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 American's third quarter earnings conference call. Today's slide presentation is posted on the investor relations news and events section of our website at plains.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 kit 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 two of today's presentation. A condensed consolidated balance sheet for PAGP and other reference materials are located in the appendix. Today's call will be hosted by Willie Chiang, Chairman and Chief Executive Officer, and Al Swanson, Executive Vice President and Chief Financial Officer.
Additionally, Harry Pefanis, President and Chief Commercial Officer, Chris Chandler, Executive Vice President and Chief Operating Officer, Jeremy Goebel, Executive Vice President Commercial, and Chris Herbold, Senior Vice President and Chief Accounting Officer, along with other members of our senior management team, are available for the Q&A portion of today's call. With that, I will now turn the call over to Willie.
Thanks, Roy. Hello, everyone, thank you for joining us. This afternoon, we reported solid third quarter 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 three, 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 million or more of asset 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 four, which highlight positive momentum as we enter 2021. We're well on our way in our transition to positive free cash flow after distributions.
Second, our year-to-date performance continues to highlight the value of our integrated business model. Third, we continue to successfully execute across each of our key initiatives. As a result of our progress and our outlook, we've announced a $500 million 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 five, we expect 2021 free cash flow after distributions to total roughly $300 million, or over $900 million when including our $600 million-plus of additional asset sales we're targeting in 2021.
Our preliminary guidance for 2021 adjusted EBITDA is ±$2.2 billion. This includes the estimated impact of our targeted asset sales and assumes a $50 million 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 six, our business has performed well despite a very challenging year. This afternoon, we increased our full year 2020 adjusted EBITDA guidance to $2.585 billion, which is now in line with the initial full year 2020 guidance that we furnished in February pre-COVID and is $85 million above our most recent August 2020 guidance. These results highlight the value of our integrated business model, and while challenging to 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 in our system over a long time horizon. As a case in point, and as illustrated on slide seven, you can see the significant increase in our term supply and our Permian 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 eight, 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 third-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 nine. 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 15th, we closed on the sale of our Los Angeles terminals, generating proceeds of approximately $200 million, which brings our year-to-date proceeds from asset sales to approximately $450 million. 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 million 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 million 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 million-$100 million. At the same time, we've continued to advance our sustainability initiatives. Highlights of our progress are summarized on slides 18- 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. First, 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 Plains.
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. 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. 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 matched with the capabilities of our teams position Plains 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, in considering our progress across multiple key initiatives in our constructive longer-term outlook, today we announced a $500 million common equity repurchase program. As Al will discuss further, we plan to take a very balanced approach and allocate up to $75 million 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 third quarter results, review our current capitalization, liquidity, and leverage metrics, and provide additional color with respect to our outlook for 2020 and 2021. As shown on slide 11, third quarter fee-based adjusted EBITDA of $620 million exceeded expectations in both the transportation and facility segment. On a comparative basis, transportation segment results increased over second quarter 2020 results, driven by a $25 million timing benefit related to MVC deficiencies that occurred during the second quarter, in addition to a modest increase in tariff volumes and continuation of cost optimization initiatives. Relative to third quarter 2019, the slightly lower segment results reflect the COVID-related impacts on producer activity levels.
Additionally, one accounting-related item I will note is that in the third quarter, we recorded a $91 million non-cash impairment within our investments in unconsolidated entities attributed to a joint venture in the Midcontinent area. With respect to the facility segment, our third 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 second quarter 2020 and third quarter 2019, effectively absorbing the impact of asset sales. Third quarter 2020 S&L results of $61 million 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&L results of $437 million.
The leverage ratio would be 3.8 x if normalized using our initial 2020 S&L adjusted EBITDA guidance of $75 million, reflecting leverage slightly above the high end of our target level, thus underpinning our focus on reducing leverage. This week, we will repay our $600 million February 2021 senior notes via the par call option. We have no other near-term maturities, and our total committed liquidity at quarter end was $2.8 billion, or approximately $2.2 billion pro forma 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 million to ±$2.585 billion, which is primarily attributed to the transportation segment and is driven by our third quarter 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 price environment and producer activity levels to remain relatively unchanged throughout the majority of the year. 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&L segment in 2021.
Moving on to slide 14, our expectations for 2020 and 2021 investment capital remain unchanged on a combined basis, but reflects a $50 million 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%-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 31 and 32 of the appendix of today's slide presentation. Beyond 2021, assuming an approximate $50 per bbl oil price environment, we estimate our run rate investment capital to be within a range of $200 million-$300 million 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 million 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 million, while free cash flow after distributions was a negative $464 million.
With regard to the unit repurchase program, as Willie noted and is 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 million 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 repurchases. With that, I'll turn the call back over to Willie.
Thanks, Al. Before opening it to Q&A, I want to reinforce three critical points which are summarized on slide 17. 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, we have a long-term positive outlook for the future. Our asset base is well positioned to move North American production to market, 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, North America will continue to be the short cycle solution to meeting the world's supply needs.
We certainly understand the longer-term transition to lower carbon energy. 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. Second, we're making meaningful progress on enhancing our financial flexibility and lowering leverage. We remain very focused on further progress as we manage through these near-term challenges. Third, 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. 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 and some additional detail within the appendix of today's presentation that I would encourage you to review. 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&A.
Thanks, Willie. As we enter the Q&A session, please limit yourself to one question and one follow-up question. 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 into the balance of the week to address additional questions. Christie, we're now ready to open the call for questions.
Thank you. To queue up for a question, please press star followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, star one to ask a question. We'll take our first caller, Shneur Gershuni from UBS. Your line is open.
Hi. Good afternoon, everyone. To start off today, if we could start with the preliminary guidance for 2021. Willie, 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? As part of the guidance question, if you can share with us the EBITDA associated with the planned $600 million 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. We've really pushed the organization to be as efficient as we can. 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 formal guidance on that in 2021 in February. I do want Chris Chandler to chat a little bit about the cost savings that we've gotten, what the configuration of some of those savings are, maybe, Al, you want to take the EBITDA question.
I think it's at $40 million that's associated with 2021 guidance. I just stole your thunder. I'm sorry about that.
This is Chris Chandler. I'll provide some additional color on the cost savings without trying to tie it to our actual 2021 plan, as Willie mentioned. We're working very hard to ensure these savings are sustainable. We believe we've reduced our fixed cost by $125 million-$150 million compared to 2019, 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. 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.
We expect to sustain cost reductions in all of those categories going forward, and we'll provide additional color on that when we release our formal 2021 guidance.
Al, do you want to add anything more?
Yeah. 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 million. That's an approximate based off of more of a mid-year type of a convention.
Okay, great. 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. In my prepared comments, I talked about maybe changing the allocation a little bit based on that consideration. No, our definition of free cash flow, and we lay out the calculation on a slide, includes 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 $2.3 billion, I don't know if you were getting after this, but as far as normalizing that, we have $50 million assumed in our S&L segment. I don't know what others have, but I've seen $100 million in some of the consensus numbers, as well as when you take that $50 plus the EBITDA, it gets you to that same zip code if you normalize the two.
Yep. That's something we were after. Thank you for that.
Yeah.
Next, we'll go to Jeremy Tonet from JP Morgan. Your line is open.
Hi, good afternoon.
Hi, Jeremy. Good afternoon.
Hi. Just wanted to follow on with the asset sales there and wanted to see the $600 million. I think you've talked about it a few different ways before. How much of that is incremental to what you guys had said before with asset sales? Seems like some has slid from 2020 into 2021. Just wanted to see what was incremental there. How far advanced are you in these? How much certainty do you have to these closing? 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 reductions. Just wondering if you could help us on those points.
Hey, Jeremy, let me start with this. I'm going to ask Jeremy Goebel to fill in the blanks here. We've said $600 million. As far as potential upside, it could be $ several hundred for 2021. On the $440 that we announced, or $450 for 2020 against the $600, all we're doing is we're resetting the slate now. Going forward, our target is $600 million plus. Jeremy, you might want to chat a little bit more.
Yeah, 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's 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. 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 in someone else's hands based on our use of available capital for potential de-leveraging and buybacks. The $450 million, as Willie said, that closed against the $600 million this year. The way you were looking at it, potentially $150 million is moving into next year.
That $600 million 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. 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.
Jeremy, I think you threw in a question on the repurchase. You probably got your follow-up embedded in there, we would look at only common equity repurchases and not either of the two preferred securities at this time.
Got it. Thanks. If I'm allowed one more, I just wanted to go to Jeremy as far as 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.
Hey, Jeremy. Good question. I think as we look at it based on just how we talk to producers and our customers, I'd say 20%-30% of cash flow is going to go back to shareholders. Roughly 70%-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-$45 oil for next year. What that looks like in the Permian Basin is largely flat to fourth quarter throughout the year. Exit of 41, 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&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. Right now, we're sticking with roughly flat to the fourth quarter. For other basins, you could see continued declines. Largely what you're seeing most producers do is the declines that started in the second quarter, they're stabilizing now using drilled and uncompleted wells, and they'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 the drill bit back to work.
Got it. Thank you.
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. 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 a number of asset sales, as you know. I think this will take us above $3.5 billion 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. As we go forward into 2021 on our guidance, if we have some additional information, we can give you some. We wouldn't have announced our intent if we didn't have some confidence that we could move forward with these.
Okay, great. Second question is just on the updated guidance for transportation for the year. It's up $80 million. The volume outlook's pretty similar. 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. Yeah, no. EBITDA up $80 million, volume's kind of flat-ish. If you recall back in May, shortly following the pandemic, we lowered our transportation segment quite meaningfully, about $300 million. The only reason I'm mentioning that is that as the business performed a little bit better in the second quarter, we had a little bit of cushion in our model. Following the big change in the uncertainties, we chose to retain some cushion in our guidance when we put it out in August. Lower costs being a big part of it, some of which aren't volume related, it's just cost management. A little bit of it is with some of our Canadian pipes with an average higher margin, just kind of the business mix are really the three key things.
We did have a little bit of cushion in our model when we updated guidance last time.
Great. Thank you.
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. Willie, 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? Obviously, you've got the $600 million. You haven't disclosed what that specifically is. When you think about kind of the other parts of the business that may not be core to kind of your long-term five-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. I'll tell you, the way we think about this is everything that we do is really part of the integrated approach. 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 it more opportunity of value with somebody else than ourselves. I would tell you the integrated model is very key.
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. 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. 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 capital efficiency for multiple parties. Hopefully that helps.
No, that helps. Just kind of a nuts and bolts question on cost management. If I look at the nine months of the year-to-date income statement, G&A is down $24 million year to date. Field OpEx is down $172 million, so call it almost $200 million year to date. Is what you're implying is that some of that will actually come back next year? If you're running at almost $200 million year to date down, and you're talking about kind of $125 million- $150 million, it almost implies some of that comes back.
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 reductions. It's truly what you'll see at a minimum versus volume related. Chris, why don't you share a bit more?
Sure. Yeah. This is Chris. You've got the right numbers. Our combined operating and G&A costs are down almost $200 million versus the same period in 2019. While we can't directly compare that to the $125 million-$150 million 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.
Those are just a few examples of why the numbers are different.
Got it. Thank you, guys. Much appreciated.
Michael, this is Willie. You've talked about operating costs and G&A, and Chris touched on it, but it's more than that, right? If you look at our maintenance capital expenses, not only do we talk 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. It's really costs across every bit of the organization and how we spend money.
Got it. Appreciate it, Willie. I'll follow up with the team offline. Thank you, guys.
Thanks.
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, it really just opens it up for you?
Al, you want to take that?
We won't have a specific trigger, nor will we necessarily assume you got to 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 one, but then the other variables as well, with regard to just industry conditions, market conditions, et cetera. No, we're not going to provide an exact formula for how we do it.
Thanks, Al. 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 Wink 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. EPIC and Gray Oak were ramping. 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. It'll be later in the year, second half to early fourth quarter, when that starts up full.
There's a slight ramp from probably the beginning of the second quarter through to the fourth quarter. At that point, the TSAs trigger. The real contribution from Wink to Webster doesn't start till the fourth quarter. Diamond Capline is really a first quarter of very beginning of 2022 startup is the way to think about it. This year is more of a transition year for those two projects. You think of the comp year-over-year to the first quarter is largely driven by the new pipes weren't on Wink to Webster and Gray Oak, and then the fourth quarter of this year, that will be somewhat steady state until the fourth quarter 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.
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 million next year, assuming a midyear sale. I read that would imply around 7.5x EBITDA multiple. My question is that right? Could the total asset sale proceed be larger next year if the EBITDA multiple could be better than that?
Hey, Ujjwal, this is Jeremy Goebel. We certainly think it could be substantially better than that. We're specifically not providing detail because we're in the process of discussing with buyers. I find it difficult to do projections on that front for that reason. There's 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. We're going to continue to look for those opportunities.
Don't look at this as a 12-month cycle. This is a continuous pruning and simplification for us to just become very efficient. 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.
This is Al. My comment earlier about midyear convention was trying to illustrate that we didn't assume January one. That was an approximate. Don't take a exactly linear calculation to that.
I'll tell you, Nav. This is Willie. Ujjwal, 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 has 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. My second follow-up here on the federal lands exposure. Sorry to go back on this certainly has been a key focus as far as election is concerned. Last year you had noted you had close to or less than, I believe, 20% of your dedicated permanent acres in federal lands. As you're looking at your current daily volume gathered on those acres, are you able to share any levels they are at and how much of that flow downstream through your long-haul pipes? Subsequently, if the respective producers have shifted production, do you expect to see the replacement volumes appearing in your system? Thank you.
Ujjwal, this is Willie. I want to start on that. We talked about 20%. What I would almost rather do is focus on the 80% that's not on federal lands. When you think about the 80% of the acreage we've got, there's a deep inventory that the producers have as far as well sites there. 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. You also have the producers that have built up a pretty healthy inventory of drilling permits.
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, 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 have much higher rig counts now than the activity. I'd say those are in hand. I think the base case is a view that there'll be a delayed permitting process, with multi-year inventories of drilling ahead of them, they can plan for that in advance. I'd say the view of everything stops immediately on day one, 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, it's not an on-off switch.
The state of New Mexico will have something to say about that. There's substantial revenues associated with oil and gas business. We feel comfortable with our customers that they're going to continue to execute. To the extent they don't, it makes a lot of the other assets we have worth quite a bit. If you think of a tougher regulatory environment, if that impacts other operators, that can positively impact ours that are operating. Depending upon how far the pendulum swings, we could benefit in different ways. This is not linear and located just in New Mexico. This could impact the Williston Basin and push barrels to our systems in other places. You have to look at this more across the entire regulatory environment, and it's not a binary switch.
Appreciate the color. Very helpful. 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 two units?
This is Al. I think the primary one will be the value and the price of the securities. Our intent would be to focus on PAA initially.
Got it. Thank you.
We'll go next to Jean Ann Salisbury from Bernstein. Your line is open.
Hi, Jean Ann.
Oh, hi. Can you hear me?
Yeah, 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 first quarter to about 22% now. Is that mainly a function of the pipeline ramping that Jeremy referenced in an earlier question? Is the current 22% a stable number until Wink to Webster starts?
Jean Ann, hi, this is Jeremy Goebel. We don't get into specifics on pipes, but what you would say is there probably some loss in spot volumes, which would be expected. This would be a stable number. I'd reference you to page eight in the guide, the presentation. We've listened to our investors in providing some more disclosure there. We're very comfortable with our Permian long-haul position. 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 if 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. We have some tools that others don't, and longer term, we'll fill our pipelines while others are looking for supply.
The view of it's a cliff and everything goes away, Plains will be the one that has volumes on their systems all the time because as we show on, I think it's on page four in the presentation or seven, we control enough volume to basically fill our pipelines if we wanted to, if the arbs and opportunities are there. No one else can say that. The view that the contracts will dictate where the volumes flow, it's 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 Midcontinent, 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. 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 to say in that because we control enough supply to kind of push barrels to where the differential support.
Got it. Makes sense. Yeah, I appreciate the disclosure on slide eight. Just had a quick clarifying question on that. Does that include acreage dedications, and is the 90% contracted at basin, is that like 90% of 90% nameplate per the footnote?
Yes. The way to think about it is the 90% of 90%, and then of our total commitments, I believe there's 100,000 that are acreage dedication, the rest are MVC. Those acreage dedications are well inside of the production levels needed to fill them.
Great. Yeah, I really appreciate it, the additional disclosure. That's all for me. Thank you.
Yep.
You know, 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.
We'll go next to Colton Bean from Tudor, Pickering & Holt.
Thank you. Just to follow up on all the questions around the 2021 guide. If we were to look at the fee-based portion of $2.15 billion and add back the $40 million that's associated with asset sales, but compared to the Q4 fee-based revenue, it actually looks like the numbers are up marginally. 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? Second, is that primarily a function of Permian drilling and offsetting declines in other basins?
Jeremy?
Thanks for the question. 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 than last fourth quarter.
Oh, yeah.
Just slightly higher.
I view this largely as flat to fourth quarter, as we 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 fourth quarter. You think you're 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. I think 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.
We would intend to provide more detailed guidance.
Yeah. Another thing to think about is, remember the basis for this, and I think it's somewhere in the presentation, it says $40-$45, we're basically assuming close to 80% refining utilization in that neighborhood for the downstream pipes. Anything better than that's going to drive potential outperformance.
Understood. Just briefly on the $200 million-$300 million 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 assets. The vast majority we would look at, and it's all going to be paced time independent, is somewhere between, as the numbers would articulate, $75 million-$150 million, depending on price environments, around some of our gathering systems. Those, we have a very high threshold, and Chris's team has worked really well with the commercial team in driving down cost 30%-40% on a per unit type gathering cost. We're going to look at even driving further efficiencies by recycling pumps and equipment as production flows from one area to the other.
We're going to keep driving that sustaining capital number down in a very cost-effective, in a very operationally and safe way. 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. 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.
Yep.
Next, we'll go to Gabe Moreen from Mizuho. Your line is open.
Hi, good afternoon, guys. Two quick ones from me. One is on the balance sheet and leverage metrics. Just wondering how the new capital return framework fits within, I guess, the goal of maybe being investment grade again at all the agencies. Also whether the agencies, I guess, that have you at IG are comfortable with the plan here.
Al?
Yeah. 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, after distributions, and 75% of that being allocated to reduce debt. The absolute reduction of debt, not counting on EBITDA growth, et cetera, to necessarily delever. 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. 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.
Thanks, Al. Maybe as a follow-up from me on election eve, I don't want to promise of read my lips, no new acquisitions. 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.
Yeah, Gabe, this is Willie. 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. Hopefully that's helpful.
Gabe, this is Jeremy. A couple other thoughts. One, our securities, we're buying them now. We're not issuing any, right? I think us 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 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. Those are tougher deals to pull off, to be honest with you. The industry is motivated to get towards getting to the right answers and taking out idle capacity and getting to a point where you can have reasonable returns. I think we'll continue to look for opportunities to do that.
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 the synergy.
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? All the levers that go into that. 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.
Next we'll go to Sunil Sibal from Seaport Global Securities. Your line is open.
Yeah. Hi, good afternoon, guys, and thanks for all the clarity. Also, thanks for taking my question. A couple of questions. First, when we look at the transportation segment, seems like this quarter you benefited about $65 million 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. Then how should we also think about that in the context of your customer credit quality? Thanks.
Al, you want to take that?
Yeah. As far as the fourth 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 first quarter of next year, et cetera, if that was the nature of the question. Clearly, with regard to the third quarter, we had a sum of that MVC amount related to second quarter, and some of it was self-contained inside of the third quarter itself.
Okay. My follow-up was on the industry environment. We've seen a fair bit of upstream M&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&A? Obviously, you guys have been active in some asset transactions, do you see the upstream M&A kind of facilitating any corporate M&A in the midstream also?
Hi, Sunil. This is Jeremy Goebel. First question was how does it impact us? 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, the acquirer generally will have existing relationships. We may need to make some new friends, but generally, we have a lot to offer and a big supply position to help with marketers. On the upstream side, we have systems that are interconnected to anyone and everyone. 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 to midstream?
I think the answer is it's inevitable, and it will happen, but just like investment cycles, upstream first, midstream next, downstream following, you'll see that it's going to take some time. I think there's the self-help that everybody's doing. Chris articulated a lot that we're doing on our end. I think all of our customers are in a similar boat. The distribution model that MLPs have makes it a little bit more difficult, and I think leverage is an impediment to transactions. 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. I think there's probably some time, but it is inevitable that it will happen. It may take some time to get there.
Okay, got it. Thanks for all the color.
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Thanks, everyone.
That does conclude our call for today. Thank you for your participation. You may now disconnect.