DCP Midstream, LP
Q2 2020 Earnings Call Transcript

Published: 6 Aug 2020

[Operator:]

Ladies and gentlemen thank you for standing by. And welcome to the Q2 2020 DCP Midstream Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Sarah Sandberg, Senior Director of Investor Relations. Thank you, please go ahead.

[Sarah Sandberg:]

Thanks Jamie. Good morning and welcome to the DCP Midstream’s second quarter 2020 earnings call. Today's call is being webcast, and I encourage those listening on the phone to view the supporting slides, which are available on our website at dcpmidstream.com. Before we begin, I'd like to point out that our discussion today includes forward-looking statements. Actual results may differ due to certain risk factors that affect our business. Please review the second slide of the deck that describes our use of forward-looking statements. And for a complete listing of the risk factors, please refer to the partnership's latest SEC filings. We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measure in schedules in the appendix section of the slide. Dr. Van Kampen, CEO and Sean O'Brien, CFO will be our speakers today and after their remarks, we'll take your questions. With that I’ll turn the call over to Van Kampen.

[Van Kampen:]

Thank you, Sarah. And hood morning, everyone. We appreciate you joining us and hope you are all safe and well. In today’s call we will discuss our strong Q2 and first half results, our guidance and outlook for the remainder of the year, and new developments in the DJ Basin. I want to first say thank you to team DCP and incredible credit goes to every employee for delivering some of our best safety, reliability, and financial results in what has been an exceptionally challenging environment. Our team and our diversified asset base, is strong. Our strategy remains consistent and effective. The earnings power of the DCP business model is evidenced by our outstanding financial results. We generated $220 million of distributable cash flow in the second quarter and $440 million year-to-date, representing our strongest performance since the company was combined with DCP Midstream, LLC. As a result of our early and aggressive efforts to optimize cash we created $54 million of free cash flow quarter and our bank leverage improved from Q1 now down to a target 4.0 times. Underpinned by our strong year-to-date performance in recent market stabilization, we have reissued our original adjusted EBITDA and DCF guidance, which Sean discuss shortly. During the quarter volumes across both segments remained stronger in a worst case scenarios as a result of fewer than anticipated shut-ins and the earlier return of curtail production. Importantly we were also able to proactively work with our customers to optimize their net backs throughout our integrated value chain. This in short that's when shut-in decisions were made, DCP was a service provider of choice and volume stayed on our system, creating a win-win for our customers and for DCP. On our pipes ethane recovery and opportunistic NGL marketing kept their utilization rates high and our earnings balanced. Looking to our highlights in the quarter with our liquidity now squarely secured through successful capital market execution, our primary financial focus is to utilize our growing free cash flow to delever the company. Our supply long, capacity capital allocation strategy, DCP 2.0 transformation an integrated footprint will continue to drive efficiencies and generate significant free cash flow throughout 2020 and 2021. Finally, several developments in the DJ Basin have completely unleashed the future potential of production. And I look forward to discussing those later in the call. Slide 5 I’ll now outline how a combination of strategic execution and deliberate self-help measures in first half of this year has helped us overcome a year-over-year at first price impact of $125 million. And while also positioning us well for long-term sustainable success. First, most importantly, our COVID-19 response has prioritized and protected the health and wellbeing of our workforce. Next, as the downturn took hold our fully integrated footprint began a critical asset. Approximately 65% of our Q2 adjusted EBITDA was generated by our Logistics and Marketing segment demonstrating the earnings power of our pipelines and downstream assets and highlighting the drive over commercial teams. Not only has this segment produced high quality earnings, but our ability to optimize producer customer net backs was critical to keeping volumes on our system and throughput rates high. As a result of our efforts and increased ethane recovery, average Q2 NGL throughput remained flat compared to Q1. On top of a great portfolio of assets we are retaining nearly $900 million of cash on an annualized basis with the sole purpose of strengthening the balance sheet, which has made a critical impact, in the first six months of this year. Our costs are down $87 million year-over-year, driven by relentless dedication to improving efficiencies in our contract services, consumables, labor, and utilities. Our sustaining capital is $23 million year-over-year due to fewer well connects, risk-based prioritization for projects and deferral, some innovation efforts. And finally, our DCP 2.0 transformation effort allowed us to not only take cost out of the system early, it also enables us to continually optimize margin and add flexibility and speed within the organization and perform operations completely remote, including safely operating gas processing plants from employees' homes. Our team has achieved significant success and proven our resiliency in navigating this downturn. This is demonstrated by the impressive financial and operational excellence outcomes of the past six months, including an 11% increase in DCF and a 5% increase in adjusted EBITDA compared to the first half of 2019. Now to talk through the details of our Q2 results, guidance, outlook, and financial position, I'll turn it over to Sean.

[Sean O'Brien:]

Thanks Van and good morning. On Slide 6, you will find the key drivers to our strong second quarter financial results. In Q2, we generated adjusted EBITDA of $311 million and DCF of $220 million representing a 27% increase in DCF year-over-year, and driving an improved leverage metric of four times despite one of the most challenging quarters our industry has ever seen. Our results were driven by our early and proactive execution on costs and sustaining capital reductions and strong L&M performance. In Q2 we achieved the lowest quarterly cost in the history of the company and set our lowest first half trend ever. Our L&M segment adjusted EBITDA increased 18% year-over-year, driven by solid Gulf Coast Express and NGL marketing results and strong volumes from our NGL logistics assets supported by ethane recovery, all partially offset by lower Guadalupe earnings. We continue to effectively manage our sustaining capital reducing our year-over-year spend by $13 million, while still ensuring safe, reliable operations. In total, these efforts more than compensated for an unfavorable year commodity price impact of $39 million net of hedges due to NGL and crude price declines of 37% and 53% respectively over the same period of time. Finally, G&P margins were down $9 million as a result of lower overall volumes in the G&P segment tied to our Eagle Ford and Mid-Continent assets, which were partially offset by increased DJ Basin and Permian volumes. I want to close out my Q2 comments by giving a little color of what we're seeing from a volume standpoint early in Q3. July NGL volumes on Sand and Southern Hills have both increased over Q2 average throughput. And G&P volumes remain relatively flat versus our Q2 average. With our strong first half of the year setting a solid foundation on Slide 7, you'll see that we've reissued our 2020 adjusted EBITDA in DCF guidance, originally given on our February call this year. We've also added a free cash flow measure, defined as distributable cash flow, less distributions and less expansion capital expenditures. With our current distribution covered sitting at 2.7 times for the quarter, free cash flow has been replaced coverage as a more relevant financial target, highlighting a comprehensive measure of cash flow and indicative of our ability to delever. Looking to our guidance, as expected, the composite of earnings has shifted from earlier this year driven by strong self-help actions, focused on preserving cash flow to offset the unprecedented impacts of COVID-19 and a dampened price environment. With that said, we see strong DCF performance this year driving toward the midpoint of our range. With EBITDA trending toward the low-end, as many of our self-help measures were strongly focused on cash generation, which is not captured within the EBITDA. We've also updated our sensitivities due to the shift into ethane recovery. Slide 8 gives some color around our current second half year outlook and potential upside and downside drivers. We're expecting relatively flat NGL throughput across our full portfolio pipelines with that same rejection forecast in the fourth quarter resulting in potential declines. Our residue takeaway earnings will increase beginning in Q3, driven by incremental earnings from the newly in-service Cheyenne Connector. On the G&P side of the house we expect second half overall wellhead volumes to be slightly higher than Q2 averages. We continue to maintain frequent dialogue with our customers and expect all previously shut-in volumes to be back on our system during Q3. Finally, as you know, we have dedicated substantial effort to reducing our costs and capital this year with a year-to-date cost reduction of $87 million from 2019, we expect to see higher costs in the second half of the year, but again, we're still on target for a more than $120 million decrease your-over-year. Our sustaining capital will be more heavily weighted to the back half of the year. And our growth capital will be significantly lower for the remainder of 2020 as we spent the vast majority on projects in the first half of the year, and are now expecting our spend to trend to the high end of our $150 million to $190 million range, but still down approximately $400 million from our original guidance. Taking all this into consideration, we're projecting free cash flow to substantially grow in the second half of the year, which we will prioritize on reducing debt and strengthening our balance sheet. As the industry outlook continues to remain dynamic on the right side of the slide, we've highlighted some potential tailwinds like sustained ethane recovery, and also headwinds that could result from ongoing pandemic volatility that we will monitor for the rest of the year. On Slide 9, I want to highlight our solid and improving financial position. Our multi-year evolution to fully integrate our footprint and increase our logistics assets coupled with our strategic hedging program have enabled us to achieve an 81% fee based and hedge ratio exceeding our goal of 80%. This de-risks our earnings and provide stable cash flows evidenced by our strong first half performance. In Q2, we significantly shored up our liquidity with strong execution of our $500 million bond transaction, bringing our Q2 liquidity to approximately $1.1 billion. With abundant liquidity now secured, our primary financial focus is to utilize our growing free cash flow to delever the company. In Q2, we produced $54 million of free cash flow, allowing us to lower our leverage to 4.0 times. We expect to be significantly free cash flow positive for the remainder of the year and throughout 2021, enhancing our liquidity and allowing for debt reduction. To close, we are continuing our track record of meeting our financial commitments, even in extremely challenging times. Now I'll hand it back over to Wouter.

[Wouter van Kempen:]

Thank you, Sean. On Slide 10, I want to highlight one of the premiere basins in our country. We've said for years that our producers are drilling some of the best rock with the strongest returns right here in Colorado. And we're excited to see the potential for DJ Basin now fully unleashed. Just a few weeks ago, several developments in short political and regulatory certainty in Colorado for years to come

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Chris Sighinolfi with Jefferies. Your line is now open.

[Chris Sighinolfi:]

Hey. Good morning, everyone.

[Wouter van Kempen:]

Good morning, Chris.

[Chris Sighinolfi:]

Wouter, we've seen a lot of companies cut costs and lead to significant improvement in operating results. But I think nobody quite like you guys have, so congrats on all the progress made today on those fronts. If I could, that's kind of where I want to start. Clearly you've had overarching initiatives for a couple of years with regard to technological adoption, remote facility operation things of that nature. We did have a cost reduction associated with head count reduction earlier this year, which you announced. And so I'm just kind of getting, I guess I want to get a better flavor. Given Sean's comment about costs will rise in the back half of the year as to maybe what were the acute drivers in 2Q that might reverse, you know, you did because business conditions mandated in heightened uncertainty and COVID limits things of that nature. And, and what of it is sort of a sustainable carry forward effect into, in your mind, sort of a permanent level set for the company.

[Wouter van Kempen:]

Yes. Great, Chris. And Sean and I'll tag team, appreciate your comments. Just overall to say, I think it's great when 1,900 people row in the same direction and all that hard work pays off. And that's what the employees with DCP midstream have done here over the last six months. And I think you're seeing the results of that? To your point off cutting costs and what else can you do and what's going to sustainable kind of run rate. You heard Sean him talk about that, $120 million is what we're looking at for 40 years. So we feel very strong. You can pick that $120 million of course, going to the bank. Is there a little bit of shape to death? Yes, there absolutely is. We have $87 million gotten if you know the first half. And then in the second half, we do see some of the cost kind of comeback that were kind of temporarily. So let me give you an example of that

[Sean O'Brien:]

Yes. Only a couple of things to add, Chris. We typically are mid- to back-end loaded on overhauls on turnarounds and things of that nature. So my comments earlier really also point to those types of activities that really didn't occur that in very little fashion in the first half of the year, you'll see a lot more of that in the second half of the year. And then Wouter alluded to it, one thing I do want to, in terms of sustainability of our costs, some of the actions we've taken this year, headcount reductions, various things on efficiencies, things we've learned that we can do differently via the COVID environment and utilizing all of the work that we've done to digitize the company. Will get a full year benefit of many of those things next year. And we're not getting that, we're getting a partial year this year, so that I'm really excited about that. I mean, the headcount reduction, we took that $9 million charge in Q2, but the ongoing annual savings of that, I think we're sort of, we're thinking on a loaded basis is 40 million to 50 million. So you'll see more of that next year. So at the end of the day, a lot of what we're doing is sustainable. Definitely some backend shape this year, just want to make sure you guys were aware of that, but I'm incredibly pleased with the performance on the efficiencies that the company has been able to deliver.

[Chris Sighinolfi:]

No. That's great. The added color is very helpful, I think maybe following on your comments about the shape for the back half and Sean, you’ve noted, you know, overhaul and turnaround activity in the back half is sort of a typical cadence. I did notice your, what you defined as maintenance CapEx went up to a midpoint of 85, you've only spent 19% of that midpoint number in the first half. So and in contrast, you've already spent; I think above the midpoint on the growth side in the first half. So can you just talk about maybe some of the items that might've shifted around there and should we just really think about it as an aggregate capital number and, and sort of dispense with this bifurcation?

[Sean O'Brien:]

Since we've gone to a free cash flow measure that includes them both, I think I liked your recommendation of just putting them both in, but I think, since we're focused on that, and then they both come out of it, probably not as big of a deal. But they don't always link, most of the projects, if you talk about the growth capital, where the majority of that has already been spent. Most of those projects were running loaded, and then obviously the big product that we pulled off, the 400 million, the Sweeney option was more backend loaded, or mid- to back-end of the year. On sustaining capital, a couple of things to think through. I mentioned two drivers; obviously we spent some of that money on overhauls and on turnarounds. Additionally, volumes are down in some key areas, well connects are down. So you would expect product replacement to be down in the first half where we may expect to see some increases there, we'll wait and see. Some producers have given us some outlooks that could require a little more in the back half of the year. There's some environmental spend Chris, that we're looking at doing in the back end the year, which would hit sustaining capital. So that's sort of shaping it. And then I think those are the primary drivers and then Wouter mentioned, some transformation costs. We pretty much put it for the most part on hold. You'll see and those hits sustaining capital by the way. You'll see those hit more in the second half of the year as well.

[Wouter van Kempen:]

Yes. Maybe Sean, quickly add on well connects, obviously not a lot of wall connection in the second quarter, but if you look at our largest customer in the DJ Basin that author our earnings yesterday, they're going to put a completion crew in here in the third quarter, they expect to grow their DJ volumes. So that will give some well-connected capital, which is great. We love that. If you look at our largest customer in Southeast New Mexico, that announced their earnings yesterday, they're talking about the drilling that they're doing in the Delaware, in Southeast New Mexico on volumes that are coming our way. So all of that will create some well connect capital. And again, I'm like, we like well connect capital especially in the DJ, especially in Permian because those are our high margin regions.

[Chris Sighinolfi:]

That's great. I also appreciate the color there. Final question from me, and then I'll hop back in the queue. Is, the distributions from your unconsolidated affiliates were sort of a surprise to us that the strength of that it's, its up significantly played year-on-year. You do detail that in pretty specific detail on your 10-Q but feeling a patient this morning, I just want to ask, was there one of the assets that stood out in terms of cash contribution to you, this period that you’d cite?

[Sean O'Brien:]

Sand Hills. The short answer Sand Hills, they had some pretty strong cash distributions. We remember the second half from a cash perspective, distribution perspective, Q1 there's always tax ad valorem payments that the assets make. So they're usually a little bit lighter. The assets had a good Q2 performance. I don't want to discount that with going back into recovery mode, with the – the commercial team did a great job of making sure volume stay on those pipes, but Sand Hills was the driver.

[Chris Sighinolfi:]

Was there something there, Sean? Like, is that a special one-timer type of distribution you have from time to time?

[Sean O'Brien:]

No.

[Chris Sighinolfi:]

Okay. Thanks a lot for the color this morning, guys, and congrats on a really nice number.

[Wouter van Kampen:]

Thanks, Chris.

[Sean O'Brien:]

Thank you, Chris.

[Operator:]

Thank you. Our next question comes from Jeremy Tonet with J.P. Morgan. Your line is now open.

[Jeremy Tonet:]

Hi. Good morning.

[Wouter van Kampen:]

Good morning.

[Sean O'Brien:]

Good morning, Jeremy.

[Jeremy Tonet:]

Just want to get a little bit more color, I guess on the ethane, I guess the extraction and how that, you know, kind of filled up the volumes there. Just trying to see you know, what's baked into your guide on ethane capture? It feels like we've stuck in the low-20s, so not sure what the economics look like today to extract C2 and the DJ at the Permian, but just want to get a sense there and how that influences DCP?

[Sean O'Brien:]

So we went, we went into recovery mode in the second half of Q2 as did the industry. So when you look at, Chris was just asking me about the strong cash flows from the pipeline, that was a pleasant surprise from us. Our models to be honest we did not have recovery baked in Q2. So that was a definitely a pleasant surprise. Obviously, when we look at those economics we're – couple of things we're factoring in, obviously the frac spread, the value of gas versus the value of the C2. And then don't forget, we also bake in the value of the transport on pipes like Sand Hills in Southern Hills. So we're in recovery mode. A lot of our third parties that put volumes on our pipelines went into recovery mode. It was a benefiting factor for Q2. As we sit here today, you asked a little bit about the future outlook. We're still in recovery mode. I think some third parties may have pulled off, I'm not privy to their economics and why they did that, but we're still generally in recovery mode, you may have heard our comments. We expect based on future frack spread to potentially go back into rejection in Q4. If we end up not doing that and ethane stayed strong, and gas doesn’t shrink, as much as the forward said it will, that was the tailwind for the company. That would be upside potentially because the pipelines would get some additional volumes. But as we sit here right now, I think we are thinking Q3 recovery, Q4 potential to go back into rejection.

[Wouter van Kempen:]

And so, I think Jeremy’s wanted to add to what Sean is saying. I think we have a relatively conservative assumption in our outlook for the second half where we will see the volumes on the pipes go down a little bit, because of the lack of ethane recovery. At the same time, when you mentioned kind of where we're sitting from a pricing point of view, ethane is hanging at $0.22, net gas is at $2.25. So what's really interesting here is, if you look at what our price forecast is for the second half, we have net gas at $1.95, so we're 15% above that. We have NGLs at $0.40. We're at $0.46 NGLs. We have $0.40 crude in our forecast. We're at $0.425, so the thing is very, very strong demand for ethane right now. I'm like one thing that COVID-19 has brought us is actually a significant increase of single use plastics. And ethane is a feedstock for that. And so, one of two things is going to happen. It's either gas is coming down if ethane stays the same or ethane prices have to start running with net gas to make sure that all of us are staying in recovery. If the latter happens, that is kind of a 3x good guy for us. We benefit from higher gas prices, we benefit from higher ethane prices, and we benefit from higher volumes on our pipeline. So, that’s obviously the scenario that we're rooting for, but it's not what we have baked into our blend the second half and trying to be conservative and saying, hey, we're just looking at what the strip is telling us right now, and that's what we're putting in.

[Jeremy Tonet:]

Got it. That's very helpful. Thanks. And it's been a very volatile year so far but it seems that things are settling out a bit here. You guys brought back your guidance. It seems like producers, I think, have settled out in their plans a bit. And I appreciate, I might be getting a bit ahead of myself here, but just wondering any preliminary thought that you think about 2021 trajectory and trends relative to the back half of 2020? Any early thoughts you could share here?

[Wouter van Kempen:]

I think we'll tag team that. Then I appreciate you saying, very volatile. I think that's probably will be the understatement of the day. It's been definitely – it's been pretty crazy, obviously again, I think what 1900 people at this company have done to kind of work ourselves through that is really monumental. But yes it feels like a little bit more calm even though the environment is still pretty rapidly changing every single day. But as it pertains to 2021 Mike, we're going to give guidance in February. So we're not going to give you an awful lot here. You heard me say, and Sean say that we believe he will be significantly free cash flow positive in 2021 as well. So I think that's going to be a pretty good outcome. This company can throw off a lot of cash. You're seeing that right now. And we're not spending an enormous amount on building infrastructure that means there is significant cash leftover to delever the company. And that's really our primary focus. And we feel very good about that in 2021.

[Van Kampen:]

A couple of things to add, the outlook does feel pretty strong right now, but we've got some good tailwinds. You've got a full – Cheyenne Connector just came online. You've got those earnings, as you think about 2021. Wouter alluded to in his comments, the growth capital we took our – we went down 400, but still, somewhere in that high range of 190, I anticipate that to be lower next year. So you've got some benefits there. I mentioned earlier Jeremy that you are going to get a full year of headcount savings. That's not small $40 million to $50 million annually. We didn't see all that benefit this year. So we've got a lot of good things for the company going into next year that, I think, could set us up quite well. Obviously we'll give you a full detail as Van alluded to in February.

[Jeremy Tonet:]

Got it. That’s helpful. Thanks for taking my questions.

[Wouter van Kempen:]

Thanks Jeremy.

[Operator:]

Thank you. And our next question comes from Tristan Richardson with Truist Securities. Your line is now open.

[Tristan Richardson:]

Hey, good morning guys. Just quick question on, you mentioned in prepared comments around sort of optimizing netbacks to customers. I mean, curious could you talk a little bit about that? Like, what does that primarily look like? Is it incentivizing volumes on fee? Or some of these temporary arrangements or some of this more kind of a permanent blend and extend type as we think about these beyond just 2020?

[Van Kampen:]

Yes, I think you should really think about some things that you can do in short term. Obviously things are really difficult for everyone, but producers have difficult times, producers make choices around shutting in. And most producers have a choice and can say, you know what, I can shut something in over here that maybe goes to midstream service provider A, or I can set something in that goes to midstream service provider B. And what we did, and our strategy has always been here for the last number of years to make this company a fully integrated midstream service provider, which means that we're clipping coupons all the way from the wellhead to the market center. And when you do that, you have an opportunity to go back to your customer and say, you know what, I can help you here on a short term basis. I can make things a little bit more attractive for you for the next couple of months so you stay on our system and maybe, you take your volumes off midstream service provider B. And that's kind of the type of arrangements that we did with our customers, incentivize them to stay on our system meant we may have given them a discount somewhere along the value chain, but what you're doing is you're creating a win-win. Unlike your customer, who is having a difficult, difficult, time. You are helping them out. It's a win for DCP Midstream because we continue to keep the volumes on our system. And I think it also creates a longer term win with our customer bar. But you know what when times are tough and you're there to help your customer, people kind of remember that. So that's the type of arrangements that we have done. And then we kind of go back to the normal when normal happens. And the other thing is the margin impact is not enormous. And you'd see that a microsecond quarter margin was great, and our earnings were great and our profitability was very strong. So I just wanted to write things to do in an environment that is pretty tough.

[Tristan Richardson:]

Helpful, thank you. And then maybe just on the other side of that coin on the downside, in terms of revenue for protections, is there a dollar number on how to think about how revenue floors kicked in just during all the disruption we saw in 2Q?

[Wouter van Kempen:]

So we have in a variety of places, we have minimum volume commitments and other stuff. We've never really hit those. So people were always above their minimum volume commitments everywhere throughout our system, be it on the G&P side or the logistics and marketing side. So we've never had any issues there.

[Tristan Richardson:]

Okay, great. Thank you guys very much.

[Wouter van Kempen:]

Thanks, Tristan.

[Operator:]

Thank you. Our next question comes to Spiro Dounis with Credit Suisse. Your line is now open.

[Spiro Dounis:]

Hey good morning guys. Sean first one for you just on de-leveraging. Sounds like it's still very much a priority, but maybe some of the pressures come off here a bit. So just curious, do you walk through what the plan is now and maybe how aggressively you plan on approaching it? I guess, is there an appetite to buyback debt or preferreds? Are you looking at asset sales? And then can you take external capital or even a second distribution cut off the table at this point?

[Van Kampen:]

Yes, I'll try and hit those in sequence. And maybe I'll let Wouter chime in at the end. But in terms of, I think, you are picking up on it exactly right. I mean, our focus is to deliver, we were able to – I was incredibly pleased that we took our leverage ratio down from Q1. That is amazing from Q1 to and it’s amazing from 4

[Van Kampen:]

Yes. Tristan, I think, Sean hit most of it. I think a lot of the things you ask it’s, hey, would you buy it back preferred? Wouldn't buy back or, sorry – wouldn't buy back preferred because you get equity treatment on that. So that actually doesn't help your leverage. But I think as it comes to what is the distribution policy? In March, we tried to have a very balanced approach of taking growth capital off the table, looking at our distribution policy, looking at our balance sheet and trying to kind of make sure that between all of our stakeholders we're doing the right thing. We're freeing up capital so we can start delivering to company. We are still keeping a distribution in place. So our long-term equity holders that value that distribution, they still get a distribution. And then take kind of some growth capital off the table. If I look at kind of where we are here in the next kind of, 6, 12, 18, 24 months, every model that I'm staring at and some of them are pretty bearish models. We're good from a leverage point of view, we are enough coming to any kind of close to any type of issues around, leverage. And I think what we do are significantly free cash flow positive, we're going to use that cash delever the company. And after that, and maybe if it's next year or 2022, we should have this company to that kind a 3.5x what Sean is talking about. By that time, this continues to be that cash machine still throwing off a lot of debt – cash, and we can decide what we want to do at that very moment. But right now I don't look at anything that says there's another distribution cut in the works.

[Spiro Dounis:]

Got it. That's helpful. Second question is just how you are thinking about 2021 CapEx specifically, I think, last quarter, you sort of talked about the range of $50 million to $150 million. And it sounds like that was mostly producer activity driven. So just curious, it sounds like overall activity is fairing a little bit better. I'm curious if you're steeling to decided that range at this point.

[Sean O'Brien:]

I think Spiro, I think, on the growth capital side we'll still, I think, we gave guides that would probably be at the low end of that range or that we gave you an outlook. I shouldn't use the word guidance. And I think it we'll be at the low end of that range on the growth. Sustaining capital. you could see go up a little bit. You see product replacement coming in, you see a little more activity. The industry dampened and volumes have come off since 2019. So until we get back to that level of getting the volumes back to flat, everything will be mostly sustaining really for a while. So I think your thought process is right, more sustaining potentially, but I don't see a big kick in growth capital.

[Spiro Dounis:]

Great. That's it for me. Thanks guys

[Van Kampen:]

Thanks, Spiro.

[Operator:]

Thank you. And our next question comes from Shneur Gershuni with UBS. Your line is now open.

[Shneur Gershuni:]

Hi. Good morning everyone. Good to hear everyone is well. May I wanted to follow-up first on one of the questions that Spiro just asked in terms of your response. Is there no appetite at all to go after any of the preferred or junior sub notes? I mean, I guess, that you get equity credit for it, I think, 50%. But, is there a yield level where it's high enough where it's kind of worth it because you're able to effectively get the same credit back within a year or two, basically, just because of how you improve your EBITDA to cash conversion ratio?

[Van Kampen:]

Yes, so I'll let Sean kind of go through it. And obviously, Shneur we're looking at this kind of stuff every single day and say, what can you optimize? But you also get a hundred percent bank credit for it. So Sean maybe you take it.

[Sean O'Brien:]

I mean you're getting a 50% from the RH and you're 100% on the bank equity treatment. So that's very, very advantageous. Look, every time, when the debt was trading at a discount, when the press were trading at a discount, we looked at it pretty hard, obviously liquidity at that point until we got out and got that phenomenal debt transaction done, liquidity is king. I would tell you, Shneur, liquidity is still king. I think we were reforming very, very well. There's still COVID – the second half of the year, we're still seeing some COVID implications. Those could continue. I want to stay focused on liquidity. We are delevering with free cash flow. I know some of these other things could help us delever and generate some cash a little more, but I want to focus on making sure we have liquidity. That September seems like forever from now, but that's September maturity, I want to make sure the company is in great shape that if we had to, hopefully we don't Shneur, put that on the revolver. But as I said, we want to set the company up that if we had to, we'd still have over a $1 billion of liquidity, set ourselves up well, and again, it's really hard to get over that a 100% equity treatment on the bank.

[Van Kampen:]

Yes, I think Shneur – I think Sean said it really well. I think it's a bit of a balance, okay. So is there a way that you can potentially arbitrage buying some of that back? Yes, there is. But what are you going to save? You're going to save maybe $10 million, maybe $20 million or so. And that's not a immaterial and that good. But the flip side is you want to have liquidity. And if there's something you want to prioritize and say, hey, I want to have plenty of liquidity in a world that is still pretty darn uncertain, or I want to go after being kind of greedy and try to save $10 million or $20 million guess what, I know what I'll take. I'll take liquidity any single day of the week. So that's kind of how we're looking at it. And you know what? Who knows where we are in three months from now, six months from now, nine months from now, things can change, things can look better. We'll obviously look at things and trying to figure out how you can arbitrage something, but liquidity continues to be king.

[Shneur Gershuni:]

Okay. Fair enough. I just kind of wanted to understand that. So my two questions actually were I know that you guys are big data folks. Given the fact that we had a pause in capital spend during the second quarter, you had wells that went offline and you have wells that came back online, are you able to share with us an updated view on what the decline rate looks like? Is it actually training better than you would have previously thought? Or just any color that you can give us just based on the data because of the pause and capital spend that it's a unique opportunity to take a look at it.

[Sean O'Brien:]

Yes, I think, there's a couple ways to look at it Shneur. And we alluded to it a little bit. The models that we had, and we are – the data that we had showed bigger declined, obviously you look at the – it was a big driver on the GNC side, even though volumes are down, they're not down anywhere near what we had anticipated and obviously what many of you had anticipated. Couple of drivers to that, and then we'll talk about natural declines. But the shut-ins again were not as severe, not as – and the duration was much shorter than we anticipated. That was a great thing. The other thing that we saw, and I think, it's an interesting point, the diversity of our portfolio, we have these assets in the Eagle Ford, in the DJ, in the Delaware, in the SCOOP stack. What we saw is some declines that did come in at the levels we might have anticipated in areas like the Eagle Ford, the Mid Midcontinent. But because of the strong economics in the Delaware Van had talked about this earlier, the strong economics and the DJ we actually, were pleasantly surprised. We did not see the volume declines to the levels that we had anticipated. So shut-ins were, again, not as deep, not as long duration. In terms of natural declines and the outlook there, I think, we gave you some guidance that we actually expect second half of the year G&P volumes to be slightly up versus first half. Again, that's going to vary by region. I think those two regions I mentioned there will do better than Midcontinent and Eagle Ford. But the diversity of this portfolio has helped us weather this. The ability for price to come back a little bit sooner, I mean, these prices are not, what I'd call high, but they're much stronger than, I think, people anticipated two months ago has kept the producers, kept their breakevens in line and kept our outlook a little bit better. And again, listening to their calls this week and last week, the outlook appears to be a little bit better than what we would have thought just a little while ago. So that's kind of how we're thinking about the volume profile, and what we saw in Q2 and what we'll see the remainder the year.

[Shneur Gershuni:]

Okay, now that's great. And maybe one final question, just to go back to the whole ethane discussion, in some of your responses, I think, it was both to Chris and to Jeremy, you sort of talked about the ethane recovery. I think at one point you had said that you are expecting a reversion to projection in the fourth quarter. At the same time you talked about the pricing impact. How much of your guidance uplift is specifically about the stronger ethane recovery number, versus price like to separate out price, separate out the cost improvements that you've done? How much is specifically about a better than expected ethane recovery angle?

[Sean O'Brien:]

So far, it was great to see Shneur it happened late in Q2. And obviously we're expecting some of that in Q3. It's not a huge driver. I think when you really think about what is – what put this company back to be able to reissue the guidance, it's the self-help, it's the way the company has executed. Hopefully, it's come across from Wouter and I that we're incredibly thankful to how the 1,900 employees at this company are delivering on the costs, on the efficiencies. The assets are running really well, where they're running the safest they've ever been. I mean, it's great. I love that we're in recovery mode. Didn't see it coming, didn't have it in our models. It is not in the top two drivers of why we feel comfortable, reissuing guidance. But I'll take it.

[Shneur Gershuni:]

Perfect. Alright. Thank you very much, guys. Really appreciate all the color today. And stay safe.

[Van Kampen:]

Thank you, Shneur.

[Sean O'Brien:]

Thank you, Shneur.

[Operator:]

Thank you. Our next question comes from James Carreker from U.S. Capital Advisors. Your line is now open.

[James Carreker:]

Hi guys. Thanks for the questions. Congrats again on the quarter. If I could just ask a question about the reinstated EBITDA guidance, it looks like you're targeting the low end of that. And just given six months of actuals, just wondering if you had given any thought to kind of revising that? Should we think about the low end as the midpoint? And is the upper end of that achievable or what would you need to see to get kind of towards the – to the mid or to the higher side of that?

[Sean O'Brien:]

I think one, the company is heavily focused on cash flow. That's why we added the free cash flow measure. Not that EBITDA – I mean, two share a lot of commonalities, but all the negatives are hitting EBITDA. They're also hitting DCF. The volume declines, the fact that price that we're happy, you heard Van say, prices are better than we thought, the spot is better than our guidance, but they're still nowhere near where prices were last year. Those things are adversely affecting EBITDA and DCF. Why we went to the low end on the EBITDA is if you think about some of the levers that we pulled, cash levers they do not, – they're not embedded in the EBITDA calculation, all the sustaining capital work that we've been able to do and the efficiencies there benefit DCF. I'll take it all day long benefit free cash flow, take it all day long. The reductions in our growth capital, ultimately in the short run really are more of a cash metric, they are not going to affect DCFs or I'm sorry, EBITDA immediately. So, that's why we feel so comfortable in the DCF being back to the middle of the range, we guided towards the lower end on EBITDA. A lot certain self-help measures are really just helping DCF, they're not helping EBITDA. But we gave you also some tailwinds that could help us get to the midpoint of the range on EBITDA. And we'll continue to monitor those. So far into Q3 we're seeing some pretty good things. But that's why you see the difference more cash focus, helping DCF, not always impacting EBITDA in the calculation.

[Wouter van Kempen:]

Yes James, Wouter here. And there's still a lot of uncertainty. There's still a lot of volatility unlike, where we don't really know what's going to happen with COVID-19 and it's something going to happen here in the second half of the year. Rigs are down fairly significantly. So how do you plan for that? I think planning for the worst, hoping for the best is the right strategy to take here. Commodity is pretty strong right now. If you look at kind of what we have in our outlook for the second and a half – for the second half, we're probably trading 15% up or so on commodity, around NGL, natural gas and oil. We have ethane rejection. We have that model thing for the second half of year. So there is a lot of different things that can kind of continue to shape and shift things here in the second half. July looks really good. We're very pleased to see July volumes and kind of lot of cost and lot of stuff that's coming in. So I think the company continues to be on a really, really good thread. At the same time, I'm a big believer in you plan for the worst, you hope for the best, that's what we're doing here. And there is still a decent amount of uncertainty.

[James Carreker:]

Yes, I guess just to ask another way, if you are initiating this new range and expecting to come into low end? I mean, you're conservative outlook, I mean, and maybe there's some headwinds and some uncertainty, do you still feel comfortable with the ability to hit the low end of that guidance?

[Wouter van Kempen:]

We obviously do. That's why…

[James Carreker:]

Okay.

[Wouter van Kempen:]

So we are very comfortable around that. So yes, I can sit here I unfortunately don't have a crystal ball kind of say, hey, what are things going to look like on January 5 when Sean collects all the numbers. But yes, we are with what we're looking at here today with the assumptions that we have given you with, knowing that, hey, there is still a lot of uncertainty. We're very comfortable with what we've given you here. That's why we decided to reinstate it. Still knowing that there is a lot of ins and outs that could happen here over the next five months.

[James Carreker:]

Thanks for that color. And then I guess just thinking about the recovery broadly and NGL volumes kind of holding in maybe a little bit better than we expected, maybe better than you expected. At what point does that Sweeny frac option come back on the table for you guys? Is it something that you still have available, or it been completely written off or kind of are there some goalposts that you need to see where that comes back on the table as a potential investment?

[Wouter van Kempen:]

Yes so we got it set that we were not going to exercise the option at the same time between Phillips 66 and between us. I think we both agreed at strategically it makes tremendous sense for us to own part of the Sweeny complex. So, we've had those discussions between ourselves and Phillips. I think we have alignment around that that strategically makes a lot of sense. We are the largest raw mix provider into Sweeney. So that makes, I think, combining strategically something between the two of us makes a tremendous amount of sense. At the same time here over the last three months, we haven't had any detail discussions about what we would do when we would do it. The agreement we have with Phillips 66 on delivering raw mix into Sweeney 2 and 3 is a pretty long-term agreement. So we have time, I think, when all the stars align to say, hey, what maybe we should do that again. So I think we'll full pickup those discussions when the time is right.

[James Carreker:]

And if I could fit one more in real quick, I was wondering if you guys have ever quantified exactly how much of your Permian position is exposed to federal lands, if something were to happen with the election and that there becomes some sort of drilling moratorium or something. Do you guys have that number off the top of your head?

[Wouter van Kempen:]

Well, we do have quite a lot of detail around that. I think just first to talk about this, our portfolio has very limited federal land exposure. The vast majority of our portfolio is on private lands in all the states that we're doing business. The largest exposure would be in Southeast New Mexico. I think it has been very clear for everyone that if something would happen and you would get a moratorium on fracking, on federal labs, you've got put that in on a retroactive basis. So the amount of land that our largest service provider or largest producers have in Southeast New Mexico is very, very significant. And there's no scenario under which they cannot continue to develop that for the next 10 plus years or so. So I think that has gotten us the key item here. I think the other thing that I always kind of try to point out to people is, yes, that could be a potential negative that sits over the industry. At the same time there could be a kind of corollary positive to that as well. And what is happening to prices when that is going to happen. I would think prices are probably going up and you would probably benefit from that. So absolutely no short term exposure for us. This is probably something that will be a long, long time away. The other thing is that the vast, vast majority of the portfolio is all on private lands.

[James Carreker:]

Thanks.

[Wouter van Kempen:]

Thank you, Jerry.

[Van Kampen:]

Thanks James.

[Sarah Sandberg:]

Those are all of our questions in the queue. I want to thank you for joining us today. And if you have any follow up questions, please don't hesitate to give me a call. Have a good day.

[Operator:]

Gentlemen, thank you for your participation on today's conference. This does conclude your program and you may not disconnect.