day, and welcome to the PAA and PAGP Second Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roy Lamero. Please go ahead, sir.
Thank you, Dan. Good afternoon, and welcome to Plains All American's Q2 earnings conference call. Today's slide presentation is posted on the Investor Relations News and Events section of our website at plainsallamerican.com where an audio replay will also be available following our call today. Later this evening, we plan to post our earnings package to the Investor Kit section of our IR website, which will include today's transcript and other reference materials. Important disclosures regarding forward looking statements and non GAAP financial measures are provided on Slide 2 of today's presentation.
A condensed consolidated 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 Alex 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 Herrgold, Senior Vice President and Chief Accounting Officer, along with other members of our senior management team are available for the Q and A session of today's call. With that, I'll turn the call over to Willie.
Thanks, Roy. Good afternoon to everyone and thank you for joining us. I hope that you and your families are safe in what seems like a new normal environment for all of us. At PAA, our organization has adapted to additional COVID protocols in the field, social distancing and working remotely for those that can. We continue to operate safely, reliably and I'm very proud of our team as we are having our best year to date safety metrics as measured as total recordable injury rate and we are achieving levels that are better than half of where we were 5 years ago, both in safety and key environmental metrics.
This afternoon, we reported Q2 adjusted EBITDA of $524,000,000 These results reflect slightly favorable performance in our fee based and supply and logistics segments relative to the revised full year guidance we furnished in May. A summary of our performance and an overview of our call is reflected on Slide 3. Al will discuss our results in greater detail during his section. I wanted to take a few moments to provide context for today's call and to discuss our updated guidance. I also want to highlight our progress on increasing profitability and free cash flow through reducing costs, executing key projects and further optimizing our capital program.
We continue to believe that long term energy fundamentals are constructive. That being said, as illustrated on Slide 4, in the near term, this continues to be a dynamic and unprecedented environment for our industry. As anticipated in response to COVID induced demand destruction in the weeks following our Q1 earnings call in May, North American producers responded aggressively by shutting in significant levels of production, limiting the amount of storage builds and mitigating the risk of testing storage maximums, while refinery utilization gradually began to increase. The previously steep contango market structured tempered and crude oil prices improved the levels that supported producers' ability to bring previously shut in production back online in June. However, the U.
S. Lower 48 horizontal rig count continue to decline and currently sits approximately 20% of 2019 peak levels. Our current expectation is that production will continue to slowly recover from the trough in May through year end as shut in production comes back online and some completions continue. We forecast the Permian to end the year approximately 4,100,000
barrels a
day, slightly better than our expectations earlier this year. I would highlight that we expect the market to continue to be dynamic in the near term, influenced by multiple factors of uncertainty including the pace of demand recovery due to potential COVID resurgence and geopolitical developments. A return to longer term sustainable production growth ultimately remains a function of the timing and the pace of demand recovery as illustrated by the 3rd various third party estimates of demand recovery reflected in Slide 5. Despite the near term uncertainty, we remain constructive in our long term view of global energy demand. We believe the world needs U.
S. Energy, the Permian Basin is critical and our positioning supports a positive and a constructive outlook for our business. As Al will discuss in further detail, this afternoon we increased our 2020 adjusted EBITDA guidance by $75,000,000 or 3 percent to plus or minus $2,500,000,000 with all three segments contributing to the increase. We are squarely focused on increasing our free cash flow with the expectation of generating meaningful free cash flow after dividends and enhancing our financial and operating position. You will note a new free cash flow disclosure in this quarter's update, which Al will also comment on.
In addition to increasing guidance for our adjusted EBITDA, we have further reduced our 2020 2021 CapEx program by an additional $100,000,000 I would note that our capital investment is coming down meaningfully in the second half of the year as we complete and put key projects in service. As reflected on Slide 6, we invested approximately $650,000,000 in expansion capital in the first half of twenty twenty and we expect to invest approximately $350,000,000 in the second half of the year. In 2021, we expect we currently estimate approximately $450,000,000 of expansion capital investment as we complete our investments in the Wink to Webster and Diamond Capline projects. We expect to further lower levels of capital investment in 22 plus as we focus on smaller projects to connect production and improve returns across our system. Project updates are outlined on Slide 18 in the appendix and I highlight the following.
We placed our Martin Hills terminal expansion in Canada into service during the quarter. Our Red River, Saddlehorn and St. James expansions are on track to be in service by year end. The Wink to Webster JV continues to progress. The JVs throughput agreements are expected to become effective when the full JV system has entered service, which is now expected in the second half of twenty twenty one with the potential for partial early service in Q2 of 2021.
The Diamond and Capline projects remain on budget with both projects expected to be in service late 2021. As summarized on Slide 7, we continue to advance initiatives to optimize our asset portfolio and streamline our business. With respect to portfolio optimization, we have closed or contracted for approximately $440,000,000 in asset sales year to date, which includes $190,000,000 expected to close before year end. We continue to advance $160,000,000 or more of additional divestiture opportunities, some of which could be more challenging to achieve in the current environment and will likely extend into 2021. With respect to optimizing our business, we continue to streamline and drive efficiencies across all aspects of our business.
In May, we estimated the benefit of this process to result in $50,000,000 to $100,000,000 of cost savings for 2020. Based on our progress to date, we're on track to achieve the higher end of our range, which is reflected in our updated guidance. We also expect a significant portion of our savings to endure in future years as we continue to reduce our cost structure. Additionally, our 2020 guidance for maintenance capital remains unchanged at $215,000,000 With that, I'll turn the call over to Al.
Thanks, Willie. During my portion of the call, I'll recap our second quarter results, discuss our 2020 guidance and review our current capital $520,000,000 Transportation segment results were generally in line with our expectations, but due to the impact of producer shut ins, tight regional basis differentials and the timing of shipper deficiency payments reflect quarterly sequential and year over year declines. We expect to collect the 2nd quarter shipper deficiency payments in the second half of 2020. 2nd quarter Facilities segment results exceeded expectations primarily due to operational cost savings and higher than expected throughput at certain of our Mid Continent terminal. On a comparative basis, the segment was in line with second quarter 2019 despite the impact of asset sales and down sequentially as a result of a multiyear deficiency payment received in the Q1 as well as the impact of asset sales.
Supply and logistics results of $3,000,000 exceeded our expectations as contango based margin opportunities and more favorable NGL margins offset the impact of shut in driven volume shortages, timing of inventory costing and the typical NGL seasonal dip that occurs in the 2nd and third quarters. Now I will shift to a discussion of our 2020 guidance, which is reflected on Slide 9. As Willie mentioned, our revised 2020 adjusted EBITDA guidance of plus or minus $2,500,000,000 is $75,000,000 or 3% above our guidance provided in May and reflects an increase in all three segments. For the transportation segment, we have revised down our expected average daily volumes by 4%, reflecting 2nd quarter actual volumes, our current views of anticipated throughput on our system in the second half as well as shipper NVC deficiencies. Unit margins have improved reflecting higher expected average tariff rates and our continued focus on reducing operating costs.
I'll note that our updated guidance incorporates a shift between quarters of earnings related to the timing of timing impact of MVC deficiencies relative to billing cycle and the deficiency payments are also contributing to the higher average tariff rate for 2020. With respect to the S and L segment, the guidance increase reflects our 2nd quarter performance, plus the benefit to the second half of the year from contango opportunities captured to date, as well as the stronger than anticipated NGL and crude oil margins. Moving to our capitalization and liquidity, a summary of key metrics is provided on Slide 10. Our reported long term debt to adjusted EBITDA ratio of 3.2x benefited from trailing 12 month supply and logistics results of almost $500,000,000 As is noted on the slide, the leverage ratio would be 3.7x if normalized using our initial 2020 S and L adjusted EBITDA guidance, reflecting leverage slightly above the high end of our target level, thus underpinning our focus on reducing leverage. In June, we completed a $750,000,000 10 year debt offering at 3.8%, which will be used to repay our $600,000,000 February 2021 maturity via the par call option during the Q4.
We have no other near term maturities in our current our total committed liquidity at quarter end was $2,900,000,000 As a result, we do not expect to access the capital markets for the foreseeable future. As Willie stated earlier in the call, improving our free cash flow is a key objective and to the extent it exceeds distributions will be reduced will be used to reduce debt in the near term. As shown on Slide 11, our free cash flow through the first 6 months of the year is a positive $122,000,000 and free cash flow after distributions was a negative $370,000,000 Absent short term changes in working capital associated with hedged inventory storage, we expect our cash generation combined with lower capital investment to benefit free cash flow for the balance of the year and into 2021 and beyond. With that,
I'll turn the call back over to Will. Thanks, Al. As discussed throughout the call, I want to reinforce we remain on track with our revised expectations that we articulated in May and we are intently focused on execution during what remains to be a very dynamic challenging environment. We remain constructive on long term energy demand as population growth and the quest for better living conditions will drive global energy demand in the years to come. Ultimately, the world needs North American energy and as the largest and one of the most economic producing regions, we expect that the Permian will ultimately lead in North American recovery.
Given the critical nature of our integrated crude infrastructure system in key North American basins and our large Permian position, which is underpinned by significant volume commitments and more than $2,500,000 dedicated acreage and facility dedications, we believe we're very well positioned over time. Additionally, we're taking the right steps to further streamline our business to lower our costs, improve free cash flow generation, reduce leverage and return cash to our unitholders after reaching our leverage targets. These actions make us a stronger company and positions us well for the future. Before I open the call up for questions, I do want to acknowledge and thank all of our PAA team members for their hard work, their commitment and dedication. As our workforce continues to operate in a socially distant world, we remain laser focused on safe, reliable and responsible operations in managing our business for the long term.
A summary of our takeaways from today's call is outlined on Slide 12. With that, we'll look forward to sharing additional updates on our Q3 earnings call in November. I'll turn the call back over to Roy.
Thanks, Willie. As we enter the
Q and A session, please limit yourself to one question and one follow-up question and then return to the queue if you have additional follow ups. This will allow us to address the top questions from as many participants as practical and our available time this evening. Additionally, our IR team plans to be available this evening and into the balance of the week to address additional questions. Dan, we're now ready to open the call for questions.
Thank you, sir. At this time, we'll open the floor for questions.
How are you guys? Interesting phone setup today. Hopefully all is well. Maybe to start off a little bit here, just to start off, I guess, a little bit bigger picture. When you last gave guidance on the last earnings call, you know when rig counts are bottomed and so forth and you had a fairly ominous view as kind of an exit rate for the Permian for this year.
You sort of moved the goalpost a little bit with this call today. I was wondering if you can share with us what are the key signposts that you are watching to are you looking at completion crews as a leading indicator? Are you waiting for sustainable increase in rig counts, shutting reversals, crude differentials? Just kind of wondering what are the things that you're looking at? Could it be something like efficiencies like we saw in the last from an E and P breakeven perspective?
Just wondering if you could sort of talk about the inputs or to come up with your views?
Sure. Let me start and then Jeremy Goble will give you his insights on this. Generally speaking, the guidance that we thought on the Permian specifically, where we are right now is pretty much it's pretty close to expectations when you think about everything else. The difference is the slope of the curve and how quickly it happened and potential recovery curve, which I think Jeremy can cover as well as some of his observations on the other things that we're looking at. Jeremy?
Senior, hi, it's Jeremy Goebel. So we basically had modeled a frac holiday, but the shut ins and curtailments happened very quickly. So in the May, you had rebalancing towards the second half of June. So you think about it, it was steeper, but it recovered quicker. And if you think about there's 3 components, those barrels either went into storage, those barrels didn't get produced because of curtailment or those barrels were just lost because of natural declines, lack of completions.
So across the system, we see producers now getting into starting to stabilize production. So I think our exit rates plus or minus 100,000 barrels a day, there's some movements in between. I'd say volumes now, recoveries, curtailments came back quicker than we thought, but you're going to experience declines. So I think people are getting back to work slowly, but you're going to have a significant inventory of DUCs. So we're going to manage watch completions, we're going to watch rigs.
But I think in general, you see maintenance capital and articulated by all the upstream producers. Everyone's looking to stabilize production towards the end of the year and maintain production until they see higher prices. So I think everyone's articulated what their plan is going to be and we see that across our system as volume stabilizing as opposed to the volatility we saw in May June.
Yes. So the other thing Go
ahead, Harry.
Yes. The other thing is all this is based on kind of a plus or minus $40 crude oil price. It's really stabilized in here. It seems to be one of staying in this range, but all those assumptions are based on this type of pricing.
Yes, I think a big difference on what we thought may happen is because of the proactive nature of the producer shutting in, we were able to avoid this filling up of storage, which would have created a knee jerk reaction across the system, which would have been more severe than what's happened. So I think the crude oil prices where they are has helped that, and the proactive nature of what the producers did help the crude oil price and helped kind of avoid a containment problem.
That makes perfect sense. Really appreciate the color on that. Maybe as a follow-up question, you CapEx again, and just wanted to focus specifically on this $100,000,000 reduction. Is this just you're finding ways to do the same things for Lyft and that you've and things are just costing less and nothing is really changing in terms of what you're putting in place in terms of assets? Or have you scaled back some projects a little bit as well too?
I'm just trying to understand if there's kind of an impact in terms of output for 2021 2022 beyond or things are just costing $100,000,000 less than what you previously thought?
Well, Shneur, I'll start again. Clearly, we've said over and over again, we are focused on improving our cash flow and CapEx spend. Any spend we've got is precious and we've got an intense focus and laser on how do we avoid spending CapEx. We have an internal term that we use. It's must do and no regrets CapEx, right?
So to answer your questions, it's really a little bit of all the above, but I'll ask Chris Chandler to comment.
Yes. Thanks, Willie. This is Chris Chandler. We're always looking for ways to optimize scope and improve execution efficiency on our projects. We have seen some material and labor cost deflation.
And of course, with the slowdown in upstream development, we're able to execute projects more efficiently without paying the expedited equipment or material or paying overtime to complete work. We've also been successful in optimizing the scope of our larger projects including Wink to Webster and Diamond Capline. This might be things like number of tanks or size of tanks at origin or destination facilities. And finally, we have deferred several projects in Canada to beyond the 2020 one time frame. So it's really a combination of a number of efforts like Willie mentioned to continue to bring down our capital spend.
And maybe just a little bit about 2022 beyond Shneur, we guided to $450,000,000 of CapEx in 2021, just a little bit over a third of that is on Wink to Webster and our Capline and Diamond project. So when you think about that and you think about 2022, it really sets us up to be able to lower our expectations of what we're going to spend on capital in 2022 plus.
Perfect. That makes a ton of sense. Really appreciate the color guys. I have some more questions, then I'll jump back in the queue. Have a great and safe day.
Thanks, Shneur.
Thank you. And again, caller, please identify yourself and proceed with your question and we'll take our next questioner in queue. Please go ahead.
This is Jeremy Tonet from JPMorgan. Hi, Jeremy. Hi. Just want to start off, if I could. There was significant contango opportunities in the quarter and just want to see how that translated into your results.
How much of that did you secure kind of in long term contracting and showed up in the facility side versus maybe shorter term contracting and showed up in the Jeremy
Jeremy, I think Harry can cover that for you.
Yes. So from contango perspective, we captured all that on the F and L side, not on the facilities. And it probably looks muted and that's because of a couple of things. First of all, one, we had under deliveries from producers, so we weren't fully able to utilize all the contango storage that we had available. Secondly, a lot of the positions were put on a term basis.
So we were looking at longer term positions rather than just doing short 1 month position. So you'll see some of that come across in future months. And then the third component of it that sort of muted it was particularly in Canada, the inventories are on a weighted average cost basis. So just the way that weighted average cost mechanism works, not all of
the profits
that were probably generated within the quarter actually occurred in the quarter, though it will be spread out over the balance of the year. So all that is reflected in the guidance for the balance fee offsetting that for the balance of the year, those are tighter differentials. And spreads that we've normally been able to capture historically won't be we're not anticipating that those will be as robust as we thought they might have been earlier in the year.
Got it. That's helpful. Thanks.
That is helpful. Thank you. And then just want to get into the guidance a little bit more, I guess. I think the transportation volume guidance went down a little bit versus what you last said, but the EBITDA went up. So just wondering what kind of the moving pieces are now versus then to drive that if it's kind of different movements in different basins, long haul for short haul.
If you could just give a flavor for how the different basins kind of changed in this guide versus the last, that'd be helpful.
Jeremy? Thanks, Jeremy. This is Jeremy. Part of that was on the reduction is you've got lower volumes, but you collect the MDC. So EBITDA will go up horizontally with lower volumes.
We expect that to correct itself over the course of the year as because if you think about it, we talked about the issues within May June. Pricing suggested the barrel should stay in the basin. So it made no sense for the marketers to ship a barrel from Midland to the Gulf Coast. They left it in Midland to take care of shorts and went in other directions or went into storage or stayed in containment as they were under produced. So that will reflect itself and EBITDA will show up, but the volumes won't show up.
On the gathering side, that's more of a natural if it's produced, it shows up. That's the way I would think about that. Lower guidance for transportation on sheer volume movements, but EBITDA will reflect that we were paid for the movement.
Okay. Maybe just to complete it then, what type of MVC dollar value do you expect to show up in the next quarter to kind of make it all come together?
It's in the ballpark of $25,000,000 That's right.
It's changed from Q2 to Q3.
We'll take our next question in queue. Caller, please identify yourself and proceed with your question. Keith Stanley at Wolfe Research.
Hi, Steve. Hi. So first I just wanted to confirm, Jeremy, I think you said $40 oil you'd expect kind of flatter production year end 2021 versus year end 2020 in the Permian. Is that your best sense right now? And does that require rigs to come back or more leaning on DUC inventory?
Keith, this is Jeremy. For a flattish case, that would be largely rely on DUC inventory. For a case where you see the way we look at it is when rigs show up at 6 to 8 months before the volume impact. So any improvement in activity is unlikely to happen in the 1st part of next year. We view it as more of a mid next year.
So a lot of the scenarios we're looking at is roughly flattish to slight growth. The way to think about it is you had an inventory of uncompleted wells to in the Permian specifically to match 400 plus rate. You immediately ramp down over 2 to 3 months to the 125 to 135 rigs, but you had substantial uncompleted inventory, plus those rigs that were drilling that wells weren't completed. So there's some surge capacity in there. We don't necessarily think that's going to drive growth, but that's going to create some noise in forecasting production.
But candidly for an impact of a rig because of pad drilling and the processes they go through now, it's close to 6 months before you'd see an anticipated impact to production. So we would think that in a very likely case you could hold production flat with the rigs you have today and you probably need to start bringing rigs on towards the end of next year or later early into 2022 for growth.
Great. That's very helpful. And then second question, I'm just trying to square. So your volume guidance went down, but it sounds like your Permian Basin wide volume outlook is now a little better on the margin in the last call. Is that a function of kind of you guys being a little more exposed to the Delaware versus the Mid impacts
to us can impacts to us can be it's revenue barrel right on our guidance. So that could be touched three times. So any movement it amplified, so changes in forecasting. I'd say that we feel strongly about our assets and where they're positioned and where volumes will be. I think a lot of that is noise on the long haul side from the MVCs.
I think that's predominantly where it is on the gathering. We have a very healthy gathering system connections. We're seeing a lot of activity in the Northern Delaware and Western Delaware and our Midland Basin assets are holding in well too. I think this is largely driven by long haul and MVCs.
Okay, got it. That makes sense. Thank you. So it's
not the gathering piece of the business.
We'll take our next question.
Good afternoon, everyone. This is Ujjwal Pradhan, Bank of America.
Hi, Ujjwal.
Hi, Willie. Thanks for taking my question here. Firstly, just wanted to get an update on what you're seeing in your gathering accretion in the Permian And maybe perhaps if you're in a position to update your outlook and some of the high double digit exit to exit decline bridge that you had referenced in the past. Some of your Permian crude gathering peers have noted some improvement in volumes in Midland since May and have made some positive revisions to their outlook. So, anything you can provide, we'd appreciate that.
So, Ujjwal, I think Jeremy covered our kind of our volume outlook in the shape of the curve. I don't know if there's anything else specific that you want to know.
Jeremy, anything to add or? Ujjwal, this is Jeremy. We don't give specific gathering asset guidance, but I'd say like I said to the previous call, we feel good about the activity and things are holding in throughout the end of the year. I think we I think our guidance reflects where we see volume to be and we're not disadvantaged relative to any gathering assets and we put our quality of the acreage underneath ours relative to anyone. As Willie mentioned earlier between facility and acreage dedications, we've got over 2,500,000 acres between Texas and New Mexico and we feel strongly with it.
We just don't give specific asset guidance.
Understood. Appreciate that. That's helpful. And just to clarify some of your comments on the drivers of the Transportation segment EBITDA update here.
Maybe if you would you be able
to provide color on sort of the bulk of volume declines, where the bulk of the volume declines are below MVCs? It sounds like it's mostly on the long haul side. But also how close the current volumes are to MVCs? So trying to get a sense of if under recovery circumstance, how close we are to those levels?
I'd say, Ujjwal, this is Jeremy. I would say that the changes in the basin reflect change in our long haul system for the most part. You saw when we said on the last call that we were forecasting close to 2,500,000 barrels a day of declines from March to May on onshore U. S. EIA data has come out and supported that.
You see a steep percent decline there and you see volumes ramp up through this quarter and in the next quarter, that's going to be the shape of what it looks like in a lot of our assets. I'd say we reflect the basin or some proxy for it.
Got it. And a quick one if I may. Just on the cost savings initiatives and the number that you have quantified towards the higher end of range around $100,000,000 this year, are you able to provide some color on what are some of the specific savings that you have made? What type of initiatives they were? And how much can we expect to be ratable in 2021 and beyond?
Yes. Chris can give you a little more insight. We do expect to have a good portion of that carry over into following years. Our efforts here are really how do we get lower our cost structure across the company through a number of different things, whether it be organizations, systems, efficiencies and things. Chris, do you want do you have some things you want to give him some insight?
Sure.
Yes, Ujjwal, this is Chris Chandler. The organization has really stepped up and delivered cost savings really almost across all of our categories. I'll give you some examples. We've seen reductions in personnel costs. We've tempered hiring and replacing any vacancies with employees that we've redeployed internally.
We've looked at our operations for the next 2 years and re optimized all of our maintenance activities around those expected operations. So for example, tanks that we were going to take out of service earlier in the year, we've been able to delay until next year to utilize in contango storage yet still within of course integrity requirements and regulatory requirements. We've seen a large reduction in travel and entertainment expenses as you would expect. Our supply chain organization has been very busy competitively bidding both materials and services and we've seen significant savings there. And then finally our technical resources instead of focusing on expansion projects have really looked internally to optimize our systems and are finding ways through number of pumps we run and which pump stations we operate and the trade off between horse power and drag reducing agents to lower the operating cost on our pipelines even at the same through part of the same volume.
So it's really it's in every category and we're seeing some very good success. And like Willie said, we think we're going to be able to carry that into 2021 and beyond even as volumes recover.
One of the things we really pressed forward on is not setting a dollar value. We really challenged our organization, how do we become as streamlined as we possibly can. And our team hasn't let us down and we've got a number of initiatives that Chris articulated in a number of them, but we're going to keep pushing on this because it's a continuous effort. Thanks.
Thanks.
Very helpful. Thanks, Willie, Chris and Jeremy, and have a great evening.
Thank you.
We'll take our next question in queue. Caller, please go ahead.
Yes. This is Pierce Hammond with Simmons Energy. Thanks for taking my question. I appreciate your comments Willie on the divestitures in the prepared remarks. And in light of the recent Berkshire Hathaway transaction with Dominion, I wanted to get your perspective on do you think valuations are attractive for divestitures in the current market?
And do you see opportunities to further streamline and optimize planes through additional divestitures?
So, the answer is we're always looking at our assets to see what makes sense for us and what doesn't, right? If it is worth more to others than it is to us, and we strive for that win win win for the buyer, the seller and the employees to get the asset over to a business that can maximize the value. So, I made a comment about a number of transactions that we're currently working on. I can't give you any more resolution on that because we're in the middle of some of those things. To answer your question, we are absolutely looking at opportunities to not only just asset sales, but we've been one of our strategies have been with strategic joint ventures to try to optimize capital efficiency where you can either share cost synergies, commercial synergies, capital synergies.
So those are obviously in play. And then the larger transactions, there's nothing that drives us to have to do anything now. We've got a pretty identified path that we're on. And if we are able to do the things that we want to do, we think it's going to unlock value in our company, which will help us if there is ever an opportunity to do something broader. As far as the Berkshire deal, I really can't comment on that.
But all is open, but we're also very, very cognizant of what makes sense, what's transactionable and we're focusing on things that we can do.
Thank you, Willie.
Hey, Pierce. This is Jeremy. I would just say that the Berkshire transaction, that's a unique set of assets and unique fit for a buyer. I still think there needs to be some health in the term loan B and the credit market to bring specific buyers back to it. I think a lot of the strategics are on the shelf right now.
So that's not necessarily a proxy for all transactions. As Willie mentioned, we're constantly evaluating our assets and them generate specific returns and it's keep it harvested or exit. And so anything in the exit box, constantly looking for opportunities to maximize value with 3rd parties. And so we're trying to pair specific assets with specific buyers. And so the things that we think are candidates for sale, we're waiting to those specific buyers are healthy.
We don't want to give anything away.
Thank you, Jeremy. And then a quick follow-up. If DAPL is shut down, would that be of net benefit for Plains because of your rail assets?
Yes. Pierce, this is Jeremy. We have the Bakken North assets in West Canada that can connect from Trenton to Regina. So we can benefit on the pipeline and the rail side and also from an S and L standpoint. So I think there are opportunities there.
We're waiting to see how that plays out, but we would look to maximize value to planes and its assets if something were to happen. But candidly from a regulatory standpoint, everybody's watching it to see it as a precedent.
Yes. I'll just make a
comment, Pierce, on DAPL. We are not close to it because we're not a partner and we certainly don't operate it. But one thing that we are watching with a lot of care is what precedent does set. Again, I don't know the details, but to have a line that's been operating for a number of years safely, being shut down
for
different reasons. It's an environment of uncertainty and it's certainly something that we don't see the benefit of. So that's one. And we always hate to see rules and regulations get confusing. And to Jeremy's point, with the assets that we have, it gives us a lot of optimization opportunity to handle not only the DAPL experience, but if there were interruptions elsewhere, if there's an interruption as far as hurricanes and the Houston Ship Channel, Corpus Christi, there's having the asset base that we have gives us the flexibility to move barrels where they need to go.
Appreciate the color.
We'll take our next question in queue. Caller, please go ahead.
Hey, guys. Michael Lapides of Goldman Sachs. Somebody asked a question about asset M and A earlier. And I want to kind of take a step back and really ask the question of when you look around the portfolio and obviously the Permian is core and obviously assets like Capline are core and Diamond, but you have a lot of assets in a lot of other basins where you don't necessarily have a lot of scale outside of the Permian and the storage at Cushing and Capline and at the Gulf Coast. How do you think about what potentially is non core or what the kind of the optimal portfolio longer term, not necessarily in the next 12 or 24 months, but kind of 3 to 5, 5 to 7 years from now, what that would look like for the company?
Well, Michael, it's a tough question to answer because I'll give you our fundamental strategy, maybe that'll answer it and help you understand how we think about it. I mean clearly with the base we've got, we do want to build around existing assets we have, build optimization capabilities and flexibility. Those are all projects that you've probably seen us do. In areas that we don't have an advantage or a significant presence, you've seen us obviously try to find the right home for the assets if they're available. We're not in a position where we have to sell assets for the wrong values, but we are always talking with people again trying to unlock what makes sense for different folks.
So I think you'll continue to see us build around our base in the areas that you can look at on the map that we don't have as a core asset base. If there's an opportunity that makes sense for us to do something with someone else there, we obviously would consider it. We also factor risk. We factor a lot of things, cash flow into it. So it's kind of a hard answer to give you our blueprint on, but hopefully that helps.
No, that helps. Thank you for that. Much appreciated, guys.
Thanks, Michael.
Take our next question in queue. Caller, please go ahead.
Hi, this is Jean Ann Salisbury from Bernstein. Do you expect U. S. Crude exports to fall off in the second half? And would that reduce the share of Permian flows going to Corpus versus other versus Houston or Cushing?
Hi, this is Jeremy. Right now, we're seeing strong flows to the Gulf Coast. Obviously, differentials in demand will play into that. But absolute volume of production is down. So you would expect from a March standpoint, you've exports to go down.
Relative share of Corpus and Houston, Corpus has been increasing as Wink to Webster comes along that can change balances. So I think there's a few things that will continue to move it, but demand and location of demand is going to have a big impact on that.
Okay. So you wouldn't necessarily say that because Corpus is so export heavy that it would be negative, I guess, if the U.
S. Starts to export less?
Not necessarily because the demand is there simply from all the MVCs across the pipes and the dock, they're going to pull as many barrels as they can that are physically available. I don't think from an export standpoint, we're not seeing from a quality standpoint, we're seeing normalization between Houston and Corpus. And when that happens, it's just going to be a matter of demand and who has access to barrels.
Okay. That makes a lot of sense. That's helpful. And then is there any appetite from customers today to blend and extend contracts or is now not really the time?
I would D and M, this is Jeremy again. I would say that there has been a bit of shock between March, April, May June. As we get into this, those discussions will be had across all assets. We're extending contracts in the field and doing a lot of different things with our customers. But those discussions will be had to optimize longer term relationships with customers, but it's a little bit too early.
There's a lot of bankruptcies going on. So those contract discussions are being had with individuals. I think that the next wave of discussions on the long haul that will be part of it for sure.
Okay. Thank you. That's all for me.
Thanks, Dan.
We'll take our next question in queue. Caller, please go ahead.
Tristan Richardson with Truist. Hey, really appreciate all the comments you guys gave on the second half. Just one quick question around seasonality in the second half. I think the 3Q directional estimate you share suggests something a bit higher and or flat with 4Q versus the normal seasonality. Is part of that dynamic the expected timing of MVC deficiency payments or the timing of contango capture?
Curious some of the factors making that second half a little more radical than what you'd normally see?
Tristan, I think you've covered the 2 of them, MVC timing impacts and contango as Harry outlined. I don't know if anyone else has anything to add to that.
This is Jeremy. The one thing that seasonality in NGL is always in the Q3 versus Q4. So you definitely will see that.
Thank you, William. Some of
the contango is mitigating at this Yes,
yes, stronger contango margins in the Q3 and Q4 and actually that press spreads are a little stronger in the Q3 and Q4 too.
Great. Thank you. And then maybe just one on contango opportunities in general. I think is there a way to frame up the total size opportunity of spread opportunities that were created by all this disruption or another way to think about spread opportunities that might be sort of non recurring just with all the disruption we saw in March, April, May, June?
I'll make a comment and others can jump in. One of the things we consciously tried to do is increase our fee based earnings. So, if you went back a number of years, we might have more storage available to capture some of these. Our intention now is the assets that we've got, if we can get fee based service out of it, it makes more sense for us to do that and try to keep tanks empty for contango or basis spread arbitrage. Harry or Jeremy, you want to add anything?
No, I think that covers the rule.
So I didn't answer your question, but it's
less than it's been in the past.
Fair enough. Thank you.
We'll take our next question in queue. Caller, please go ahead.
Gabe Moreen with Mizuho. Just two quick questions for me. One out, if you can just comment on sort of the working assuming no other, I guess, contango or other S and L opportunities present themselves?
Can you ask that again? I'm sorry, you broke up there, Gabe.
Sorry, can you
hear me better now?
Yes.
Just I was going to ask about whether the magnitude of working capital return in the back half of the year assuming no other content and go or S and L opportunities present themselves?
This is Al. As you know, working capital and that is difficult to forecast. We clearly built a decent amount of contango storage and NGL into the 2nd quarter, Q1 to Q2 with seasonal build prices, margin, all that come into play. So it's one that we will not start forecasting working capital swings. We won't be doing a true forecast in our guidance for how we're defining free cash flow for that very reason, because prices at the end of a period can impact margin and all that.
With that said, clearly as it relates to the activity, we think over periods of time that 4 quarters, a lot of that seasonality comes out and it's then it's purely price and our focus is going to be on generating free cash flow.
Okay, great. And then maybe, Willie, if I can follow-up on your comment on 1 third of the twenty 21 growth CapEx being in larger projects. Does that imply that the $300,000,000 that's left is your base level of G and P growth capital that you're spending kind of year in, year out? Just curious if you would characterize it that way?
I would say in the right neighborhood, but I don't want to quote specific numbers because it's 2 years out, but it's a fair way to look at it.
Okay. Appreciate it.
We'll take our next question in queue. Colin, please go ahead.
Good afternoon. Colton Bean, TPH. Just to follow-up on some of the questions around transportation. Is it possible to speak a bit more explicitly to what type of volumes you all have seen over the course of July?
Colton, this is Jeremy Goebel. I would say that the vast majority of curtailments were we've seen gone outside of the Williston Basin in by July. So the declines we've seen have been offset by some additional completions we started to see in June and now in July and in August we expect more. So I see activity ramping and curtailments are behind us. Not going to talk about specific assets, but I would say that the production in July exceeded our forecast
or estimates.
Understood. And then just as you look at capital needs expected to average $500,000,000 or less, it sounds like potentially a decent bit less. It does seem like excess free cash flow should continue to grow. So as we think about allocating that capital, is you're reaching your leverage target a gating event to allocating more cash to unitholders or does equity valuation also factor into that priority ranking?
Al?
In the near term, leverage will take priority, but clearly do we have to hit our target? That will be a question. We're a bit aways as I've mentioned our in the prepared comments about with where we think our leverage is in a more challenged S and L environment, which is what we're expecting going forward. But we will be focused on using the excess in the near term for debt reduction, leverage reduction, and then we'll be looking to allocate to equity holders whether it's distribution increases and or share repurchases and those decisions are far enough out that it would be premature to talk about how we will approach that.
The other thing we'll look at carefully is it's all also a fact of kind of what does the future look like, right? So there's a better certainty of the future that may change the story a little bit. So it is a bit of a moving target, but clearly the message is we want to get our leverage down to lower levels.
Got it. Appreciate the detail. I
think we have time for one more question. Can we go ahead and take that please?
We'll take our last question in queue. Caller, please go ahead.
This is Ganesh Joyce from Goldman Sachs. Quick question, how would you react to the decision that BP announced this morning to reduce its oil production for the long run? And if this becomes a longer term trend, how do you view the capital intensity of your business and some of the decisions that you have to make?
Well, Ganesh, on lower volumes, I think, again, back to what we're focused on is how do we reduce our capital intensity, right? And I think you've seen us take actions to do that. Portfolio optimization plays a piece in that and it's just very difficult to lay out a strategy on what you might do with your portfolio without knowing timing, extent and duration of what people are doing. But directionally speaking, to answer your question, we would obviously adapt. And again, everything we're doing is to try to put the position put the company in the position where we flourish in the future.
And so we would not be we would take that input and just adjust our CapEx programs appropriately or look for more opportunities to do some strategic JVs. In some cases, maybe there's an opportunity for a line to go into a a service that may help a less carbon intensive world. So until we have better definition of that, it would be hard to kind of articulate a specific strategy.
Got it. Thank you.
Thanks, Ganesh.
This concludes the Q and A. I will now turn it over to Willie for any closing remarks.
Well, great. Listen, thanks again for everyone dialing in. We hope you remain safe and we look forward to talking to you all soon. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.