Q3 2019 Earnings Call
Welcome to the Q3 2019 Summit Midstream Partners LP Earnings Conference call. My name is but I thought and I will be your operator for today's call.
This time all participants are in listen only mode. Later, we will conduct a question and answer session. During the question answer session. If you had a question. Please press Star then one on your Touchtone phone. Please note that this conference is being recorded I will now turn the call over to Blake I.
Vice President of strategy and head of Investor Relations.
With me today to discuss our third quarter of 2019 financial and operating results as he dedicate our president Chief Executive Officer, Mark <unk>, Our Chief Financial Officer, along with other members of our senior management team.
Before we start I like her mind use our discussion today may contain forward looking statements.
These statements may include but are not limits your estimates of future volumes operating expenses in capital expenditures. They may also include statements concerning anticipated cash flow liquidity doesn't strategy and other plans and objectives for teacher operation.
Although we believe that the expectations reflected in such forward looking statements are reasonable we can provide no assurance that such expectations will prove to be correct.
Please see our 2018 annual report on Form 10-K , which is about the FCC on February 26, 2019, as well as our other I can see filings for a listing all factors that could cause actual results may differ materially from expect to resolve [noise].
Please also note that on this call will use the term EBITDA adjusted EBITDA and distributable cash flow.
non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures how much we said another way.
With that I'll turn the call over here.
All right. Thanks, Blake and good morning, everyone I want to thank everyone for joining us on some its third quarter 2019 earnings call.
I'll start by expressing my excitement enthusiasm in Serbia, Sionyx, new CEO since joining the company in mid September I've had the opportunity to conduct an in depth to review of the business and I've been thoroughly impressed by the dedication and attitude exhibited by all of our employees.
In addition, and in spite of the continued softness in the upstream sector and really overall macro backdrop I'm optimistic regarding the outlook of the business and I believe that there's tremendous potential to navigate through this current environment and or drive significant near term and long term value for our stakeholders, while we can't control producer activity levels.
Our core focus areas in the Bakken the DJ the Permian and the Utica said at the top of the stack of the most economic oil and gas acres to drill in North America.
We believe that customers behind our systems can deploy capital on these areas and generate solid returns in the 50, plus all of 250 gas environment that we're currently again.
Our GNP systems in these core focus areas are also largely built out with ample room to grow without a significant amount of follow on capital requirements.
Legacy area cash flows in the Marcellus and the piano regions are largely supported by Nbcs that continue at or near current levels through the end of 2021 with a significant portion that continue through the middle of the next decade.
Also our Barnett acreage is underpinned by a nice wedge of relatively low decline PDP production that we estimate has a marginal cost of less than one dollar per mcf to produce and that's inclusive of our gathering fees. We also have a considerable amount of drilling inventory remaining on the system.
Our Barnett assets are also supported by a large anchor tenants and it has significant LNG commitments in the Gulf region, and we believe drilling results suggest that they have taco production cost to develop our barrhead acreage, which will be inclusive of b and C elderly gathering and transportation cost at the dock is price advantage to help meet those commitments versus buying.
<unk> gas at the current Henry hub strip and transporting it from the how to their committed LNG facilities.
Furthermore, we have a world class gas pipeline project in the Permian Basin, which is in flight now and is anchored by firm commitments from the largest and among the most active major in the basin.
By the way, it's also a strategic joint venture partner in equity owner in the Doubletree pipeline system.
So the point I wanted to make here that I believe that are bit our base business stands on very stable ground in the near term and I think it's very well positioned for highly attractive and accretive growth in the out years and this comes without the need for a large pickup in development activity.
Now, having said that we fully recognize that we're not where we need to be from a leverage and overall balance sheet standpoint, and then a much more rigorous focus on cost control and capital discipline as warranted going forward. We also acknowledge that we need to restore confidence with our investor base on two fronts, one management's ability to deliver on the guy.
Instead, we said and to concerns regarding sponsors commitment and alignment post simplification.
While we'd like to get the benefit of the data most who topics. My view is that time and actions will speak much louder than words.
We think that today's CBPO transaction, which I'll cover a good bit more later on in the call is a major step and demonstrating our sponsored continued commitment to ethanol fee and its alignment with our stakeholders.
In addition, I want to take the opportunity now as a new CEO to emphasize that capital discipline cost control, improving the balance sheet and setting realistic expectations and delivering on them alright, very top of managements priority list going forward as is our commitment to providing safe responsible and reliable operations for our CFO .
Customers.
Now let me hit on a few of the highlights of the third quarter results in a few key things that are currently playing out across the various operating segments.
First our results for the third quarter of 2019 included adjusted EBITDA of 72 million distributable cash flow of 41 point Sevenmillion and our distribution coverage ratio of 1.75.
These results included over $2 million of Nonreoccurring remediation expense and approximately 1.9 million lost EBITDA in the quarter associated with temporary operating operational disruption.
Okay, and having the coming within our Williston Basin segment.
Excluding these events, which are now behind us our adjusted EBITDA would have Dan approximately 76 million for the quarter, which will be in line with our expectations and represents a more than 10% increase over the second quarter of 2019.
Customer activity levels have also trended inline with expectations as demonstrated by the quarter over quarter volume growth and six out of our eight reportable segments.
And our DJ Basin segment, our third quarter volumes are up 65% from the second quarter.
The combination of volume growth, along with $1.8 million quarterly demand payments related to the startup of the new carpet plan resulted in a 133% increase and our segment adjusted EBITDA as compared to the second quarter. Our customers are currently operating two drilling rigs in our service area, one of which has operated by high point resources.
Who has recently highlighted better than expected well results in Hartford filled and we are encouraged by their strategy to utilize cash flow generated by their northeast Wattenberg asset to further support development of their Hartford acreage.
Our DJ basin gathering and processing systems will be the primary beneficiary of this activity and we think it will contribute to continued volume growth as we look forward into 2020.
The Wilson basin continues to be a topline driver for us here at summit as liquid volumes have trended ahead of our expectations.
Customers turn in line 39, new wells in the quarter, many of which are exceeding internal type curve estimates and as a result exit rate volumes for the month of September when excess of 115.
1000 barrels per day. This is a new record for summit and also represents over 20% growth relative to the second quarter volumes of 94.3 thousand barrels.
In the Utica, we're excited to report yet again, a third consecutive quarter of segment, adjusted EBITDA growth, which was up over 18% quarter over quarter.
Looking forward, we're very excited about a five well pad site that was recently drilled behind our SMB system and we expect it to yield initial production rates in excess of 150 million today once completed in the first half of 2020.
To put that in perspective. This one pad side is expected to produce approximately 60% of our third quarter pad level volumes wants is turned in line and should continue to grow in the segment beginning in the first half 2020.
It's also worth pointing out that we are beginning to see cap ex levels decrease across the platform in the third quarter, which has driven by the recent completion of our new DJ processing plant and Permian GMP system expansions, we expect that our capex spend levels will further decrease in the fourth quarter as we finish up the Angus compressor station expansion.
In the DJ.
At the 2090 major expansions in the Permian and DJ wind down all of our GMP systems in our core focus areas are largely built out and again or in a great position to capture a lot of volume metric growth without much additional capital going forward.
Looking ahead in the fourth quarter at this point based on Rick and well activity that we that we monitor infield on a real time basis, we continue to expect our quarter over quarter volume growth trend to continue through the end of the calendar year across really all of our core focus areas.
Accounting for the nearly 4 million of third quarter nonrecurring remediation and downtime in the Williston segment that I referenced earlier, we expect EBITDA for the year to come in at or near $290 million.
So with that I'll now hand, it over to our CFO , Marc Stratton to review our quarterly results in more detail.
Great. Thanks Heath and good morning, everyone.
I'll begin by walking through the segments that comprise our core focus areas and ill start with the Utica shale segment.
The f. immune system averaged 290 million cubic feet a day in the third quarter and segment adjusted EBITDA totaled 7.9 million, which was up 18.4% from the second quarter of 2019.
This growth was due to a full quarter of volumes from four new wells that were turned in line late in the second quarter and provide the more favorable mix of pad level gathered gas on the system.
More than 85% of Essam use average daily volume in the quarter or 248 million cubic feet today will gather from pad sites directly connected to the system, which represents a 30% increase from the second quarter.
This pad level volume growth represents a continuation of a trend that we've seen over the last three quarters and as an important driver in our topline revenue trajectory given that these pad level volumes generate gathering fee that was approximately three times higher than the fee we earn on volumes originating behind our TPL seven connector.
Looking forward, our anchor customer connected to new wells in early October and has also risen flows on five older wells that were previously shutdown due to simultaneous drilling and completion activities.
The volume impact from these wells gives us confidence that we will see continued strength in our Utica shale segment throughout the balance of the year.
In addition, this customer has plans to turn in line. Another two wells in the first quarter of 2020 ahead of a separate customers plan to commission 150 million today, five well pad the Heath referenced earlier, which is expected in the first half of 2020.
Just to remind you these dry gas Utica wells are large IP rates in 15 to 30 million a day range and have historically shown to hold flat for up to eight months upon initial commissioning.
As such even five wells can move the needle for our business and this five well pad in particular represents a significant growth catalyst as we look forward.
Turning to our Ohio gathering segment.
Gross volume throughput in the third quarter 2019 averaged 777 million cubic feet, a day up 9% from the prior quarter as 13 wells were turned in line, bringing the total to 51, new wells year to date.
Our customers currently have 16, ducs and inventory, which are expected to be completed in 2020.
These customers are also currently operating two rigs our service area, which will increase the DUC backlog as we head into 2020.
Beyond that certain customers are evaluating drilling programs behind the ODC system targeting the condensate and wet gas windows of the Utica to satisfy commitments that they've made to provide feedstock for a new third party ethane cracker in the region.
We expect drilling activity will pick up behind the Ohio gathering system over the next several years as this facility is placed in service and has base load commitments are filled.
And the wealth and segment.
Third quarter liquids volumes averaged 105000 barrels per day up approximately 11000 barrels a day or nearly 12% from the second quarter 2019 behind 30, new well connections.
We expect liquids volumes to maintain their upward momentum into the fourth quarter with average throughput in the month of September and in the fourth quarter to date period in excess of 115000 barrels per day.
Our customers are currently operating two rigs behind our liquids gathering systems and have 25, ducs and inventory, which supports our expectations for continued growth throughout the balance of the year and into 2020.
As Heath reference third quarter adjusted EBITDA for our Williston Basin segment was negatively impacted by more than $2 million related to higher than normal levels of remediation expense and $1.9 million lost EBITDA associated with an operational disruption on our bison midstream system that occurred late in the second quarter and continued for a port.
One of the third quarter.
The bison midstream system was restored to full operating capacity in late August and no lingering expenses are anticipated in the fourth quarter.
In addition, we have visibility towards eight new wells being turned in line behind our bison system in the fourth quarter, which represents an attractive growth catalysts for us as we exit 2019.
DJ Basin segment, adjusted EBITDA totaled $6.6 million for the third quarter, 2019, and 133% increase compared to the second quarter of 2019, driven by a 65% increase in volumes and the $1.8 million of demand payments that we began to recognize in the third quarter in connection with commissioning of our new.
Processing plant.
The volume and EBITDA ramp has trended inline with our expectations and the two rigs currently working in our service area should bode well for increased utilization rates and higher segment adjusted EBITDA in the coming quarters.
Lastly segment adjusted EBITDA for the Permian Basin third quarter increased by $900000 over the second quarter results driven by a 17.6% increase volume throughput and a $400000 decrease in operating expenses.
The third quarter was the first full quarter to manifest from our new Blue Quail compressor station, which was commissioned in June and facilitated the new source of volume throughput for our gathering and processing system.
Our customers have remained active operating one to two rigs in our service area for much of the third quarter and have increased their DUC inventory to 17 wells.
We have good visibility for 11, new wells to be turned in line behind our Permian system in the fourth quarter, which will facilitate higher throughput and improved operating efficiencies over the coming quarters.
Now turning back to the partnership.
SMP reported third quarter financial results that included $72 million of adjusted EBITDA and $41.7 million of distributable cash flow.
Relative to the second quarter of 2019, adjusted EBITDA was up 5% and distributable cash flow was up 8.6%, primarily driven by increasing volumes across six of our eight segments.
At this point, we expect this trend of increasing volumes to continue across many of our systems through the end of the year based on rig and well connection levels that we are currently monitoring.
Based on our third quarter distribution of 28.75 cents per unit.
Stroppy generated quarterly distribution coverage ratio of 1.75 times.
At Sanofi also reported a third quarter 2019, net loss of $10.6 million, which included a $16.2 million noncash expense related to the impairment of goodwill on the mountaineer system.
This impairment was primarily due to a more tempered volume outlook for the Marcellus shale reportable segment.
The system did benefit from five new wells that were turned in line in the quarter, but our outlook for additional activity on this system and the current environment is unclear.
Capital expenditures for the third quarter, 2019 totaled $46 million, including $5.4 million capital calls associated with our equity investment in the double the pipeline project.
These investments were approximately $10 million lower than the second quarter of 2019, and we expect our capex to decrease further in the fourth quarter given the recent commissioning of our new 60 million to date DJ processing plant and the compressor station expansion in the Permian.
Our legacy areas, which include the POS basin, Barnett shale and Marcellus shale segments generated approximately $38.9 million of free cash flow in the quarter with only $1 million total capital expenditures.
We had $600 million outstanding under our $1.25 billion revolving credit facility for September 30, 20 mile gains and approximately $641 million of available borrowing capacity subject to financial covenant limitations.
Total leverage at quarter end was 4.9 times compared to a maximum limit of 5.5 times.
With that I'll turn the call back over to.
Great. Thanks, Mark so I'd like to touch on a few strategic themes before we open the lineup for for question. So let me let me start with a great progress that we're the team is making on the doubly project.
In September we received a favorable notice from the PRC with respect to their intent to issue and environmental assessment for the project in March of 2020, which is in line with our expectations, having now locked in our pipe cost and the majority of our right away. The project remains on time and on budget to meet a third quarter 2021 in service date.
As it relates to our financial plans for doubly we've evaluated the market fairly thoroughly and we are currently advancing asset level financing that would shift a substantial majority of our doubly capital expenditures from ethanol fees revolver to third parties beginning in the first quarter of 2020.
Our third party financing plans would alleviate a significant capital obligations for somewhat over the next several years and will help position us to utilize the excess free cash flow to accelerate deleveraging and strengthen the balance sheet.
The financing strategy also maintains our ability to capture long term upside and exposure to the highly attractive doubly project.
Regarding the DPP O transaction that we announced this morning, MLP will make a prepayment of 51.75 million in cash.
Issue 10.7 million in SMP common units and an exchange we will reduce the remaining balance by 122.75 million or nearly 40% of the prior depot balance that will get moved to a current balance of 180.75 million.
Sure you all have already done the math, but the implied price of the common units issued reflecting approximately 43% premium relative to yesterday's closing price.
We've also extended the date that MLP is required to make the final DPP O payment to January 2022 from an otherwise requirement to make a $151.75 million payment in June of 2020 with another hundred 51.75 million payment in December 2020.
We also preserve the company's flexibility to pay the remaining depot balance in all cash all stock or combination of each.
This transaction is very important step forward for the company and we believe a good and balance outcome for all of our stakeholders.
Not only puts a substantial portion of the DPP funding uncertainty in the rearview mirror, but the deferral to January 2022 also gives us more time, and therefore more flexibility to develop an optimal solution to retire the remaining balance.
I also believe the consideration mix the implied premium to the unit price for the equity component as well as the deferral of the remaining balance into 2022, all reflect energy capital partner support and alignment with Smbs Lps and creditors and also reflects an overall willingness to support the company with a flexibility at needs, particularly in the.
Current market environment.
Now, having said that we fully acknowledge that even with the longer runway. There is still a lot of work left to be Don on the remaining mmboe.
And most importantly, we need to take meaningful steps now that are within our control to reduce leverage and strengthen the balance sheet to improve our financial flexibility going forward.
So let me cover a few of those steps that we are taken and then we'll open up the line for questions.
So first we just completed an organizational wide assessment of our cost structure and we've identified a number of cost savings and efficiency opportunities that we expect will generate at least 10 million of expense savings in 2020 and up to an annual run rate of 20 million per year thereafter.
These amounts are in addition to the 5 million to reoccur in cost savings that we previously disclosed in the August conference call.
The team, which was comprised of both employees and outside consultants conducted a top to bottom review, leaving no stone left unturned, whether that's out in the field where at the C suite level.
While there are number of difficult decisions that we we've made and we'll have to make in the coming months very confident that the cost saving targets are achievable appropriate and did not conflict with our core values, which include our commitment to providing safe reliable and responsible operations for our customers also want to take the opportunity to knowledge a tremendous amount of time.
Thoughts and effort that our employees from across our organization have put into this transformational initiatives.
The level of objective any and professionalism that was demonstrated by our employees. During this effort has simply been remarkable.
The outcome reflects a strong character and since his stewardship that is embedded in our operating culture as well as ability of the organization to rise and meet the challenges we're facing in the current market conditions.
Second we will continue to remain disciplined with respect to future growth activities. These activities will be concentrated on the doubly pipeline project.
As well as accretive expansions of our infrastructure in our core focus areas.
Excluding our investment in double Lee, which again, we expect to fund with third party capital. We expect our 2020 capital program will come in less than 75 million and thats relative to the $175 million program expected in 2019.
So as I mentioned earlier on the call with a chunky 18, 19 capital programs behind us virtually all of our core focus area GMP systems are built out and they have ample capacity to capture a meaning amount meaningful amount of volume growth in the future with very modest capital requirements going forward.
And finally, we are expanding our asset divestiture program to include potential sales and or Jvs and our of asset in our core focus areas.
While we are continuing to pursue legacy asset sales. There is no doubt the current market conditions have made a challenging for us to find serious buyers that are willing to transact at a reasonable price, while we're not giving up we're not willing to compromise on value just for the sake of getting the deal done and we're going to remain patient and disciplined as we continue to evaluate offers opportunities go.
Going forward.
So to wrap up I just wanted to say, thank you again to our unit holders our lenders and all of our stakeholders for your continued support and patients in what continues to be a challenging market.
I think we've announced some very important steps here to help repositioning the business to be successful into 2020 and beyond.
I want to reiterate my optimism and what the future has in store for summit and I certainly look forward to leaving the company in this important next chapter of its evolution. So.
So with that let's open the call up for questions.
We will now begin the question answer session. If you have a question. Please press star and want and you touched on Paul.
You mean in both from the Q. Please press the pound time or the has.
You are using the speaker phone you may need to pick up the handset first before passing the numbers. Once again have you had a question. Please press Star then one.
Paul.
Okay.
We're standing by as those questions commit.
Our first question comes from Tristan Richardson with Suntrust. Please go ahead.
Hey, Good morning, guys. Keith appreciate your commentary on operating cost initiatives.
Restoring confidence and sponsor alignment.
Particularly in that changing production growth environment can you talk about the extent to which the sponsor might.
Waive the remainder of the DPP entirely.
Just thinking about the potential for actions that would be.
It is seismic our our unequivocal potential actions out.
Hi.
Thanks, Chris and hope you are doing well I'll look now.
I think the the depot transaction today, obviously created a lot of flexibility for us going forward, we push it out obviously to 2022.
We certainly don't anticipate the sponsor just basically giving giving it away, but what I think this does show is that when you look at the consideration mix the the implied premium to the share price of roughly 43% relative to yesterday's close the extension.
Out almost two years from now I think I think what we are saying is that the sponsors in the very flexible can work with the business to make sure that as we look to retire the remaining obligation that we can do an optimal way and if we need more flexibility on down the road on I'm sure our sponsor World will will provide.
Appreciate it and then Heath or Mark can you talk about the extent to which equity remains an option for the remainder of the DPL and as such.
When you think about the potential split and and cost of equity capital.
Either targets for.
Distribution coverage.
Sort of lower bookends that you'd be willing to accept in terms of further equity issuance.
Well estimated we're at this point, we're talking about something that's leased a couple of years away right. So I think as we as we think about it we did retain flexibility to to use all stock. If we felt like that was the most appropriate way to go and we also certainly good could use cash.
Or any combination of it so I think I think a lot of is just going to depend on how how well the business performs over the next couple of years and.
If we achieve our plans to to aggressively de lever the balance sheet will create a lot of financial flexibility and we'll make a determination based on how our units are trading at that point in time, and how how strong and half what how much flexibility we built in the balance sheet to resolve.
Thanks, and then just last one from me.
I'm, just trying to triangulate and on a pro forma for the new units.
The sponsor would own effectively across the different buckets is that is approximately 50% or is it.
Just generally it.
Sure Trust and this is mark yes pro forma for the new issuance.
On it.
Units owned.
The directly by Sep or through S&P holdings, approximately 50 by 56%.
Helpful. Appreciate it thank you guys very much.
Alright, Thanks Susan.
Our next question comes from Christopher talent with Barclays. Please go ahead.
Hi, guys good morning.
I guess first for me is on the.
Double the pipeline you mentioned you expect.
That to be funded by third party capital I guess could you speak to just the types of structures are considerations that you guys are looking at there.
Yes sure Chris This is mark so look at as we mentioned, having some I'd say very productive discussions with investors regarding.
Options to finance, our 70% interest and doubly going forward and I'd say, we're we're in a fairly good spot obviously.
This is a world class project and Theres, a lot of investor interest out there.
So just give you a little background, we've got about $25 million invested in doubly today.
And over the balance of of the early fourth quarter, we really only have about another five to 10 million a capital spend which we expect to do under the revolver.
Our larger capital investments will begin really in the first quarter of 2020.
As we begin to make payments on our pipeline and other materials to prepare for construction.
But as we think about.
Longer term financing strategy, we are giving serious consideration.
To third party asset level financing, which could take a number of forms that we are evaluating and progressing.
But I think the the takeaway is that we think this would be a very efficient way for us to shift a substantial majority of our doubly capital commitment.
From ethanol Pease revolver.
To a third party during the construction period.
Obviously, we think this would be of a credit positive for ethanol be as of would really enable us to remove.
Of substantial amount of future funding from our revolver and really accelerate deleveraging and strengthening the balance sheet throughout 2020.
Obviously over the long term, we would continue to have the opportunity to capture.
The longer term upside by bringing it back into the partnership sometime after commercial operation. So while we don't have any any specifics to announce today on the I'd just say stay tuned for for updates as we as we continue to make progress throughout the fourth quarter.
Okay. Thank you.
And then maybe shifting to the depot for a second.
Can you can you speak at all too.
The timing of what you guys might be thinking in terms of repaying the remaining portion.
And I guess the reason that I asked that is given the the 8% interest cost on the remaining 180 million or so.
By my math it just seems like if you wait until 2022 to do that.
The all in amount might still exceed kind of the amount that was renegotiated earlier. This year. So just kind of wondering how we should be thinking about that.
Yes, Hi, Chris This is Heath I mean, I'll I'll take a stab at that amount I think look we bought ourselves obviously the time I.
I think the the 8%.
Cash paying interest is as something that was part of the consideration mix.
And we think is a fairly attractive.
Now rate relative to.
The other potential structure. So my view on this is is that we have while we defer we don't have to pay it off until 2022 could favor.
Make payments on down the road, if we have success on the asset sale front and as we kind of de lever and create more financial flexibility. So I think will the good news on oriented that we have a lot of flexibility and if it makes sense to to do another prepayment, which certainly will be position and take advantage of that but we felt like on balance I think we've got it to a much more manageable.
A level now and one that again, we have just a lot of time and options to resolve going forward.
To answer your question.
Yes got it thank you.
Well from you guys. Thanks.
Thanks, Chris.
Thank you. Our next question comes from Taryn Miller with Cantor Fitzgerald. Please go ahead.
Good morning, two quick questions number one is are you willing to give us an asset sales target level.
Number two is do you have a target leverage level you'd like to achieve by the end of 2020.
I'm, sorry, I Didnt can you repeat your first question I don't think I really follow what you're you're asking.
You're talking about potentially doing some asset sales.
Size that potential.
Program.
Right size the potential program.
Yes.
Hi.
I'm not sure that I didn't know exactly what you're looking for there, but I think look what what we're going to do obviously is at by expanding our Andy program to include some of our core assets and.
Whether thats outright sales or or joint ventures, we're looking at it in a manner that will immediately help us delever the balance sheet.
Depending on how much cash flow, we raised that'll give us flexibility, we want to prepay the DPP or we can so I think.
Theres not a specific target in mind I think we're very value focused and if we get a.
Healthy.
On some of our assets in our core focus areas will will.
We'll certainly take advantage of that but at this point again not to extreme target.
In mind, it's really about just kind of creating some flexibility and and doing what we can to to de lever as quickly as boss.
And in terms of the second question, which is do you have a target leverage level you'd like to get through by the into 2020.
I think long long term ours are really as fast as we can I think we feel like the business should be at four times are less and so.
That timing, obviously is going to be dictated by how the base business performs access on the asset sale side and other things, but but definitely we we were not going to kind of slowdown de levering until we can get in and around that four times or below.
Thank you.
Okay.
Thank you. Our next question comes from India.
Scott ill with RBC capital. Please go ahead.
I'm very your line is now open.
Hi, sorry.
Good morning, I, just had a couple of clarification question.
I'm going to CPPL, we notice that it looks like the sponsor actually do use.
The remaining portion of that.
Event CPPL by 19.25 million.
And maybe this was asked earlier, but is there any potential for email further reduction of the DPP Joe.
Yes, I mean look I think when you when you look at it whether you think of it as.
Okay.
$20 million reduction in the balance or nor the willingness to take stock back at a premium that we think is more indicative of where we should be trading I think I think we'll we'll evaluate that again as we look to kind of settled the balance. So I don't think theres any yeah I Wouldnt think of this is necessarily being an impairment.
If you will to the DBP I will balance I think it was more when we looked at the consideration mix.
We negotiated a price that we felt was was directionally reflective of where we should be training.
As opposed to just what the current market look like.
Okay.
Okay that makes sense and then just I wanted to follow up on a double e. So just help me understand the.
When you're talking about this third party asset level financing.
Are you in discussions already and.
Thank you mentioned the 75 million of growth Capex in 2020, I think what's your guidance.
Assumes that you have been placed all the financing on the heavily.
Yes, Elvira good morning. This is mark yes, so the 75 million that weve outlined in our remarks.
This morning, and in our press release.
Reflect.
Capex that we have visibility towards in the business today, excluding our equity investment in in W. E.
So.
Finally, as I mentioned earlier, the significant capital expenditures related to that project are really going to ramp up here in the first quarter of 2020.
And really continue through called the end of 2021.
And so we have begun.
Formally.
Ill conducting conversations with.
Prospective investors and that processes is well underway.
Such that we have third party capital in place by by the first quarter 2020.
Right so.
Ken.
You have this investment by the third parties and then.
How does it work you would buy that back.
When the pipeline comes on line and for them. They would just make a certain return over that time period is that the right way to think about this yes, thats exactly the right way to think about El Baradei, it's away for us to utilize third party capital during the construction period too.
Financed the development of the project.
And following.
Commercial operation of the asset.
We would obviously have the ability to bring that back into the partnership.
Subject to a certain return profile, but thats it thats exactly the lab think about it.
Okay, Great and then just in terms of of asset sales.
Are you.
I mean would you sell any of the core assets if you got.
I really attractive.
Bed.
Yes, we will.
Okay, Great and then.
I think you also mentioned potentially change being the assets.
Is that something similar like do you think you could do a JV with your your sponsor on some of these assets.
Yes, I think that that could be the case or third parties I think particularly in areas that we we have a tremendous growth around our footprint obviously in the back in the DJ The Permian.
If it if it made sense to consolidate with someone to generate not only proceeds to de lever, but also put some capital work to further grow those systems I think we'd be we meet inclined to do that as well.
Gotcha Okay.
Okay. That's all I had for now thanks.
Alright, thank very much.
Thank you we have a follow up question from Jackson Richardson with Suntrust. Please go ahead.
Hey, sorry, guys just quick follow up for me.
Could you talk about flexibility and Max flexibility, whether it be on project financing.
Or.
The flexibility that the new DPL arrangement offers.
Just thinking about distribution policy.
Is that a lever to create additional flexibility as you look forward sort of to the extent asset sales are either unsuccessful or pro prolonged process et cetera et cetera.
Thinking about that as a potential levered near term.
Ill address and I think Thats a good question I mean look obviously, we just made a decision to maintain the distribution at its current level, what I would say right. Now we're just we're deepen our planning efforts with our customers for 2020, and we just announced that we cut our opex by by 10 million and we're going to realize that this year and should hit an annual run rate savings of.
20 million per year by the end of the year.
We just work through our margins outlined kind of our plans around double Lee with asset level financing.
With the DPP O transaction, we just bought ourselves a lot of time in consideration there.
We just told you we're going to we're going to reduce our capital budget, which has averaged close to 200 million a year over the past couple of years, we're going to cut that by roughly 65% at a minimum.
And I think Thats, that's certainly going again position us.
To to potentially even start generating some positive free cash flow here towards the end of the year.
And look we are core systems are largely built out and we doesn't take heroic amount of activity level to really materially drive the needle from an EBITDA growth standpoint.
The combination of that and the HD program that that we have an expanding that include asset sales or joint ventures in our core focus areas, where we even in this market we believe they want to premium.
Yes, I think when you look at all these steps in in total we got a lot of wood to chop between now and the distribution decision next next quarter. So look as as new every quarter, we're always going evaluate the distribution, we're going to may make sure that make a determination that when they were using our distributable cash flow and the best manner possible, but I will.
I'll say in our balance sheet is our number one priority going forward going into the year, but we've got a lot of options in front of us here and we're going to work through those diligently over or so the next couple few months and then.
Got a lot of time between now and a quarter due to get there.
Thanks, guys very much.
Thank you and at this time, we have no further questions turning the call back to final remarks to heat can you. Please go ahead.
Yes, thanks inhaled, thank everyone I want to thank everyone for joining us today.
If we left you with a better appreciation for how the management team and are going to work to reposition the business here for success in the coming years.
Look we look forward to our upcoming Investor conferences and look forward to continued to update everyone on our progress going forward.
Thank you and we'll talk soon.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.