying the business as far as streamlining. With asset sales, with assets that aren't core to you, as we've sold over the last number of years, it is really I think enhanced our ability to be able to streamline more because you can focus more on the key assets that you have versus trying to spread yourself across lots of different assets.
Got it. Very helpful. And my second follow-up here on the federal lands exposure. Sorry to go back on this, but this certainly has been a key focus as far as election is concerned. So last year, you had noted you had close to or less than, I believe, 20% of your dedicated premium acres in federal lands.
And as you're looking at your current daily volume gather on those acres, how are you able to share any levels they are at and how much of that flow downstream through your long haul pipes? And subsequently, if the respective producers have shifted production, do you expect to see the replacement volumes appearing in your system? Thank you.
So, Ujjwal, this is Willie. I want to start on that. We talked about 20%, but what I would almost rather do is focus on the 80% that's not on federal lands. So when you think about the 80 percentage of the acreage we've got, there's a deep inventory that the producers have as far as well sites there. And when you go to the federal lands, I think the one thing I want to highlight is that there are volumes that are flowing today as we think about potential restrictions on federal lands, the way we view it is most of that is going to be in the future.
Being able to take back leases on federal lands, we don't think is in the purview right now. So and you also have the producers that have built up a pretty healthy inventory of drilling permits. So I don't want people to take away from this that any risk to federal lands takes existing volumes off our system. I don't know, Jeremy, if you want to add anything to that.
No, Willie. I'd say it's appropriate. We talk to our customers all the time and they feel comfortable they have a contract with the federal government to develop those assets. They have multi year inventory with options to extend. They have substantial inventory because they had much higher rig counts now than the activity.
So I'd say those are in hand. I think the base case is a view that there'll be a delayed permitting process, but with multi year inventories of drilling ahead of them, they can plan for that in advance. So I'd say the view of everything stops immediately on day 1, that doesn't make a lot of sense. Could there be delayed in permitting and go back to Obama era? Yes.
Could it be if the Trump administration wins? I think there's a lot of permutations and it's not an on off switch. And the state of New Mexico will have something to say about that. There's substantial revenues associated with the oil and gas business. So we feel comfortable with our customers that they're going to continue to execute.
And to the extent they don't, it makes a lot of the other assets we have worth quite a bit. And you think of a tougher regulatory environment, if that impacts other operators, that can positively impact ours that are operating. So there is depending upon how far the pendulum swings, we could benefit in different ways. So this is not linear and located just in New Mexico. This could impact the Williston Basin and push barrels to our systems and other places.
So you have to look at this more across the entire regulatory environment and it's not a binary switch.
Appreciate the color. Very helpful. And if I may just squeeze a quick one, with the buyback language you indicated you could repurchase either PAA or PAGP units. What could drive the decision between buying back those 2 units?
This is Al. I think the primary one will be the value and the price of the securities. Our intent would be focus on PAA initially.
Got it. Thank you.
And we'll go next to Jean Ansouwberry from Bernstein. Your line is open.
Hi, Jean Ann. Hi, can
you hear me?
We can now.
Okay, great. I just had a market share question. If I divide your long haul Permian volumes by total Permian, it looks like you are losing some market share from 28% in Q1 to about 22% now. Is that mainly a function of the pipelines ramping that Jeremy referenced in an earlier question? And is the current 22% a stable number until Wink to Webster starts?
Jeanine, hi, this is Jeremy Goble. We don't get into specifics on pipes, but what you would say is there are probably some loss in spot volumes, which would be expected. This would be a stable number. I think I'd reference you to Page 8 in the guide presentation and we've listened to our investors and provided some more disclosure there. So we're very comfortable with our Permian long haul position.
And one of the unique things that we haven't really ramped up is our lease supply pushing barrels to market and that's something that we have the opportunity to do and bring barrels at the profitability and margin is there. In some cases, we can make the same amount by selling it in basin versus shipping on a pipeline. So we have some tools that others don't and longer term will fill our pipelines while others are looking for supply. So the view of it's a cliff and everything goes away, planes will be the one that has volumes on their systems all the time because as we show on, I think it's on Page 4 in the presentation or 7, we control enough volume to basically fill our pipelines if we wanted to if ARBs and opportunities are there. No one else can say that.
So I think the view that the contracts will dictate where the volumes flow is a little bit different. We can make markets, we can do some other tools. I'd say some of the volumes that came off into the Mid Continent, those we're looking to figure out ways and as domestic demand pulls more barrels to Cushing, you could see some move more in that direction. So there's a lot of things at play. It's not as simple as saying it's going to be static and linear.
It's market driven and we'll have a hand of say in that because we control enough supply to kind of push barrels to where the differential support.
Got it. Makes sense. And yes, I appreciate the disclosure on Slide 8. Just had a quick clarifying question on that. Does it include acreage dedications?
And is the 90% contracted ex basin, is that like 90% of 90% nameplate per the footnote?
Yes. The way to think about it is 90% of 90%. And then of our total commitments, I believe there's 100,000 acreage dedication, the rest are MVC. And those acreage dedications are well inside of the production levels needed to fill them.
Great. Yes, I really appreciated the additional disclosure. That's all for me. Thank you.
Yes. I think Jean Ann, this is Willie again. One of the things you're really seeing is, back to my comment of growth versus efficiency mode, we are firmly in efficiency mode. When you think about our footprint and the flexibility that it has, we're continuing to push on optimization and we find different ways to be able to generate value versus just running more volumes on new lines.
Great. Thank you. And we'll go next to Colton Bean from Tudor, Pickering and Holt. Your line is open.
Thank you. So just to follow-up on all the questions around the 2021 guide. If we look at the fee based portion of $2,150,000,000 and add back the $40,000,000 that's associated with asset sales, compared to the Q4 fee based run rate, it actually looks like the numbers are up marginally. So I guess, one, is that a fair characterization that from an exit to exit perspective, your earnings are actually flat to actually a little bit better for fee based? And then second, is that primarily a function of Permian drilling and offsetting declines in other basins?
Jeremy? Thanks for the question. Can you what specific numbers are you looking for? I just want to make sure I match up to the trend that you're looking at?
It's a little higher being much 4th quarter versus 5th quarter. Yes. It's slightly higher. It's not Yes.
I view this largely as flat to 4th quarter as we've said from the beginning. I think that's the way to look at it is, it's going to be noise, but the general trend would be consistent with Q4 because you think you're at largely at MVC levels on the long haul pipes and your gathering systems are basically flat production. Our gathering exposure outside the Permian is very minimal at this point contributing to this. So the Permian gathering trend plus the long haul trends in the facilities are relatively stable as you see across the assets. That's the way I would look at it.
And we would intend more detailed guidance.
Yes. And another thing to think about is remember the basis for this and I think it's somewhere in the presentation, but it says $40 to $45 We're basically assuming close to 80% refining utilization in that neighborhood for the downstream pipes. So anything better than that, that's going to drive potential outperformance.
Understood. And then just briefly on the $200,000,000 to $300,000,000 of long term investment. You mentioned the 50% that might be allocated to well connects. Could you just frame at a high level what the expectation would be for that other 50% just the types of projects?
Sure. If you think about it just facilities types expansions, we have a lot of exposure in Canada potentially expansions of just along those the pipeline system. Domestically, it could be, like I said, facilities in and around some of our terminals and docks and in the assets. But the vast majority we would look at and it's all going to be pace time independent is somewhere between as the numbers would articulate $75,000,000 to $150,000,000 depending on pricing environments around some of our gathering systems. And those we have a very high threshold and Chris' team has worked really well with the commercial team and driving down cost 30% to 40% on a per unit type gathering cost.
So we're going to look at even driving further efficiencies by recycling pumps and equipment as production flows from one area to the other. So we're going to keep driving that sustaining capital number down and in a very cost effective in a very operationally and safe way. But we're looking at that number and we hope to continue to beat that number and drive it down. What would be a really big win for us is if producers continue the trend of coming behind existing pads and wells, then we're going to get free production and that's when the sustaining capital really drops. So in the Delaware Basin where we have a lot of gathering exposure, If you're not building laterals, all you're doing is coming behind existing batteries.
That's when that number can get really low and that's what we're looking forward to as producers get more and more efficient.
Understood. Appreciate the detail.
And next we'll go to Gabe Moreen from Mizuho. Your line is open.
Hi, good afternoon guys. Two quick ones for me. One is on the balance sheet and leverage metrics. Just wondering how the new capital return framework fits within, I guess, a goal of maybe being investment grade again at all the agencies and also whether the agencies, I guess, that have you at IG are comfortable with the plan here?
Al?
Yes. We believe it is compatible with IG and we are taking a very disciplined approach to that allocation. Probably what's embedded under it is what you're hearing us talk about is being free cash flow positive, 1, after distributions and 75% of that being allocated to reduce debt, the absolute reduction of debt, not counting on EBITDA growth, etcetera, to necessarily delever. So it's a very disciplined approach. We think it is consistent with IG metrics.
And ultimately, if we don't generate free cash flow after dividends, we won't be buying in any equity in 2021 or beyond. So that's a little bit of where we're intensely focused. I think you kind of heard that in Willie's comments on
running a very disciplined
approach to how we run the company.
Election Eve, I don't want to promise of read my lips, no new acquisitions. But I'm just curious with all the talk about consolidation within, I guess, the energy sector at large, how the capital return framework and I guess the focus on dispositions would fit into I guess a general viewpoint of midstream consolidation and whether assets that are attractive and ancillary to your footprint come to market, whether you would not pull the trigger based on your current, I guess, guidance and outlook there?
Yes, Gabe, this is Willie. When we think about I've talked about rationalization. A lot of the things that you've seen in our playbook around strategic joint ventures in doing things that are leverage friendly and accretive. I think you're going to see more of those. Pure asset sales and some of the assets we've got, I think valuation differentials will probably create a little bit of hesitation to move on some of those.
So hopefully that's helpful.
Gabe, this is Jeremy. Just a couple of thoughts. One, our securities, we're buying them now. We're not using our currency
to buy something is largely off
the table. What we're looking more is
cashless transactions, as
Willie said, it's a relative value exercise. The seller is less concerned about the exercise. The seller is less concerned about the absolute value at that point. You can still enter into strategic JVs with others and get to a point where you extract the synergies on a relative basis. And so those are tougher deals to pull off to be honest with you, but the industry is motivated to get towards getting to the right answers and taking out idle capacity and getting to a point where you're going to have reasonable returns.
So I think we'll continue to look for opportunities to do that, but our focus will be doing it in a very disciplined way and getting valuation right and doing it in a cashless manner where you can still extract synergy. Yes.
I think the other way to think about this Gabe is you've heard us talk a lot about driving free cash flow plus, right, and all the levers that go into that. So for us to do something that would increase debt, maybe near term for a long term return, That's just not in the playbook right now.
Thanks guys.
And next we'll go to Sunil Sibal from Seaport Global Securities. Your line is open.
Yes. Hi. Good afternoon guys and thanks for all the clarity. Also, thanks for taking my question. So, a couple of questions.
So first, when we look at the Transportation segment, it seems like this quarter you've benefited about $65,000,000 or so from MVC payment. How should we think about that going forward? Obviously, you're guiding to a kind of similar level of activity where you are going forward. And then how should we also think about that in the context of your customer credit quality? Thanks.
Kyle, you want to take that?
Yes. I mean as far as 4th quarter, we expect to see shipments roughly in line with the contractual requirements. Clearly, if that doesn't happen frequently, there's a delay and you might see the collections actually come in Q1 of next year, etcetera, if that was the nature of the question. Clearly, with regard to the Q3, we had some of that MVC amount related to 2nd quarter and some of it was self contained inside of the Q3 itself.
Okay. Then my follow-up was on the industry environment. So we've seen a fair bit of upstream M and A. I was just curious what are your thoughts on how does it impact the midstream and how do you see the environment for midstream M and A? Obviously, you guys have been active in some asset transactions, but do you see the upstream M and A kind of facilitating any corporate M and A in the midstream also?
Hi, Sameel. This is Jeremy Goebel. First question was how does it impact us? And I'd say from a midstream standpoint, we generally have larger customers and this leads to better credits, larger customers, which should be generally a benefit to us. Each individual transaction is different and the acquirer generally will have existing relationships.
So we may need to make some new friends, but generally we have a lot to trend. We generally play nice in the sandbox with the bigger customers and I think that's the trend which you would expect. The second part of your question was associated with do you see upstream yielding the midstream? I think the answer is it's inevitable and it will happen, but just like investment cycles upstream first, mid following, you'll see that it's going to take some time. I think there's the self help that everybody is doing.
Chris articulated a lot that we're doing on our end. I think all of our customers are in a that that MLPs have makes it a little bit more difficult and I think leverage is an impediment to transactions. So there's some capital, everybody's going to have to heal up their balance sheets and get to a place to where deals can happen. So I think there's probably some time, but it is inevitable that it will happen. It's just it may take some time to get there.
Okay, got it. Thanks a lot of my color.
I want to thank everybody for joining our call today. I appreciate your following us and your continued support and look forward to touching base throughout the remainder of this week and
in the future. Thank you. Thanks, everyone.
And that does conclude our call for today. Thank you for your participation. You may now disconnect.